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ACCOUNTANCY FUTURES CRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 09 I 2014
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ACCOUNTANCY FUTURES I EDITION 09 I 2014
ACCA offices
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*ACCA HEADQUARTERS 29 Lincoln’s Inn Fields, London, WC2A 3EE, UK +44 (0) 20 7059 5000
Stephen Heathcote Executive director –
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Electronic and iPad versions of Accountancy Futures are available at www.accaglobal.com/futuresjournal
POLITICS, PROTEST AND PILLAGE A NEW WORLD OF RISK FOR MULTINATIONAL BUSINESS
PLUS: KPMG GLOBAL CHAIRMAN I MINT ECONOMIST I SIR DAVID TWEEDIE I NATURAL CAPITAL I THE NEW SPACE RACE I CONFIDENCE ACCOUNTING I CEO/CFO RELATIONSHIP I PUBLIC AUDIT I AFRICAN SUSTAINABILITY REPORTING I DAWN OF THE MOOC I CHINA FINANCE INNOVATION
ACCOUNTANCY FUTURES Editor Chris Quick chris.quick@accaglobal.com +44 (0)20 7059 5966
Editorial board
Managing editor Lesley Bolton Contributing editor Colette Steckel Sub-editors Dean Gurden, Peter Kernan, Jenny Mill, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar Designer Robert Mills Production manager Anthony Kay Pictures Corbis Printing Wyndeham Group Paper Antalis Ltd. This magazine is produced on paper that contains certified fibres and is manufactured under strict conditions that allow the grade to carry the EU Eco-label. The mill operates under the ISO 14001 certified environmental management system. ACCA President Martin Turner FCCA Deputy president Anthony Harbinson FCCA Vice president Alexandra Chin FCCA Chief executive Helen Brand OBE ACCA Connect Tel +44 (0)141 582 2000 members@accaglobal.com students@accaglobal.com info@accaglobal.com A list of ACCA offices can be found on the back cover.
Sue Almond
External affairs director sue.almond@accaglobal.com
Chiew Chun Wee
Head of policy, Asia Pacific chunwee.chiew@accaglobal.com
ACCOUNTING
FOR THE FUTURE
Dr Afra Sajjad
Head of education, emerging markets afra.sajjad@pk.accaglobal.com
ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 170,000 members and 436,000 students in 173 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of over 91 offices and centres and more than 8,500 Approved Employers worldwide, which provide high standards of employee learning and development.
CONFERENCE 2014 Four days of on-demand videos and webcasts
Accountancy Futures Edition 09 was published in September 2014. Accountancy Futures® is a registered trademark of ACCA. All views expressed in Accountancy Futures are those of the contributors. The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication. Copyright ACCA 2014 Accountancy Futures. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA. Accountancy Futures is published by Certified Accountants Educational Trust in cooperation with ACCA. ISSN 2042-4566. 29 Lincoln’s Inn Fields, London WC2A 3EE United Kingdom +44 (0)20 7059 5000 www.accaglobal.com
PG02 EDITION 09
Cover illustration: A protester against military rule gestures during a protest in Bangkok in June 2014, one of many political protests around the world during the year.
ACCA’s Accounting for the Future is a worldwide event that ran in early September which has created four days of on-demand content exploring the role finance professionals will play in building a strong and successful global economy. It will be available free of charge until the end of 2014 at the URL below. The event brings together finance professionals from around the world to share with their peers. Our experts share the latest insights on how businesses need to adapt to meet the future needs of stakeholders, regulators, the economy and the public. Access the content at: www.accaglobal.com/accountingforthefuture
Sponsored by:
accountancy futures
Accountancy Futures Academy Chair: Ng Boon Yew FCCA Executive chairman, Raffles Campus
Global Forum for Governance, Risk and Performance Chair: Adrian Berendt FCCA Executive director, LCH Clearnet
Global Forum for Audit and Assurance Chair: Robert Stenhouse FCCA Director, national accounting and audit, Deloitte UK
Global Forum for Corporate Reporting Chair: Lorraine Holleway FCCA Head of financial reporting, Qatar Shell
CFOs of multinationals are painfully aware of the political turbulence affecting many parts of the world, but the resulting risks to their business are not always obvious. The word ‘pillage’ for example, might not appear on the average risk register, yet in these days of labyrinthine supply chains, can all company directors say for sure they are not unknowingly paying for goods and materials stolen in an armed conflict? Businesses now face legal changes that have made a prosecution arising from such circumstances a real possibility – see page 6 for more. As conflicts escalate in many parts of the world, we look at the geopolitical risks facing business and CFOs, and hear from finance professionals in Ukraine on running businesses in times of conflict. We also cover a wide range of other issues, such as corporate reporting, audit, sustainability and tax. In addition, we hear from senior finance professionals across the world, including KPMG global chairman John Veihmeyer, accounting heavyweight Sir David Tweedie and BRIC inventor Jim O’Neill on the rise of the MINTs. And as a 21st-century space race kicks off, we look beyond our own planet by exploring the economic benefits of lunar exploration. Chris Quick, editor You can find out more about ACCA’s research and insights activities at www.accaglobal.com/ri
Global Forum for Sustainability Chair: Andrea Coulson Senior lecturer in accounting, University of Strathclyde
Accountants for Business Global Forum Chair: Richard Moat FCCA CFO, Eircom Group
Global Forum for Business Law Chair: Faris Dean FCCA Solicitor, Lyons Davidson
Global Forum for the Public Sector Chair: Stephen Emasu FCCA
Public financial management expert, IMF
Global Forum for SMEs Chair: Rosanna Choi FCCA Partner, CWCC Certified Public Accountants
Global Forum for Taxation Chair: Tom Duffy FCCA Consultant and partner, Affecton
Global Forum for Ethics Chair: Sara Harvey FCCA Director, Hines Harvey Woods
Global forums ACCA’s 11 global forums bring together experts from the public and private sectors, public practice and academia. They aim to further thinking on current and future issues, and look for opportunities for the accountancy profession. www.accaglobal.com/globalforums
pg03 edition 09
pg01 cover pg02 contact details pg03 welcome pg04 contents pg05 pg06 risk and governance pg07 pg08 pg09 pg10 pg11 pg12 pg13 pg14 pg15 pg16 pg17 pg18 pg19 pg20 pg21 pg22 smart finance pg23 pg24 pg25 pg26 pg27 pg28 pg29 pg30 pg31 pg32 pg33 pg34 pg35 Tax pg36 audit pg37 pg38 pg39 pg40 pg41 pg42 corporate reporting pg43 pg44 pg45 pg46 pg47 pg48 pg49 pg50 Risk and governance
audit
pg06 pillage and procurement Increasingly complex supply chains can leave multinational businesses vulnerable to moneylaundering prosecutions and reputational damage by associating them with pillaged goods pg10 geopolitics Turmoil in emerging markets in the form of economic sanctions, popular protests and currency controls can derail business plans pg16 help at hand KPMG global chairman John Veihmeyer says the global firms are well placed to identify geopolitical risk and help clients deal with problems
pg36 internal audit IIA president Richard F Chambers examines the changing face of audit leadership, and the pros and cons of rotating internal audit heads pg39 europe The EU debate on audit reform has concluded and businesses must grapple with new regulations pg40 confidence accounting The use of probability distributions is under development to reduce the uncertainty inherent in traditional accounting
pg18 complexity Greater regulation of the insurance sector inevitably means bigger premiums pg20 cybercrime Prevention is a lot less painful than cure smart finance pg22 transformation For shared services and other big shakeups to succeed, finance heads must take ownership of the change programme pg24 viewpoints CFOs share their change leadership experiences pg26 the ceo The CFO’s key relationship is with the CEO, so here’s how to make it work
pg29 viewpoints CFOs explain their CEO partnership successes pg30 business partnering The three impediments to getting finance properly aligned with the business – and the three ways to overcome them pg33 viewpoints CFOs on how best to work with the business tax pg35 global tax The current corporate tax model may be unworkable, and a new approach is required that prioritises clarity, transparency and simplification
‘You cannot be
successful unless the CEO treats you as a partner’ PG29
pg04 edition 09
corporate reporting pg42 international valuation standards As a result of the glaring inadequacies revealed by the global financial crisis, Sir David Tweedie has become a champion of International Valuation Standards
pg44 overseer US financial oversight body looks for common ground among world’s accounting standard-setters pg46 sub-sahara Momentum is building across the continent for reporting environmental and social impacts, and governance procedures pg49 emerging markets Investor support is key to sustainability reporting by listed companies in developing economies pg50 the gulf The value creation advantages of integrated reporting are widely welcomed in the region pg52 south africa The integrated trailblazer still has some way to go along the holistic reporting road
pg51 pg52 pg53 pg54 pg55 sustainability pg56 pg57 pg58 pg59 pg60 pg61 pg62 pg63 global economy pg64 pg65 pg66 pg67 pg68 pg69 pg70 pg71 pg72 pg73 pg74 pg75 pg76 pg77 pg78 pg79 pg80 pg81 pg82 pg83 pg84 pg85 pg86 pg87 pg88 pg89 pg90 public sector pg91 pg92 pg93 pg94 pg95 pg96 public value pg97 pg98 news in brief pg99 pg100 acca network global economy
sustainability pg55 natural capital The world’s governments are looking ever harder at ways to measure, manage and maintain their natural resources and ecosystems pg58 energy With the UK’s powergenerating capacity falling as consumption keeps on growing, energy management is key to avoiding blackout and even bankruptcy pg60 water Water security is becoming a business imperative across much of the world and accountants are playing a key role as awareness experts
pg63 moocs Massive open online courses could transform education programmes at universities and professional bodies pg65 educating asia Demographics plus mobile penetration have driven a MOOC explosion in Asia pg67 china Technology innovations and opportunities are explored at ACCA’s series of conferences in Asia pg71 ethiopia A raft of recommendations made over the past decade offer the country’s profession a valuable template for progress pg72 history lesson Jacob Soll’s book The
Reckoning charts the rise and fall of Renaissance bankers and modern nation states to make a powerful argument for financial accountability pg75 space A new space race has begun, but this time round it’s businesses not governments that are piloting the ship in search of the economic benefits
pg78 the mints Economist Jim O’Neill explains why Mexico, Indonesia, Nigeria and Turkey will be GDP giants pg84 afghanistan As foreign troops leave, the country needs to build an accountancy profession to crystallise recovery pg86 junior stock markets SME-focused equity exchanges aim to reduce the difficulty and expense of tapping public markets for smaller businesses pg88 supply chain finance Does it benefit larger businesses more than the smaller companies it is supposed to help?
‘When they’ve got a purple
face and knotted veins, you know they don’t like what you’re doing’ PG42
public sector
public value
pg90 role of audit After the harsh adjustments to public finance in many countries, a stronger public audit function is emerging pg94 china Government accounting reforms will support collaboration, consultation and education, says Xiamen University’s Jianfa Li
pg96 best practice Building accountability and transparency among the Gulf’s family businesses pg98 in brief ACCA membership milestone, meeting the challenge culture, accountancy in Colombia, five-year economic survey
accountancy futures: risk and governance procurement
The return of pillage The increasing complexity of supply chains could expose businesses to charges of money laundering through handling pillaged goods, warns ACCA’s Jason Piper
P Jason Piper is ACCA’s technical manager, tax and business law. He is a chartered tax adviser, with Big Four and niche practice experience advising businesses and individuals on all aspects of UK and international issues, and has degrees in European and commercial law.
pg06 edition 09
illage is a little like a hippopotamus. Everyone thinks they know what one is and that they could recognise it. Some people even know where they live, and where the name comes from. But far fewer people know enough about them to understand just how dangerous they really are: they kill more people each year than any other mammal on the planet, man excluded. Developments in litigation and legislation have raised the risk to corporates from pillage. Direct prosecutions of limited liability corporations, not just their officers, may now be on the cards, and liability for moneylaundering offences can attach indirectly, simply as a result of handling goods that were pillaged by a supplier or their associates. Detailed knowledge of your supply chains is more than just a matter of profit margins, it can be a defining element in your corporate reputation. Identification of your brand with war crimes could be disastrous for customer relations, while a conviction for money laundering would be fatal to public procurement. Pillage is the crime of theft in the context
of an armed conflict. There are strict legal definitions around what constitutes ‘armed conflict’, along with a distinction between appropriations for military necessity (permissible within ‘the rules of war’) and commercial theft. Historically the roots of pillage were small-scale, and limited to such goods as could easily be carried. But with the advent of industrialised warfare in the 20th century, the scale and parameters of pillage changed, and many of the war crimes trials after the second world war were of the individuals who controlled the mines and factories which processed raw materials taken by force from occupied territories. More recently, prosecutions for pillage have been rarer, despite more of the raw materials on which modern supply chains rely being in areas where armed conflict is common. But all that may be changing, and the crime itself is adapting to the realities of modern international trade. Perhaps most significantly for business, theft (and with it pillage) has become a predicate crime for moneylaundering offences. In other words, the act of handling pillaged goods in your supply chain
accountancy futures: risk and governance procurement
may constitute money laundering. Crucially, there are indications that courts will consider direct prosecution for pillage of corporate bodies themselves, rather than the individuals who control them. While the International Criminal Court (ICC) restricts its jurisdiction to natural persons, almost every national legal system on the planet has
Left: the rare minerals required in the production of some electronic goods makes supply chain management and control a particular concern in the sector.
The act of handling
pillaged goods in your supply chain may constitute money laundering
also incorporated a triable domestic offence of pillage. Because of this, the definitions of which legal persons can be charged with pillage will also follow local rules. In many jurisdictions, this means that companies, with their separate legal personality, can in theory be charged with the offence. There is by no means universal academic support for the proposition that liability for pillage can be attributed to a corporate body. Yet there are strong indications that the concept of pillage is developing so as to encompass this wider application, with clear implications for companies in both financial and reputational terms. The different national crimes of pillage all incorporate the same key elements of the ICC definition. As a war crime, pillage is treated
Below: German consumer minister Ilse Aigner answers questions from the media about the European horsemeat scandal in February 2013. Complex supply chains meant that supermarkets were not aware that meat they were marketing as beef for their own-label foods was in fact horsemeat.
with utmost seriousness, and the offence need not have been committed within the borders of the nation entertaining the charges. The gravity of war crimes is such that several countries have ‘universal jurisdiction’ to deal with pillage, and will entertain charges regardless of where it took place. Remote though management may consider the risk of such an action, the potential consequences are so great that it must be managed. Supply chain due diligence The length and complexity of modern supply chains defy comprehension. The difficulties of fully understanding your own business were highlighted in the EU recently when horsemeat was found to have made its way, unidentified, into the food chain. Major supermarket chains were faced with the embarrassment of publicly admitting that they did not know what was going into their own-label foods. With manufactured goods, the scope for incorporation of untraced components and materials is even greater. Cotton and palm oil both have ‘high-risk’ supply chains, while the risks to electronic goods manufacturers posed by the prevalence of raw materials from the Democratic Republic of Congo are well known in the industry, and have been publicised by non-governmental organisations. Depending on where in the world you operate, and what sector you trade in, your potential
pg07 edition 09
accountancy futures: risk and governance procurement
exposure to legislative controls designed to impose some level of supply chain due diligence on businesses will vary. While the main areas of defence for a business will relate to the knowledge of circumstances and intention to commit pillage, a ‘win’ based on ignorance of its own supply chains is unlikely to be satisfactory for most multinational corporations. In addition to involvement in highly emotive criminal conduct, they will have been shown not to have fully understood their own supply chains, albeit not to a criminally irresponsible level. The only fully satisfactory outcome for a business will be to prove that it has no involvement in pillage, whether intentional or otherwise. The reporting regimes proposed around the world all rely on detailed knowledge, not only of the business’s own activities, but of its relationships with others and their activities. The administrative burden of maintaining a consistent trail of accountability at every production stage for every individual shipment of materials is, however, unlikely to be an
Right: palm oil – found in a wide range of products such as cooking oil, soap, lipstick and fuel – has a high-risk supply chain, with producers accused of using child labour, human trafficking, slavery and violence against employees. Below: armed groups in the Democratic Republic of the Congo earn hundreds of millions of dollars a year by illegally trading the ores that produce tin, tantalum, tungsten, and gold – the key conflict minerals.
The legislators get to work The US has already implemented specific measures in relation to Congolese conflict minerals which impose significant recordkeeping obligations on US-listed firms dealing with metal ores sourced from the Democratic Republic of the Congo. Opinion seems split as to whether the measures have misfired because businesses have stopped buying all Congolese minerals or because they can be bypassed by purchasing processed or assembled components from unaffected markets such as China. In the EU, a separate voluntary regime has been proposed that will allow importers of the key electronics ores (tin, tungsten, tantalum and gold) to certify that their supplies at the point of smelting have been sourced from a legal mine. The chemical analysis required to identify each shipment’s ‘fingerprint’, which pins down the source, is in any event a key part of the smelters’ operations, as they will be keen to know exactly which potentially toxic impurities they are putting into their furnaces.
The risks to electronic goods manufacturers posed by
the prevalence of raw materials from the Congo are well known
pg08 edition 09
accountancy futures: risk and governance procurement
Enlightened self-interest Caught between the risks of litigation and the certainty of regulation, big business is taking steps to protect itself. Most larger enterprises involved in relevant trades, including key names such as HP, Sony and Microsoft, have engaged with the anti-conflict mineral partnership of the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI), which have established two tools that companies can use to check the conflictfree status of their supply chains. The Conflict-Free Sourcing Initiative programme focuses on the smelters and refiners that are a key pinch point in the supply chain, especially for tungsten and tantalum. The programme is voluntary, and firms are evaluated on the steps they take to avoid purchasing or processing conflict minerals. The Conflict Minerals Reporting Template documents information related to the minerals that suppliers use, the products they create, and the smelters they source them from. Completion of the template allows manufacturers to build up a comprehensive picture of the businesses they source from.
Not just a private sector issue Even though it is primarily multinational corporations that can be affected by pillage, public sector officials equally need to be aware of the breadth of pillage as an offence. The EU has found itself in controversial waters over a fishing treaty with Morocco that includes fishing rights to the seas off the Western Sahara coast. Western Sahara is territory occupied by Morocco. While active violent resistance to the occupation ended in 1991, the Fourth Geneva Convention imposes an obligation on the occupying state to protect the territory’s resources against pillage until the occupation ends. As a result, it could be argued that a treaty which purports to assign fishing rights in the territorial waters off the Western Sahara coast is potentially stealing the property of the indigenous population, against their wishes and international law. While this appears a remote possibility, were this to be upheld in any court, it is not just the trawlers and fishing companies that benefit from the catches that would be potentially liable for pillage. The officials who negotiated and signed the treaty could possibly find themselves accused of being liable as accomplices to the actual physical removal of the fish.
attractive prospect. The levels of due diligence required at each stage of the production cycle will vary according to the perceived risk, and the resources available to the business. After all, lack of resource to confirm the status of goods does not constitute a legal defence. Businesses may need to find proxies for direct assurance. For example, suppliers’ membership of recognised trade bodies or submission to certain levels of audit will demonstrate a commitment to good practice. Whether this can be judged adequate will involve a considered appraisal of the circumstances, a process ideally suited to the skills of the modern accountant. Increasingly, though, businesses are opting for voluntary transparency initiatives – both Intel and Apple have committed to programmes of smelter verification as part of their efforts to ensure conflict-free minerals are used. But notwithstanding the abhorrent nature of the underlying crimes, a business must, in managing risk, focus on the economic realities of staying in business. If the costs of effective supply chain assurance become too great, then competition from less scrupulous rivals may well render the best efforts of a responsible business counterproductive as its goods are priced out of the market. In any event, whether your business is compelled to maintain records or simply wants to manage its reputational risk properly, supply chain due diligence will be an integral part of any defence against charges of involvement in financial war crimes, whether those charges are laid in a court of law or the court of public opinion. Jason Piper’s paper, Pillage: a new threat to global supply chains, is available at www.accaglobal.com/ab100
pg09 edition 09
accountancy futures: feature description and byline
Members of Ukraine’s Azov battalion at Bohdan Khmelnytsky monument. The country’s volatile situation poses problems for foreign business.
pgxx edition XX
accountancy futures: feature description and byline
Accounting for risk CFOs doing business in emerging markets need to be aware of the increasing range of geopolitical risks and how they can head these off pgxx edition XX
accountancy futures: risk and governance geopolitics
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o CFO of a global company can afford to ignore political risks. Turbulence in emerging markets can derail even the best-laid business plans. Popular protests can disrupt supply chains, currency controls can make it hard to bring profits home and economic sanctions can cut off established business partners. Such dangers have recently been brought home by the diplomatic tensions following Russia’s annexation of Crimea, a military coup in Thailand, simmering tensions in Egypt, fighting between Israel and Hamas, and the downing of Malaysia Airlines flight MH17. So how can CFOs stay ahead of the game? The first tip is to be alert for deteriorating standards of governance. ‘The World Bank data on the quality of government institutions has proved a remarkably good predictor of where problems are likely to emerge,’ says Mark Williams, chief Asia economist at consultancy Capital Economics. ‘It is no coincidence that, among the countries where governance has worsened over the past decade – Venezuela, Egypt and Thailand – are all countries that are now facing serious problems,’ says Williams. This indicator bodes ill for the likes of South Africa and Hungary, where the standard of governance was once good but has been deteriorating.
pg12 edition 09
The World Bank governance indicators may also offer clues as to where companies might want to divert their attention to reduce political risk. The figures point to improvements in nations like Indonesia and Colombia.
Palestinians wait to cross into Egypt at the Rafah border crossing between Egypt and the southern Gaza Strip. Egypt’s continuing internal polarisation makes diverting operations into countries such as Morocco an option.
currency clues Cautious CFOs can also look to International Monetary Fund (IMF) figures for indications of the next victims of financial turbulence. Big currency devaluations, for example, can threaten companies in several ways. ‘Aside from reducing the dollar or sterling value of local profits, they make countries more likely to impose capital controls – locking cash inside a country,’ says Williams. ‘A burst of inflation after devaluation may also encourage countries to impose price controls – hurting corporate profitability.’ Despite a recent bout of strong growth, the IMF data suggests that such financial strains may be mounting in some African countries. For example, the budget deficit in copper-rich Zambia jumped to 8.6% of GDP in 2013, more than double the previous year, the IMF’s Fiscal Monitor showed. Ghana has now run a deficit of over 10% of GDP for several years, despite high prices for its agricultural and gold exports. Several African states, including Kenya and South Africa, have also seen large inflows of hot money into stocks and bonds. ‘Large imbalances are often early-warning
accountancy futures: risk and governance geopolitics
Nataliya Vovchuk HEAD OF ACCA UKRAINE, baltic and caucasus states ‘The Maidan protests happened in full view of the ACCA office, making us very aware of the dramatic developments affecting so many businesses, people and Ukrainian society as a whole. The first thing we noticed was genuine solidarity and support from many ACCA partners in countries we are working with, including the Baltic states and the Caucasus region. Their support gave us the strength to continue with business operations within very constrained circumstances and actively demonstrated ACCA’s “thinking global; acting local” maxim. The protests might have died down but a new government and tensions with Russia escalating are creating a growing vacuum of uncertainty. However, there are many silver linings in the shape of economic reforms, EU membership and a growing sense of national unity despite all troubles. ACCA is working hard to take advantage of these opportunities, for example by preparing proposals for strengthening educational and economic reforms, putting finance professionals at the heart of a progressive Ukraine.’
Andrey Tsymbal FCCA MANAGING PARTNER, KPMG UKRAINE ‘We had to close down for a few days. We heard the explosions and demonstrations [in Maidan Square, at the centre of the demonstrations in April 2014]. It had a psychological impact and it was difficult for staff to concentrate. As a company we are politically neutral, but some of our colleagues participated in the protests. If they felt they needed to go, we did not object. What is important in any crisis is to keep a cool head. We simply did our jobs, consulting with clients as circumstances permitted. If it was too dangerous for security reasons staff worked from home or at clients. We just tried to keep remembering our mission and purpose.’
Alexei Kredisov MANAGING PARTNER, EY UKRAINE ‘I can’t recall a single country that has gone through everything – a revolution, a coup, an uprising – all these things combined in just three months. For five days EY’s office was effectively shut down. For an extended period of time we encouraged personnel to stay out of the centre. Luckily we had already started to promote the practice of remote and flexible working. We could hook up through secure channels provided by the global EY. Being part of a global firm was an incredible help. We were able to reach out to people in other countries who have gone through similar things, such as Israel and Egypt.’
Oles Shevchenko FCCA AUDIT DIRECTOR, DELOITTE UKRAINE ‘It was a difficult time, with a significant psychological element. We are all part of this country and, even if we didn’t participate directly, we are all involved mentally. It did not change much in terms of how we operated with clients, but it was difficult. I think it was important that we established a mutual understanding, a good atmosphere, with clients.’
signs of financial unrest to come,’ say Marc Chandler, senior vice president at Brown Brothers Harriman in New York. ‘Deficits of both budget and current accounts can be particularly ominous.’ Even after a political or financial crisis has hit the headlines, it is not always too late to take defensive action. Russia is a case in point, says Anders Aslund, a fellow at the Peterson Institute in Washington. ‘So far sanctions against Russia have been relatively mild,’ he argues. ‘But a prudent executive should prepare for the possibility that stricter measures will be on the way.’ ‘Russia has the highest levels of trade protection of the main G20 countries, so it is hard to sell goods and services from the outside.’ Instead, the best way to deal with this looming threat, he argues, is to carefully select who you interact with. ‘It used to be that you were better off dealing with state-backed companies or banks that were closely linked to president Vladimir Putin,’ he says. ‘Now the reverse is true. The state firms are far more likely to be hit by any sanctions, so it is better to keep as much distance as possible.’ A cautionary tale is offered by the recent case of France’s largest bank, BNP Paribas, which agreed to a record US$9bn settlement with US prosecutors over allegations of breaking US sanctions against trade with Sudan, Iran and Cuba. diversify operations In other countries, however, it is easier to diversify operations. This was the case after the recent military coup in Thailand, Williams argues. ‘Those who are worried that the situation may become even more unstable have the option of relocating some or all of their operations,’ he says. ‘CFOs could consider Malaysia, the Philippines or Indonesia.’ There are also local alternatives to Egypt, says Capital Economics Middle East analyst William Jackson. ‘The society is still extremely
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accountancy futures: risk and governance geopolitics
Dealing with political risk 1 Keep your eye on where the next crisis is brewing. Data from the World Bank and International Monetary Fund can provide clues. 2 Choose your counter-parties more carefully; don’t get stuck with a Russian bank that might get hit with sanctions. 3 Batten down the hatches and at least try to minimise losses until the situation improves. 4 Find a safer alternative location to protect your supply chain. 5 Financial derivatives can also be used to hedge risk, but may be pricey. 6 A solid programme of corporate social responsibility can help reduce the severity of political risk. polarised between those who support the Muslim Brotherhood and those who back the armed forces,’ he says. ‘For executives looking for a nearby nation with a big home market but less risk, Morocco is worth considering. It has become a good location for manufacturing and is also close to the Southern European market.’ Venezuela’s political plight is also so extreme that many executives are considering nearby political safe havens, observes David Rees, the regional specialist at Capital Economics. The country has been experiencing the worst unrest
A protester gestures during a protest at a shopping district in Bangkok, Thailand. The recent military coup has heightened foreign businesses’ awareness of local relocation options.
‘A burst of inflation
after devaluation may encourage countries to impose price controls’
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in a decade, along with rampant inflation and a continued flow of expropriations of private businesses by the government. The worsening situation has dented the profits of multinationals like consumer goods producer Procter & Gamble, which was caught off guard by a sharp depreciation in the currency. Despite its massive oil revenues, the country is facing serious shortages of basic commodities. Many economists believe that the situation could go downhill further before it gets better. A debt default and current account crisis are considered possible. ‘Obviously companies do not want to totally retreat from a nation that might rebound in a few years,’ says Rees. ‘But trimming operations to the bone in such countries is sensible. It is also a good idea to beef up businesses in the likes of Chile, Peru and Colombia, where the risks are much lower.’ There are other ways of hedging risk without fleeing a country, says Win Thin, an emergingmarket strategist at Brown Brothers Harriman. ‘Companies can protect themselves against a sharp devaluation by locking in the dollar value of profits in the derivatives market,’ he says. ‘Of course, this can be an expensive option.’ In addition, if the political climate in a country is deteriorating, a company can buy credit default swaps; while these are intended to reimburse investors if the government
accountancy futures: risk and governance geopolitics
Ravi Mahendra FCCA, FD, global consumer distribution, AIG The US insurance multinational AIG is the 62nd largest company in the world, according to Forbes, with over 63,000 employees and customers in 130 countries. AIG companies serve commercial, institutional and individual customers worldwide. The nature of the business means that Mahendra is interested in just about any major event that makes the news. ‘When I get up in the morning I turn on the TV or look at the Financial Times and see what is happening in the world and my first question is, what is our exposure?’ says Sri Lankaborn Ravi Mahendra, who was recently promoted to his new role after a spell as AIG’s UK executive finance director. ‘We insure a comprehensive range of risks faced by a broad spectrum of individuals, organisations and businesses. These include financial and property risks to satellites and risks associated with political instability.’ To an outsider insurance seems – there’s no way to avoid it – a risky business, held hostage to the vagaries of life and nature. Disasters, natural and man-made, can come from anywhere at any time, with the potential to wreck not only lives but also a perfectly decent set of financial results. But for those working in the industry, this is all part of the excitement. It all comes down to pricing risk, says Mahendra: ‘The point is that insurance companies have to select the right risk, price it correctly and manage their portfolio. If they do that right, they’ll be fine.’ In insurance the finance function plays a vital strategic role. ‘I’m constantly looking at how finance can add value,’ he says. Liz Fisher, journalist
* Retail includes public spaces such as markets * Transport includes attacks on land, maritime and aviation
of the roughly 4.9 million barrels from BP’s infamous Deepwater Horizon accident. But infuriated government officials in Brazil sought to slap the company with a record US$11bn fine – equivalent to almost half the company’s worldwide net income for the year. The authorities also ordered top Chevron executives to surrender their passports and threatened criminal charges. Chevron eventually managed to diffuse these tensions. But Castro Neves argues that companies need to proactively build goodwill where they operate. ‘A solid programme of corporate and social responsibility can really help reduce such threats,’ he says. ‘Companies need to ensure that they are minimising ecological or social damage. But also that they constantly remind emerging markets of the benefits they provide, in terms of job creation, royalty and tax payments.’ Crafting a strong message, Castro Neves says, can ensure that when a crisis hits, there is less political animosity. Political risk is impossible to avoid for global companies. In many cases, a country’s large consumer market, rich natural resources or efficient workforce can make such risks worth taking. Chevron, for example, has been investing heavily in Argentina’s energy sector – despite the fact that the nation expropriated Spanish oil company Repsol’s stake in YPF in 2012 and took over a year to pay compensation. But there are a host of techniques that CFOs can take to control such risks or predict where the next crisis might explode.
Source: Terrorism Tracker, a comprehensive global database of terrorist attacks and plots, at www.terrorismtracker.com
Christopher Fitzgerald, journalist based in New York
defaults on its debt payments, they rise in value during times of political turbulence. Companies may also be increasingly vulnerable to new kinds of political risk, says Joao Augusto de Castro Neves, senior analyst at Eurasia Group. ‘In many parts of Latin America we are seeing an emerging middle class who care far more about environmental issues,’ he says. ‘This can be a real peril for foreign companies.’ Chevron experienced this kind of challenge in 2012 following a leak from one of its Brazilian offshore oil wells. This spill released just 2,400 barrels of oil into the sea, a small fraction
Attacks by sector 33% Retail* 18% Transport* 12% Oil 6% Electricity 6% Construction 5% Media 5% Tourism 5% Gas 3% Agriculture 3% Financial 2% Mining 2% Utilities Global risk management consultancy Risk Advisory’s Terrorism Tracker gives corporations and financial institutions a global picture of terrorist risks that can – and should – affect their due diligence activities.
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accountancy futures: RISK AND GOVERNANCE INTERVIEW
Good in a crisis The services of a global firm are crucial both in times of geopolitical risk and in expanding global economies, explains KPMG chairman John Veihmeyer
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lobal accountancy firms have much in common with diplomatic services. Like the US State Department or the British Foreign Office, KPMG and its peers have their ears to the ground all over the world. That makes them acute analysts of trends in political risk. John Veihmeyer, the global chairman of KPMG, believes that his firm’s international reach – it has operations in 155 countries – is a huge asset for its multinational clients. ‘Our offices around the world are close to the action,’ he says. ‘As a result this often gives us an early warning system when problems are emerging, along with a sense of how policies will develop.’ Like other large firms, KPMG is a federation of partnerships with offices in many politically perilous countries, including Egypt, Ukraine and Israel. ‘Geopolitical risk is more on the top of the agenda in recent months as we have seen tensions escalating in Ukraine and the Middle East,’ Veihmeyer says. This is a double-edged sword for KPMG. Overall, Veihmeyer believes the firm does best in successful and robust economies. ‘A growing economy lifts all boats and that includes our operations in these countries.’
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On the other hand, political and economic crises are also times when KPMG can be most useful to its clients. ‘Companies that operate in struggling economies often need our services,’ he points out. ‘We can be very agile when necessary.’ One example is Venezuela, where a highly elaborate currency regime – three official
John Veihmeyer John Veihmeyer became global chairman of KPMG, the world’s fourth largest accountancy and consultancy network, in February 2014. He has spent his entire 37-year career at the firm, having started as an auditor in Washington DC in 1977. He is also chairman and chief executive officer of the US practice, roles he has held since 2010. Between 2005 and 2010 he was deputy US chairman following a stint as Washington area office managing partner. He was made a partner at the firm in 1987 at age 32. Veihmeyer has been repeatedly named one of the top 100 most influential people in accounting by Accounting Today magazine and one of the top 100 most influential people in corporate governance by Directorship magazine. Veihmeyer and his wife Beth have been deeply involved in KPMG’s Family for Literacy programme, which has provided more than two million books to underprivileged children in the US – an initiative that is being extended to eight more countries. Veihmeyer has also served as a member of the US Securities and Exchange Commission’s Advisory Committee on Smaller Public Companies.
accountancy futures: RISK AND GOVERNANCE INTERVIEW
exchange rates and a black market too – poses considerable challenges for companies. There may be no magic solution to such situations, but businesses still need help in sorting through such complexities. ‘One of our roles is to help companies understand what risks they will face in different countries and where there are still opportunities,’ Veihmeyer says. ‘We can help firms assess whether the environment in certain countries will support their business operations.’ In addition, the regulatory and tax frameworks in countries undergoing political and economic stress often undergo significant changes. ‘It is important for companies to have the best information on where policymaking is heading,’ Veihmeyer says. The firm itself is not immune to turbulence, and its offices can be disrupted. ‘Our role is to provide support and help to those countries experiencing trouble and our practices within them,’ he says. Accountancy firms are often in danger of getting embroiled in political disputes. One recent example is the pro-democracy movement in Hong Kong, where protesters have been angered by China’s backing away from a pledge to introduce universal suffrage there by 2017. The Big Four – Deloitte, EY, KPMG and PwC – have come in for criticism from Amnesty International for taking out an advert in three Chinese-language newspapers warning that the protests by the movement ‘would have a negative and long-lasting impact on the rule of law, the society and the economy of Hong Kong’. The advert continued: ‘We hope that the disagreements could be resolved through negotiation and dialogue instead.’ But Veihmeyer is upbeat about the broad prospects for the global economy over coming years. ‘Political risk waxes and wanes,’ he says. ‘But there is no clear indication that what we are seeing now is part of a large cycle.’ Indeed, Veihmeyer believes the environment is positive. ‘The global economy is on the mend and that is creating tremendous opportunities,’ he says. Where clouds are sighted on the corporate horizon, these can often play to KPMG’s strengths. A recent survey of 400 chief executives asked about their main concerns over the next three years. The top two were regulatory challenges and tax policy. The poll had 34% of the CEOs saying they were spending more time with regulators or government officials or considering doing so. ‘This fits well with what we do as a firm,’ says Veihmeyer. ‘More and more companies are operating globally. Even mid-market businesses are now sourcing supplies from overseas, and that creates tax complexity.’
Looking forward, Veihmeyer believes that more companies will focus on exploiting disruptive technologies, including mobile and cloud. The global economy may be growing relatively slowly but the pace of technological evolution has been accelerating. ‘This is going to be a growth area over coming years,’ he says. ‘It is also an area where KPMG has distinctive expertise both in terms of strategy and the ability to execute.’ One area where progress will likely remain sluggish, Veihmeyer fears, is that of converging global accounting standards. ‘If you had asked me six years ago, I would have expected that this process would have progressed at a more rapid pace. Obviously this is a challenging situation and a discussion where people hold conflicting views about what is preferable. So I do not discount the challenges. Clearly, however, we should be aiming for fewer differences between nations and regions.’ In fact, divergent accounting and regulatory structures can be beneficial for professional services firms, since they create problems that businesses need to solve. ‘But as a matter of public policy, such complexity is harmful for businesses and economies,’ he says. Overall, though, Veihmeyer is optimistic that the global economy will offer plenty of opportunities for KPMG and its clients over the coming years – despite the recent upsurge in political turbulence. Christopher Fitzgerald, journalist based in New York
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accountancy futures: risk and governance interview
Complexity in the risk relationship Insurers are changing how they deal with corporate clients as complexity in regulations and risk data increases, explains EY’s Shaun Crawford FCCA
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he insurance industry model is facing a growing level of complexity and sophistication that is changing the relationship between insurers and their corporate clients. Take regulation, for example. New rules are emerging from the national level through to the G20. Solvency II is the particularly burdensome new European regulation heading down the slipway. The deadline for implementation was recently pushed back by Brussels because of the difficulty in putting together a comprehensive – and comprehensible – rule book, but few would risk betting on a further extension of the deadline beyond 1 January 2016. It’s a complicated piece of legislation but, as far as Shaun Crawford, global insurance leader at EY, is concerned, what Solvency II really means is: ‘insurers are going to have to put more capital in their balance sheet’. Of course, ‘more capital means more governance, a lot more cost and that ultimately will be passed on to the customer’. While the need to generate additional returns on an enlarged capital base to underwrite the same risks will mean higher premiums, Crawford is clear that, in some cases, insurance companies may not be prepared to take on certain risks in the future. They may pull out of certain lines if they become too capitalintensive for the returns available. ‘Some of the niche players may find it difficult to trade in the future under these new stringent rules for capital,’ Crawford says. CFOs take note. Looking globally Global corporations increasingly want to get the buying power that comes from negotiating global deals with suppliers. The geographic footprint of the insurers rarely matches that of the client company, however. ‘You’ll probably see more international brokers who are going to broke different policies in different regions,’ Crawford says. ‘So the broker rather than the insurer will piece together the international solution, broking different policies in different regions. But it would depend on the product and the type of risk that’s being insured.’ Indeed, there are situations where corporates find that it’s better to have a local provider in each territory rather than trying to get a one-stop worldwide solution, Crawford says.
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Shaun Crawford FCCA leads EY’s global insurance business of over 5,000 specialists. Prior to joining EY, he fulfilled a range of senior management bancassurance roles within NatWest Bank and HSBC. He has been in the financial services industry for 30 years having worked both in consulting and line management with many European life assurers and UK retail banks.
This is particularly so where there are local tax, regulatory or cultural reasons that make a global solution more difficult to implement. The costs of local tailoring and compliance can counteract any economies of scale. Pensions, health cover or vehicle insurance are typically sourced locally. ‘But when you look at buildings cover and large international travel policies, some of that can be done on a more global basis,’ Crawford says. Insurers are increasingly looking to emerging markets for growth. But these markets also have a few of their own rapidly developing insurance businesses, reaching out to the rest of the world. China’s Ping An, for example, is already of a scale and complexity that, in 2013, it was named by the Financial Stability Board (FSB) as one of the first nine global systemically important insurers (G-SIIs). But at present these emerging market insurers are active in the consumer field or in deploying their swelling investment coffers. They are not yet making their presence felt in the corporate client arena. ‘We are going to see more of these insurers from emerging markets but these companies aren’t global yet,’ says Crawford. ‘Their deals tend to be more about acquisitions or investments. They have capital in the balance sheet but you don’t see Ping An products in the street.’ Good insurers have realised that they need to compete by offering good customer service. This is especially true in employee-oriented policies, such as pensions, life cover or health. Insurers, says Crawford, ‘need to make sure it’s easy to transfer people in and out of the schemes as they join and leave a company’. For pensions, of course, they need to ‘make sure they invest well and make sure that pensions pan out when staff retire. Similarly, companies want to know that it will be hasslefree for an employee’s family if it’s necessary to pay out on a life policy. And health cover is an area where employers won’t want insurers making life any more difficult than it already is for an employee in need of medical treatment. ‘This is a much deeper relationship all the way through and price becomes less of an issue,’ says Crawford. ‘It’s about the whole service proposition because if you do it on the cheap and the health insurer messes up, the employees become upset.’
accountancy futures: risk and governance interview
Even for less employee-sensitive types of cover, service is still a key ingredient of the relationship between insurer and corporate client. Take buildings insurance, for example. As competitive as this market is, it is one where the incumbent insurer often isn’t rotated out just so the company can save a little bit of money. ‘In that sort of relationship it’s more about demonstrating that when something goes wrong the insurer can respond quickly and deal with it,’ Crawford says. ‘It’s how the insurance company deals with situations that will decide how the relationship progresses. It’s a postevent type of thing.’ Partly that is about paying up promptly, but it can also be ‘service’ things like immediately arranging alternative cover if employees need to relocate in an emergency. How service reduces risk Increasingly, however, insurers are realising that there are opportunities to provide customer-winning service and reduce their own risks, Crawford says. Upfront advice (eg, don’t keep your servers in the cellar where they are vulnerable to flood risks, do make sure that you have – and test – a disaster recovery plan) is valuable to the corporate client, but can reduce the insurer’s risk and slice something off the premiums as well. ‘Insurers are needing to do more of that preventative customer care. If they don’t, the losses will be a lot higher.’ Pre-emptive advice is playing a bigger part in the service offering, too. For example, some insurers are well equipped to advise clients of storms that are on the way, giving companies time to make preparations. ‘Insurers are getting more sophisticated. There’s a lot more data being pulled together, enabling them to analyse, underwrite and price more effectively,’ Crawford says. At least one Canadian insurer monitors ‘dry wood’ so that it can anticipate forest fire risks. ‘They are also contacting the local authorities and warning them: “unless you put a fire appliance in that area or clear some space, we’re not going to insure those areas” – which is not what the authorities want to hear,’ Crawford says. ‘If you can prevent a fire or put the fire out more quickly then there’s less damage for the customer. So they’re helping society by providing this kind of information.’
Forest in Vancouver, Canada. At least one insurer in the country monitors ‘dry wood’ in order to anticipate forestfire risks.
‘Insurers are getting
more sophisticated. There’s a lot more data being pulled together’
Similarly, insurers are monitoring climate patterns to help them provide crop insurance anywhere across the globe, or studying flood plain data. ‘We’re seeing that in the UK. When rivers are dredged the pricing of premiums changes,’ Crawford says. ‘What you’re seeing is much more science, much more data and analytics to be able to assess those risk – and then a desire to formally advise people such as governments who don’t have that data and information.’ Hand in hand with the growing mass and range of data that insurers are studying is a demand for a much broader range of employee skills than ever before: insurers are recruiting meteorologists, geologists, geographers, DNA scientists – ‘all sorts of people so they can predict what might happen’. ‘If I was a CFO looking to ensure I’ve got all my risks covered,’ says Crawford, ‘I want to work with someone who has got a handle on managing it.’ Andrew Sawers, journalist
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accountancy futures: risk and governance cybercrime
Prevention is better than cure ACCA USA’s second annual New York conference on cybersecurity highlighted the seriousness of this mounting IT threat and offered solutions
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very year fewer citizens of rich nations are being assaulted, murdered or held up at gunpoint. In the US, the number of violent crimes per year has plunged 32% since 1990 and, in the biggest cities, such offences are down a stunning 64%. A similar trend can be seen everywhere from the UK to Estonia. Yet one class of crime has been immune to this welcome trend. In 2013 the number of damaging cyber attacks on US companies doubled to 122 every week, according a recent study by technology firm HP and the Ponemon Institute. The average annualised cost of cybercrime meanwhile climbed by almost 80% to US$11.5m. In its second annual conference on cybercrime, ACCA convened a group of top experts to shed light on what lies behind this IT menace and what steps businesses can take to protect themselves.
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Above, from left: Jonathan Hill, Pace University’s associate dean and director of special programs and projects; Charles Gilgen, FBI; Bernadette Gleason, Citi; Robert Zandoli, AIG; and Vincent Tophoff, International Federation of Accountants.
Introducing the event at New York’s Pace University, David Szuchman, executive assistant district attorney and chief of the investigations division at the Manhattan District Attorney’s office, said that technologybased crime had become a pervasive hazard. ‘Identity theft is the fastest-growing crime in this country,’ he said. ‘As the technology becomes more sophisticated, so do the criminals who use it.’ Most traditional offences require criminals to be physically close to their victims. Not so cybercrime. ‘Somebody sitting in Ukraine can impact New York City,’ Szuchman said. ‘To prosecute that kind of crime you need some very unique capabilities.’ But he highighted how, in 2013, the New York District Attorney’s office successfully secured the conviction of 15 members of an organised crime gang with links to Ukraine and the Czech Republic that
accountancy futures: risk and governance cybercrime
had stolen over US$5m from over 100,000 card holders. One of the ringleaders in this Western Express case, Douglas Latta, was sentenced to up to 44 years in prison. Deterrent value This sentence, Szuchman said, was a warning to IT fraudsters. ‘While my job is not purely to put people behind bars, it clearly is a deterrent,’ he said. ‘Judges are coming to understand what is happening to victims, who are being completely manipulated by technology.’ Speakers said companies, individuals and government agencies still faced an uphill struggle to protect themselves. ‘The ease with which people can penetrate your systems is sobering and you can’t be completely vigilant every hour of the day,’ said Charles Gilgen, a supervisory special agent at the Federal Bureau of Investigations (FBI). The speed with which a cyber attack inflicts damage also helps explain why the financial losses are mounting. ‘The technology allows bad things to happen quickly and in large volumes,’ said Robert Zandoli, global chief of information security at insurance giant AIG. In addition, speakers complained about a shortage of experts. ‘Currently there are not enough qualified cyber experts to stop all the threats against us,’ said Judge Robert Keating, Pace University’s vice president for strategic initiatives. Panellists agreed that it is not always clear where the threats are coming from. ‘We tend to think about this problem as an “us and them” problem,’ warned Vincent Tophoff, senior technical manager at the International Federation of Accountants. ‘But there is a large grey area where people can turn from good guys into bad guys.’ Given the large financial rewards of cybercrime, some IT experts can be tempted into illicit activity. The FBI also believes companies need to be more aware that the threat can come from within. ‘Sometimes there are people inside the company and everything is going fine,’ says Gilgen. ‘Then a problem arises – personal or financial – and they become a bad guy.’ Zandoli added that a company’s own staff can be the organisation Achilles’ heel. ‘A really smart, malicious insider can get around many of the protections you put in place,’ he said. The vulnerability of companies has been further increased by the use of personal technology in the office, explained Bernadette Gleason, the North America eCrime laboratory manager for the banking group Citi. ‘The fact that employees can now bring smartphones into the office means they can potentially take pictures of screens with customer account information,’
The clone zone Credit-card skimming has become a global epidemic, according to a report produced by New York’s Pace University and ACCA USA. ‘Criminals – often highly coordinated and operating globally – are using new methods to steal from customers at petrol pumps and ATMs,’ writes Dr Darren Hayes, computer information systems programme chair at Pace University and author of the ACCAsponsored research. Skimming the surface: how skimmer fraud has become a global epidemic is available at www.accaglobal.com/ab98 she cautioned, adding that ‘allowing staff to bring their own computers on to the network or take company computers home for personal use raises the threat of infection.’ Despite the complexities, panellists agreed there were ways to mitigate the threat. The starting point, said Zandoli, was a ‘continuous and constant’ programme of awareness. ‘It’s not just a question of educating a lot of specialists,’ said Tophoff. ‘This problem concerns everybody in an organisation.’ Companies and government agencies also needed to move cybercrime to the forefront when designing IT. ‘You need layers of defence built into the IT systems,’ said Gleason. It is not enough to test for vulnerabilities once a system has been set up and only then try to plug gaps, she explained. Dynamic defence Zandoli said the future of security also lay in dynamic defence. The latest generation of intelligent systems can learn, adapt and combat fast-changing cyber threats, as a recent report from consultant Booz Allen explained. ‘One criticism of cybersecurity is that it has always been reactive,’ said Zandoli. ‘But tools are advancing and the latest technologies can see anomalies and react automatically.’ Companies also need to be more ready to get help when problems arise. Gilgen said that an increasing number of companies were willing to come forward when their systems had been infiltrated. ‘It is very hard for companies to take this to their shareholders and the public, or even to law enforcement,’ he said. ‘But we cannot do our jobs unless corporations cooperate with us. Our pledge is that we want to work as swiftly and professionally as possible to protect their resources.’ Despite soaring incidences of cybercrime, ACCA’s panel of experts believed that IT offences could be contained. The hope is that by the time of the next conference there will be more evidence that cyber criminals – like their lower-tech predecessors – are on the back foot. Christopher Alkan, journalist based in New York
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accountancy futures: smart finance transformation
From A to B While change is always hard, if transformation programmes are to achieve their aims it is vital that finance leaders take ownership, says ACCA’s Jamie Lyon
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any CFOs have a good understanding of the current state of their finance function – and a clear vision of what it ought to be like. Rationalisation, new processes, better technology and even entirely different working models such as shared service centres or outsourcing can all be important and compelling components of that vision. The challenge lies in getting from A to B. Managing change is critical to turning the vision into a reality in sync with the business case for the transformation programme. But finance people may sometimes be too rational, and assume that the bright, shining logic of the ambition and the promised return on investment will be enough to bring about the change. Finance leaders who assume the bald facts are all that is needed to get their
Jamie Lyon FCCA is ACCA’s head of corporate sector and leads its global research and insights programme on finance transformation.
difficult to convince people of the need to change their familiar ways of working. But as Chris Gunning, vice president for global shared services at Unisys, says: ‘Finance leaders need to be proactive rather than reactive, sitting and waiting for an organisational indicator. I think we should be steering the vision and the strategy of finance.’ Patrick Hicks, service owner for global finance services at GlaxoSmithKline, puts it a bit more colourfully, saying that ‘when there is no burning platform, it’s critical to create discontent with the status quo as a scare factor’. All well and good – but CFOs wanting to embark on ambitious change programmes at a time when the rest of the enterprise is ‘business as usual’ will have to first engage with and then secure a mandate from their CEO. That does not mean delegating upwards;
‘Finance leaders need to be proactive rather than reactive, sitting and waiting for an organisational indicator. I think we should be steering the vision and the strategy of finance’
teams to fully engage with a transformation project and deliver it are in for a culture shock. As is clear from ACCA’s recent report, Transformation challenges in finance, finance leaders must fully invest in change management, get the right sponsors to support their project, deal effectively with stakeholders, obtain the necessary resources and keep the transformation on the corporate radar. The need for change One of the problems for organisations trying to transform the finance function is that, often, people simply don’t see the need for it. It is easier to make an enthusiastic case for change when an industry is going through a period of rapid transformation – perhaps because of the internet, for example – or if competitors are stealing a march. And if the CEO and the rest of the board set out to change the strategy of the business, then that, too, can be a powerful force that brings about change across the whole organisation. However, if the business environment is relatively benign and the strategy is one of ‘steady as she goes’, then it is much more
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it does mean that, as Gunning says: ‘If the cynics in the business don’t want to get on board with the finance transformation, you do need the CEO to beat them with a stick and get them back on track.’ Hicks agrees that the CEO’s support is critical to underscoring that participation is not optional. Fast or slow? Evolution or revolution? Simon Newton, FD for partnership services at UK retailer the John Lewis Partnership, puts it nicely: ‘Go as fast as you can and maybe a little bit faster than you ought.’ You can’t deliver revolution if money is tight and change has to be brought about through small steps and quick wins, but everyone seems to agree that a transformation programme that is too slow, under-resourced or lacking a certain aggression will not communicate the right message. But whether the change is fast or slow, Deloitte partner Peter Moller advises: ‘Respect the culture.’ The nature of the transformation strategy is probably the most important business decision. The question of whether to go for a
accountancy futures: smart finance transformation
captive or to outsource completely is one that has no easy answer. In any event, the ‘right’ answer to the ‘make-or-buy’ decision will be different from one company to another, and many opt for a hybrid solution. So how do you tell what’s right? Factors to bear in mind include the vision for the finance function (is it to be a ‘centre of excellence’, for instance, or a ‘partner to the business’?), the scale of the business (does finance have the critical mass to make outsourcing economically sensible?) and organisational maturity. Culture is important: Hicks says: ‘We are used to solving our own problems.’ But John Ashworth, global head of finance transformation at Pearson, thinks the model choice presents an opportunity to ‘kick the culture’. His company went down the outsourcing route, creating ‘shock and awe’ as part of the change programme. Does your business have this level of risk appetite?
Julie Spillane FCCA md, Accenture Global Services ‘The single biggest success factor is having a CFO or a business leader who can talk about the need for change. Why do we need to change? What will it feel like when we change? What’s going to be different? Painting that compelling picture of the future, then ensuring that the broader leadership team really walk the talk.’
Seeing differently Either answer to the risk-appetite question involves significant cultural change for finance functions that have control and compliance at their heart. Moving toward an outsourcing model or even shared services means finance managers are controlling the environment and not the processes. They use dashboards to gain an overview, not spreadsheets, to drill down into individual transactions. The ‘real’ accountants are in Eastern Europe or India or Manila. CFOs, says the ACCA report, need to ‘shut the door on the past but communicate, invest in new career models and highlight the business imperative’. The right external expert can help bring a fresh pair of eyes, but they will need to build relationships within the company from scratch. Internal leaders may already have that connectivity with the business, but may not be in the best position to champion the need for change. A true partnership between internal leaders and external experts is the solution that Hicks says is needed. There are many keys to success, and all are needed to unlock the value in a transformation programme. Commitment, knowing the culture, preparation and resources, aligning capability and ambition – without all of these, change programmes will fail to deliver. Perhaps the most important of all, though, is a clear vision that is communicated so that everyone knows what is expected of them and believes that they can – and should – do it. The ACCA report, Transformation challenges in finance, is at www.accaglobal.com/smart
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accountancy futures: smart finance viewpoints
Agents of change Four finance leaders share their experiences of leading change within organisations – and how being proactive is the key to real transformation
Paula Kensington FCCA CFO and coo, regus, australia and new zealand ‘I personally see myself as a corporate disrupter, because I know that unless you question what is going on in the business, you are going to get left behind. I am not just the finance leader, but a leader across all of the business. I care about the company as a whole and want to make sure that we achieve what we set out to achieve. Apart from the qualifications, I want to see passion for the job. I want change agents in my team, people who buy into my vision, come on board and help me drive my vision.’ Full interview at www.accaglobal.com/ab112
Angela Dong FCCA CFO, NIKE GREATER CHINA ‘We have three-year strategy planning, ad-hoc and long-term strategy planning, and in those processes you need to first project where we want our consumers to go and how we influence them. As a CFO, I need to balance the shortterm vs longer-term investment, but nevertheless, innovation is the core focus. Each category [within Nike] has a finance person in it and that person works to form category-specific strategies under the overall umbrella of corporate strategy. That gives them a platform to operate – almost like mini entrepreneurs. They come up with proposals and ideas and we collaborate with each other for the final strategy.’ Full interview at www.accaglobal.com/ab113
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accountancy futures: smart finance viewpoints
Andrew Pollins FCCA FD, LONDON UNDERGROUND ‘When I first arrived in 2010, the organisation was coming out of the dark ages. There hadn’t been a lot of financial pressures. During the era of the PPPs, money was pretty free-flowing. London Underground was focused on quality but not necessarily on value for money. Things had to change. I wanted to make sure that we started to change the culture within the business. We basically locked everything down over a period of months to reset the organisation. The programme was not only successful culturally; it saved us £50m.’ Full interview at www.accaglobal.com/ab114
Doug Alexander HEAD OF FINANCE OPERATIONS, SHELL ‘Our initial focus in Shell when we created Finance Operations was to radically improve the efficiency of our transaction processing, but over the years we have grown and changed the nature of what we do. Take some basic things like staff who process invoices to pay suppliers. Once they get better at paying on time, the only way to make that process even more effective is to talk to colleagues at the front end who are negotiating the contracts, to make sure they are set up properly. So these [shared services] centres moved from basic transaction processing into more value-added activities. Over time, not only has the size of the centres grown, but the nature of what we do in them has changed dramatically.’ Full interview at www.accaglobal.com/ab115
pg25 edition 09
accountancy futures: smart finance relationships
Dynamic duo Successful executive teams are often marked by a healthy tension between the CEO and CFO built on mutual respect, explains journalist Jason Karaian
B Jason Karaian is senior Europe correspondent for Quartz, where he writes about business, finance and economics. He previously covered the financial services industry for the Economist Intelligence Unit and served as deputy editor of the European edition of CFO magazine. His writing has appeared in The Economist, Barron’s, and The Treasurer, among others.
y its nature, finance is a technical field with obscure jargon understood almost exclusively by its practitioners. When CFOs interact with their teams, they are free to employ this arcane language. But to fulfil their crucial role as business partners outside the finance function, they need a different approach. According to Lawrence Litowitz of SCA Group, a recruitment firm: ‘You have to be able to put yourself in someone else’s shoes to see what they need. They don’t tell you what they need, and they don’t necessarily know what you can give them.’ Like any good leader, CFOs are most effective when they adapt their knowledge and influence to suit the audience. And the CFO’s most important relationship, without question, is with the CEO. In a 2010 survey of Fortune 500 CFOs with tenures of more than six years by the Korn/ Ferry Institute, building a trusted partnership with the CEO was cited as a first-time CFO’s most critical factor for success. This surpassed an operational understanding of the business, dealing with investors and all the other responsibilities that come when making the step up to finance chief. More often than not, the top executive duo is defined by their complementary skillsets. If the CEO is the heart of a company, the CFO is its head. The chief executive provides
The yin-and-yang nature of the relationship works best when there is mutual regard for the other’s position
the passion, the CFO the pragmatism. Less happily, the CFO is sometimes cast in the role of goon in a good-cop/bad-cop gambit, charged with cutting costs while the CEO extols exciting plans for growth. Whatever the nature of the partnership, it is crucial for the CFO to forge a productive relationship with the CEO. In a survey of CEOs and CFOs, professors at Duke University identified noteworthy differences in the way the executives made capital-spending decisions. Both CEOs and CFOs gave the net present value and timing of cashflows similar
pg26 edition 09
scores in terms of their importance. Outside these orthodox measures, however, the other reasons for allocating resources receive significantly different emphasis. CEOs are much more likely to cite ‘gut feel’ as an important consideration; CFOs are more likely to factor in the previous return of a similar project. CEOs also tend to weigh the proposing manager’s reputation more highly when allocating capital; perhaps because of this, CFOs cite ‘corporate politics’ more often than CEOs as a determinant of spending decisions. The yin-and-yang nature of the CEO-CFO relationship works best when there is mutual regard for the other’s position. In practice, this puts the onus on CFOs to establish their independence. ‘You need to have enough stature and respect from the chief executive that you can say “no”,’ asserts Peter Harris, who has served as finance chief at a number of media and marketing firms in the UK. ‘It’s not blind allegiance.’ beware blind allegiance Indeed, given the CFO’s fiduciary duties, blind allegiance can lead to trouble. In a 2011 academic study of more than 70 US companies caught manipulating their accounts, one of the biggest differences between firms that cooked the books and those that did not was the size of share-price-linked bonuses awarded to CEOs. The incentive packages for CFOs at manipulating and non-manipulating companies were similar enough to fail the tests for statistical significance. As a result, the researchers concluded that ‘CFOs are involved in material accounting manipulations because they succumb to pressure from CEOs, rather than because they seek immediate personal financial benefit from their equity incentives’. Higher turnover of CFOs ahead of the discovery of accounting manipulations also suggests that standing up to a CEO bent on fiddling earnings often costs finance chiefs their jobs. Disagreements over strategy, rather than outright illegality, are much more common between CFOs and CEOs. At most companies, these disputes take place behind closed doors, with the top two executives presenting a united front in public. Michael Clarke, finance chief at ADAS, a UK environmental consultancy, describes his approach with the CEOs he has
accountancy futures: smart finance relationships
worked for over a long career at listed and private companies, large and small: ‘If there were any issues where we disagreed with each other, we disagreed outside board meetings. I remember the feedback from one director was, “I wish they wouldn’t look as though they had pre-prepared everything prior to the meeting or would argue from time to time.” What the directors didn’t see was the arguing.’ Of course, the CFO’s subordinate position to the CEO can make these arguments a somewhat delicate affair. But the growing power and influence of CFOs gives them a lot more leverage in these discussions than before. Still, open clashes between the CFO and CEO are rare, and almost always end badly for the finance chief. Joe Kaeser was one of the few to buck this trend in July 2013. A 33-year veteran at Siemens, a German conglomerate, the CFO of six years saw his counterpart in the executive suite, CEO Peter Löscher, ousted after a series of quarterly profit shortfalls and missed revenue targets. According to reports, the finance chief was not necessarily a bystander. After Kaeser stepped up from CFO to CEO at Siemens, he emphasised the conservatism that one would expect from a former finance chief, asserting to a conference call with analysts that ‘we have been trying to achieve too much too quickly’ and noting that his top priority was ‘to calm our enterprise and to stabilise its internal organisation’. Adversity need not lead to the breakup of CEO-CFO duos. Indeed, it can strengthen them, according to Jesper Brandgaard of Novo Nordisk. He was appointed CFO in November 2000, the same time as the CEO, Lars Rebien Sørensen. A formative moment in their relationship came 18 months later, when a profit warning knocked 50% off the company’s share price. ‘We had to revise our plans and face the music,’ Brandgaard recalls. The CFO’s ability to handle the tricky task of crafting a communications plan to placate irate investors put him in the CEO’s good graces: ‘It was at one of those meetings when Lars realised that I was able to express myself clearly in ways that created reasonable expectations. That was a significant change in the way we worked. We have both characterised that profit warning as a
blessing in disguise. We learned that we had complementary competencies.’ In the 13 years since Brandgaard and Sørensen took over as CFO and CEO, Novo Nordisk’s share price has risen more than sevenfold. other side of the table Another perspective on the CFO-CEO relationship comes from executives who have served in both positions. Before joining Prudential, Jackie Hunt served as finance chief at Standard Life and Aviva under CEOs with previous CFO experience. Having sat on the other side of the table, these chief executives appreciated a CFO who stood up to them, she says. ‘They don’t take it personally.’ Before Jim Buckle became CFO at Wiggle, a UK-based online sports-goods retailer, he was managing director at LoveFilm,
This article is an extract from Jason Karaian’s book, The Chief Financial Officer – What CFOs do, the influence they have and why it matters, published by Profile Books and The Economist.
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a DVD-by-mail and video-on-demand provider acquired by Amazon in 2011. In making the step up from CFO to CEO shortly after the takeover, he questioned the necessity of a bona fide CFO, given that the firm, by becoming a division in a much larger group, would cede many financial responsibilities to its new parent company. Instead, he could rely on his financial acumen and the existing accounting and financial analysis specialists who were part of his team when he was CFO. Or so he thought:
‘What I discovered is that the CFO is hugely valuable. Running a business can be a lonely place, and the CFO performs a really important function by being the person that the CEO can bounce ideas off and be challenged by. You need people who will tell you how it is, but not in a destructive way.’ Some healthy tension between the CFO and CEO is acceptable, even encouraged. But once decisions are made, whether a finance chief’s input is accepted or not, the CFO needs to support the CEO and make sure actions are implemented in a financially prudent way. If a CFO cannot accept the CEO’s chosen direction, the main alternatives are resignation or a high-stakes gamble on persuading the board to side against the chief executive.
Culture clash In a speech to members of the Financial Executives Institute in 1963, William Cary, then chairman of the US securities regulator, urged CFOs to resist pressure from CEOs to engage in accounting ‘chicanery’ to flatter earnings. ‘In some cases you may say you cannot control your chief executive officer – a “salesman at heart”,’ he said. The differences in personalities between CFOs and CEOs have long been observed. A trio of professors at Duke University set out to measure this empirically, giving psychometric tests to around 2,500 CFOs and CEOs. They found that, yes, CEOs are more optimistic than CFOs. In fact, they are more optimistic than just about everyone; 80% of the CEO sample was classified as ‘very optimistic’, which the academics note is ‘well above the mean in the psychology literature norms’. CFOs are not the gloomy bunch they are sometimes typecast as – 65% are classified as very optimistic – but they are not nearly as cheerful as their bosses. (The results, published in the Journal of Financial Economics in 2013, also showed that US executives tend towards higher optimism than their European counterparts, regardless of the position they hold.) Similar results are evident in other studies, such as one by Deloitte that sought to categorise CFOs and CEOs into one of four personality types: driver, guardian, integrator and pioneer. The most common CFO-CEO combination is a driver CFO and pioneer CEO. Drivers are characterised as analytical, logical and pragmatic, while pioneers are adventurous, creative and spontaneous. According to the Duke researchers, higher CEO optimism is linked with more short-term debt and acquisition activity. This makes it important for the CFO to act as a balance to hard-charging chief executives, which indeed appears to be the case according to Deloitte’s observations. Just over half of finance chiefs are classified as drivers, a ‘decisive, direct, tough-minded’ character that translates a CEO’s vision into a practical reality, without compromising their ethics if the boss asks them to get ‘creative’ in the wrong sort of way.
‘Running a business can be a lonely place, and the CFO performs a really important function by being the person that the CEO can bounce ideas off and be challenged by’
pg28 edition 09
accountancy futures: smart financE viewpoints
Power of a shared vision Two prominent CFOs working in Asia Pacific stress the importance of working in partnership with the CEO to effect positive change
Kee Kim Eng FCCA GROUP CFO, COURTS ASIA ‘I was very lucky. My CEO is a very modern CEO, and the moment I joined, we clicked. He was open-minded about the new ideas I brought to the table and his support allowed me to show the full potential that the finance team can bring to the business. You cannot be successful unless the CEO treats you as a business partner.’ Full interview at www.accaglobal.com/ab116
Belinda Lau FCCA REGIONAL CFO, OGILVY PUBLIC RELATIONS ASIA PACIFIC Belinda Lau describes herself as a finance partner of the management board. Finance leaders’ views are appreciated by the board of management, she feels, with the CFO viewed as a reliable mechanism for providing a point of view from the financial perspective, in order for the CEO and board to make the right business decisions. Her working relationship with the CEO of the Asia Pacific operation, Steve Dahllof, is, she says, a ‘real partnership’. Full interview at www.accaglobal.com/ab117
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Partner power An ACCA report has identified what finance functions need to do to deliver business insight in a fast-changing environment. Teuta Bakalli FCCA explains
D
espite all the talk about the role of finance as a partner to the business, this is by no means a new concept. It has been talked about and, indeed, put into practice for many years. Finance has long provided CEOs and the rest of the business with more than just ‘rearview mirror’ financial results. And finance’s role in providing insight and analysis, in helping the business formulate strategy and make decisions, is well recognised by boards and senior management teams. Yet the topic, quite rightly, refuses to go away. One reason for this is that while technology is driving changes in business models, reducing barriers to entry and pushing the pace of new product development (and ‘not quite so new’ product obsolescence), it is by no means certain that finance is keeping up. ACCA, in partnership with the Institute of Management Accountants (IMA), has undertaken research as global as our membership.
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Roundtables with finance leaders have been held in New York, Toronto, Vancouver, London, Singapore and Hong Kong, while two surveys involved 750 CFOs around the world and more than 1,200 respondents from ACCA and IMA members. The results tell us a lot about how the demands on business create demands on finance. The best finance functions are adopting an entrepreneurial approach. Others are struggling with the challenge and risk losing credibility within the organisation as to their ability to provide the insight that the business requires. They will, therefore, carry a huge burden of responsibility should their organisations be unable to create growth. The research identifies three kinds of impediment for the finance function: Leadership and strategy. Does finance have the business understanding and sponsorship to have its value creation ideas taken seriously? This is arguably the hardest problem to fix because it may be
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accountancy futures: smart finance collaboration
the one that finance is least equipped to recognise as a problem. Technology. Does finance possess the technological capability that will allow it to deliver recommendations based on timely and accurate information? This ought to be the easiest problem to fix, although board approval for investment can never be a foregone conclusion – the business case for ‘better information’ always needs to be made. Human capital. Does finance have people with the right mix of knowledge and capabilities to support the business continuously, and a mindset that will let them deliver effectively? Finance needs to recognise where missing skills or inappropriate attitudes can be dealt with by training and development or if resources need to be brought into the business (and other resources rotated out), and to know what skills will be required in future. The research made clear that all these challenges are surmountable; finance can deliver on the partnering skills required for effective decision-making in an increasingly competitive, fast-moving and entrepreneurial climate. To do so, it needs to do three things: create the mandate, fix the information and deploy the right talent.
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Creating the mandate This is a two-way street. Finance needs the culture to be able to deliver commercial insight – indeed, to take a leadership stance in doing so, by being proactive, not reactive. The problem for many is that this can be at
Teuta Bakalli incorporated Extol Solutions in 2013 to pursue a management buy-in and provide consultancy to high net worth individuals and SMEs, helping them evaluate investment opportunities, establish strategy and raise capital. Previously she was CFO of Pepper Europe, FD at Vanguard Asset Management and FD and acting COO at Willis. She is a member of the ACCA/IMA Accountants for Business Global Forum.
is likely to be as the department that keeps the business out of jail. Finding a space or a seat at the table that allows finance to contribute insights as a partner can be incredibly difficult.’ To get the ‘pull’ from the rest of the business, finance needs to empower itself to deliver. ‘Part of the success here is the strength and quality of personal relationships with the rest of the business, and the perception they have of what finance can bring to the table,’ another roundtable participant suggested. Fixing the information If it takes too long for systems to churn out information, or manual workrounds are needed to verify untrustworthy data or hammer conflicting spreadsheets together, then finance is ill equipped to do its job in the 21st century business world. Similarly, if the finance machine cranks out numbers that make little sense, provide no insight, few analytics and not much forward-looking guidance for decision-making, then it’s failing. Calling a piece of data a key performance indicator doesn’t make it so. Finance is often led by technology, the roundtables concluded, and so finance has to ‘step back and understand what the organisation needs in terms of its reporting and its insight and analysis’. Then the task is to find and adapt the right technology solution to achieve this. Deploying the right talent This requires getting two principal issues right. First, should finance skills be embedded
‘The business actually wants finance to
challenge it, but unless you speak the same language and phrase the questions carefully you can get pushback’ odds with the deeply embedded stewardship and controllership functions of finance. CFOs need to set the tone at the top to position the whole finance function to support the business. ‘It’s a way of setting an example to the finance fraternity to become as essential to whoever they are partnering as the CFO is to the rest of the management team,’ as one of the London roundtable participants put it. The CFO also has to get buy-in from the board and the business to win the trust and mandate that finance needs to be an effective partner. As another London roundtable attendee put it: ‘If you work for a traditional organisation or sector, their view and perception of finance
across the business – and risk finance staff ‘going native’ and losing their professional independence by doing so? Or should they remain tightly within finance – and sacrifice the visibility and deep level of understanding of what’s happening in the business? A hybrid model arguably addresses that dilemma. A roundtable participant in Singapore said: ‘The most successful organisations, where finance is a true business partner, have the ability to balance governance with value-add.’ The second issue is having staff with the right skills. Finance staff need the technical accounting skills but also communication and relationship skills. They also need to have the right attitude, the right mindset. ‘The
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Sunil Golecha CFO for Asean and North Asia, Thomson Reuters ‘One of the big changes for today’s commercial finance function is that we are all operating in an environment which is rapidly changing, particularly with emerging technology, the growth in social media and so many disruptive players now coming into the industry. So many traditional businesses are trying to compete with very innovative business models, and we don’t quite know how they may evolve in the future. What this means is that today’s enterprise has to be much more entrepreneurial to drive growth in a competitive and volatile environment. The finance function really has to embrace this entrepreneurial spirit. ‘Reflecting on the evolution of finance business partnering practices, again we need to be much more entrepreneurial. If you look at many of the great commercial successes over the past 10 years, the starting point has been solving the customer problem, or making the customer happy, and then figuring out the most appropriate business model that delivers this. ‘This isn’t necessarily very intuitive to the finance function. We need to be prepared to take more risks and let the business take more risks too and allow it to fail within reasonable parameters. Also there are simply more unknowns when you are preparing the business case, so we have to accept more ambiguity. We absolutely need to be able to challenge the business but we need to do this in a way which doesn’t stop innovative decision-making. Ideas and innovation will be at the heart of future commercial success. Today’s commercial finance function has to support that innovation, not stop it. For me that is why the debate on the role of today’s finance function is so important.’ business actually wants finance to challenge it, but unless you speak the same language and phrase the questions carefully you can get pushback,’ one of our panellists said. It’s all about finding people who are willing and able to do this effectively. The clear goal for finance is to be a truly effective, supportive and proactive partner for
‘You’re top of mind for
leaders from the business when they know you will add value to decision-making’
the business in an increasingly fast-moving world where decision-making can no longer be put off until a complete and perfect suite of information has been compiled by finance. In measuring finance’s performance against that goal it is hard to think of a more appropriate or more simple metric than the one suggested by one of our Singapore finance leaders: ‘One of the ways I see success is where leaders from the business come to me when they have a big decision to make, rather than me having to go to them. ‘You’re top of mind for them because they know you will add value to the decisionmaking process.’ Financial insight – challenges and opportunities is one of a series of reports looking at how finance functions can improve their business partnering practices. You can find it at www.accaglobal.com/ab101 More at www.accaglobal.com/smart
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accountancy futures: smart finance viewpoints
Together we stand From building trust to understanding customer needs, finance leaders give their views about the importance of good business relationships
Jean Stephens CHIEF EXECUTIVE, RSM INTERNATIONAL ‘Every network is on a similar journey, but is there an RSM way of doing things? Absolutely. This is the most interesting part of the job for me – differentiating RSM by bringing member firms closer together in a way that encourages collaboration. If people don’t know each other they are not going to refer their biggest clients. Strong relationships build trust, and anything we can do to keep building that trust is going to help us to provide the services our clients expect.’ Full interview at www.accaglobal.com/ab118
Aneal Maharaj FCCA GROUP FD, ANSA McCAL, TRINIDAD ‘We have a performance culture of entrepreneurship and execution, with 6,000 staff across eight sectors, 13 key business lines and 60 companies all connected together through our business model to deliver our targets. But business is business, wherever you go. The processes and the industry may be different, but the approach to doing business, in terms of paying attention to the details, understanding what the customer wants, paying attention to the quality of the product and service you deliver, those things don’t change.’ Full interview at www.accaglobal.com/ab119
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Rohit Bhardwaj FCCA CFO, CHEMTRADE LOGISTICS INCOME FUND Rohit Bhardwaj has successfully negotiated US credit facilities of US$1bn and played an integral role in closing the biggest acquisition in his company’s history. It was a very complex deal and it took the CEO, CFO, many senior management staff and a small army of experts to make sure they got it right. ‘It’s helpful to establish relationships continuously, especially when there is no immediate business need. If you haven’t done that groundwork in advance, then it’s very challenging to raise that sort of money.’ Full interview at www.accaglobal.com/ab120
Kamal Rajani FCCA CFO, NATURE CONSERVANCY OF CANADA ‘The fun part of being CFO at NCC is that it’s not simple straightforward accounting. To understand the numbers you have to get involved in how projects are financed. If you look at different funding sources, their restrictions and the number of projects, there are so many combinations and permutations in which financing can work. The intent is to maximise leverage of funding to ensure conservation success. So these are many little pieces of the puzzle that you have to put together on a regular basis to achieve the whole picture. And in the end, the puzzle isn’t the same shape as it was in the beginning.’ Full interview at www.accaglobal.com/ab121
pg34 edition 09
accountancy futures: tax New approaches
World needs a new deal on tax The politicisation of tax and the lack of clarity in what can be highly complex regulations make a new approach essential, says ACCA’s Chas Roy-Chowdhury
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Chas Roy-Chowdhury FCCA is head of tax at ACCA. He is the staff expert on ACCA’s Global Forum for Taxation and worked in public practice before joining ACCA.
he issue of how to tax companies so that they contribute fairly to the economies they operate in, but are also enabled to thrive, is an international one. The joint G20/Organisation for Economic Cooperation and Development (OECD) work on base erosion and profit sharing illustrates how seriously the matter is being taken. Governments and tax authorities around the world need revenues from businesses to help meet public funding needs in the wake of the global financial crisis. At the same time, changing business practices – particularly globalisation and an increasingly digital economy – challenge the workability of tax rules formulated at a time when profit generation always required some form of physical presence. For their part, corporate tax functions face conflicting pressures. Company directors have a fiduciary duty to minimise business costs, including tax payments. Not to do so could put their business at a competitive disadvantage and reduce returns to shareholders. However, they must also navigate often complex and unclear tax regulations, as well as address community concerns about multinational tax avoidance. Such challenges are highlighted in ACCA’s paper, Global policy on taxation of companies: principles and practices. It also notes how public perception of the contribution made by businesses to society often overlooks the wider benefits of economic activity (such as employment) and the role that companies play in tax administration (for example, by collecting employment and consumption taxes on the government’s behalf). Given this complex landscape, ACCA has framed a set of principles for its approach to policy on corporate tax and in contributing to the global debate. For example, ACCA believes that companies should not pursue aggressive tax avoidance – completely artificial arrangements with no clear purpose other than to avoid tax.
While companies have a commercial imperative to minimise costs, they need to consider the wider impacts of tax policies and recognise that certain legal approaches will be seen by some as unethical. Greater transparency on tax treatment and how decisions on tax are made would, in ACCA’s view, enhance corporate reputation and help a wider range of stakeholders to understand the issues and complexities around business tax. This could include more or better disclosure. Professional accountants are clearly involved in the business tax debate. ACCA’s principles lay down that accountants have a duty to advise clients and employers on all options for maximising profits, recognising that taxpayers have no obligation to pay tax beyond the legal requirements. However, accountants also have a clear duty to advise on technical and reputational risks associated with tax approaches, including ethical dimensions. ACCA is also calling for clearer and simpler tax laws that reflect society’s desired ethical framework. Tax laws need to be made fit for purpose, especially in relation to emerging business models – globalised operations and digital transactions. Taxpayers’ rights must be recognised and balance achieved between potentially competing interests. As for policymakers, ACCA suggests that a new approach to company taxation may be required. The question needs to be asked whether the current corporate tax model is workable in the new global environment. We may need to look for alternative ways to tax business activity. Jurisdictions cannot work alone to address these issues. Coordinated international action is essential if we are to achieve substantive and viable solutions to the corporate tax challenge. You can find Global policy on taxation of companies: principles and practices at www.accaglobal.com/ab110
pg35 edition 09
accountancy futures: audit internal audit
Rotation and evolution President and CEO of the IIA Richard F Chambers considers the role of audit leadership and the pros and cons of internal audit rotational assignments
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here is mounting evidence that heads of internal audit increasingly are coming from outside the ranks of internal audit. According to the Institute of Internal Auditors’ (IIA) Audit Executive Center’s annual global Pulse of the Profession survey, 48% of heads of audit/ chief audit executives (CAEs) held a position outside internal audit immediately prior to assuming their current role. While it is likely many have prior internal audit experience, it is notable that such a large percentage report that their most recent organisational assignment was outside the profession. The changing face of audit leadership raises considerations about the risks and benefits associated with CAEs having career paths predominantly outside of internal audit. In examining this, we need to look at how the profession has changed over the years and the factors that may have led us to this possibly evolutionary inflection point. One key factor is the growing practice of rotating those with executive potential through internal audit. This seems logical and reasonable; diverse work experiences can make for better leaders. Moreover, exposing future organisational leaders to internal audit affords them the opportunity to gain intimate knowledge of various business units as well as a broad view of the organisation, its challenges, risks and opportunities.
Can the requisite integrity and courage
hold strong if a chief audit executive views his or her current position as a temporary assignment? Furthermore, critical thinking and analytical skills can be developed and refined during a meaningful stint in internal audit. However, a number of concerns arise when individuals with little to no previous internal audit experience are tasked with leading the function. Beyond obvious questions about skillsets, there are considerations about independence, objectivity, bias and adherence to certain key professional tenets, as well as conformance to a well-vetted, globally embraced set of standards.
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accountancy futures: audit internal audit
pg37 edition 09
ACCOUNTANCY FUTURES: AUDIT INTERNAL AUDIT
Richard F Chambers is president and CEO of the Institute of Internal Auditors (IIA), the global professional association and standard-setting body for internal auditors. He also serves on the Committee of Sponsoring Organizations of the Treadway Commission’s board of directors, the International Integrated Reporting Council and the IIA board of directors. Prior to assuming his current role in 2009, he was national practice leader in internal audit advisory services at PwC. Accounting Today has named him one of the Top 100 Most Influential People in Accounting.
Management and boards rely on the CAE’s experience for professionalism, adherence to standards, adequacy of processes to support observations and conclusions, and mitigation of the risks to objectivity. A solid CAE must understand business objectives, the risks and challenges that may hinder achieving them, and the controls, policies and practices to mitigate those risks. He or she must possess the skills to develop effective risk-based audit plans, assure compliance, craft audits that get to the root causes, and clearly communicate recommendations to improve the business. These skills can take years to develop and may not necessarily be present in a novice internal audit leader, even one who has shown success and ability in other organisational areas. A strong audit staff can help, but only if the rotational CAE knows how to leverage and learn from that staff’s experiences. SHIFTING FOCUS Audit’s evolving role could further compound the risks. Defining the role has become particularly challenging after one of the most volatile decades in corporate finance history. Internal audit leaders have had to adapt quickly to profound changes. Deft navigation through this period has produced a new crop of highly talented and seasoned CAEs who have shattered historically limiting stereotypes. The challenge is for CAEs to expand their base of experiences. Having a broad perspective on the organisation’s various functions boosts credibility – but balancing new and traditional roles has not been easy. KPMG’s 2014 Global Audit Committee Survey suggests a significant expectation gap may exist. According to the survey, 80% of respondents believe internal audit’s role should extend beyond financial reporting and controls to include other key risks – something the IIA has always advocated. However, only 50% said internal audit currently has the skills and resources to be effective in that role. I would hypothesise that maybe more strategic and selective rotational assignments could help to bridge this gap over time. SUCCESSFUL AUDIT LEADERSHIP Two distinguished Korn/Ferry International partners and myself identified essential traits for audit leadership in the 2010 white paper License to Lead: Seven personal attributes that maximise the impact of the most successful chief audit executives. Among those attributes were superior business acumen and breadth of experience. These two traits serve as obvious benefits that a rotational model offers for developing a varied or expanded business resume. Three other traits – dynamic
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communications skills, excellent grasp of business risks and a gift for developing talent – also can be honed from a career progression that includes diversity of experience. The final two attributes, however, raise questions about which career path can best serve to develop them: unflinching integrity and ethics, and unwavering courage. As we wrote, ‘Serving two masters – the audit committee and management – while maintaining the necessary independence, means an auditor must walk a fine line.’ That daily demand on the internal auditor builds the necessary integrity and devotion to ethics to face tough situations when the time comes – as it will in every CAE’s career – to stand up for what is right, even in the face of adversity. Extreme situations can bring out the finest examples of unflinching integrity and courage under pressure. For example, Cynthia Cooper, the former WorldCom vice president of audit, led a team that often worked after hours to avoid scrutiny to uncover a US$3.8bn fraud. The challenges and adversity that had to be navigated to elevate the issues in this particular situation have been well chronicled. Rhetorically, we should ask ourselves, can the requisite integrity and courage hold strong if a CAE views his or her current position as a temporary assignment? For example, an audit head who plans to rotate back into operations may be less inclined to be critical of work in that area. Could that CAE, consciously or unconsciously, develop a blind spot and overlook, miss or simply ignore red flags if a future relationship is in play? PROTECTING THE INVESTMENT I conclude with some prudent considerations and safeguards that can help if your organisation decides a rotational CAE’s perceived benefits outweigh the risks: Be mindful of reporting relationships and avoid having the rotating audit leader report directly to the area where he or she previously worked or expects to return. Exercise professional scepticism over risk assessments around areas where the audit leader worked or expects to return. Lean towards requiring that the CAE not return to their previous organisational area. Strive for rotational assignments of sufficient duration – for as long as five or six years – to lessen the risk of perceived or actual reporting bias. Ultimately, leadership’s consideration of the rotational CAE dilemma must include a healthy and informed debate of the risks and opportunities before determining its suitability for an organisation.
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accountancy futures: audit regulation
Audit changes start to bite Discussions on audit reform in Europe have finally come to an end and the challenge now is keeping up with the requirements, says ACCA’s Sue Almond
I Sue Almond is ACCA’s director of external affairs. She is responsible for ACCA’s global policy and technical teams, and is lead external representative on financial reporting and auditing and assurance. She spent over 20 years with Grant Thornton UK as national assurance services partner.
t may feel like audit reform has been batted around the debating chambers of Europe and elsewhere constantly since the global financial crisis. However, in Europe at least, we have finally arrived at our new steady state of regulation. The time for talking has passed, the focus is now on tackling the practical challenges of implementation. For multinational corporations with operations in a range of jurisdictions, one challenge may simply be staying abreast of the detailed requirements of local audit and corporate governance regimes. Under the EU’s new rules, for example, listed companies in Europe will have to rotate their auditors every 10 years, unless they put the audit out to tender (when a further 10-year appointment can be made – or 14 years for joint auditors). In the UK, however, FTSE 350 companies are already required to put their audit out to tender, though not necessarily rotate, every 10 years. The Netherlands has also moved slightly apart from the EU pack, requiring auditor rotation every eight years. Such requirements could be considered relatively moderate, given Argentina’s recently introduced requirement for mandatory firm rotation every three years. This is not purely a ‘multinational’ concern – even relatively simple listed businesses can
have overseas subsidiaries and will have to comply with the different local regulations. Despite such compliance challenges, those in charge of auditor appointments in the world’s major companies must try to avoid too process-driven an approach. Yes, regulations must be complied with, but the focus should be on achieving value from the audit – in terms of quality and expertise, not just price. We would expect this from good governance in any aspect of corporate activity. The role of audit committees will be crucial. Regulators have considerable expectations of audit committees and their ability to appoint, monitor and potentially replace the external auditors. How effective audit committees show themselves to be as champions of audit quality will be observed by regulators, institutional investors and all other stakeholders with an interest in good corporate governance. There are, of course, repercussions for audit firms as well. Anecdotal evidence suggests that audit tendering in the UK has increased sixfold. This will inevitably create a substantial planning challenge for audit firms and require a considerable investment of resources. Audit tendering is an expensive process, so it will be interesting to see how selective the firms are in the tenders they pursue – and the extent to which mid-sized firms are able to compete and win new work. Once new auditors are appointed, firms will need to get up to speed fast; there are mixed views on the risks in the early period of a new auditor’s tenure (when insight and knowledge is lowest, but equally when there may be more opportunity to challenge existing practice). Patience is needed as we assess the impact of new audit regulations. Achieving a significant change in the profile of the audit market – specifically greater involvement of non-Big Four firms in the largest listed company sector – will take time. Audit tendering is periodic, and only a proportion of audits can be expected to be awarded to new firms in any one year. So while there may be huge activity going on now within audit committees and audit firms, we may have to wait 10, 15 or even 20 years before judging the success or otherwise of the new audit regimes being introduced.
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accountancy futures: audit confidence accounting
Courting confidence The concept of confidence accounting is being developed using probability distributions to represent a range of outcomes, explains John Davies
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John Davies FCIS is former head of technical at ACCA.
he dramatic changes in corporate value we saw during the financial crisis serve as a reminder that the accounting information currently contained in financial statements does not, and cannot aspire to, represent economic realities with absolute certainty. Though figures are largely arrived at through standardised methodologies, they are also conditioned by the particular accounting policies adopted by preparers and are the product of various assumptions, estimates and forecasts. Judgments are made in the context of an understanding of business and market circumstances, which entails an element of subjectivity. It is also implicit in benchmarks such as ‘true and fair’ and ‘fair presentation’ that users of accounts can only expect an assurance that they comply with technical rules and incorporate reasonable judgments; International Financial Reporting Standards and other frameworks can only go so far. It is to address this fundamental issue of uncertainty that the concept of confidence accounting is being developed. This identifies the degree of confidence that preparers have with the figures they are including. While companies may be perfectly justified, on technical grounds, in reporting certain figures, the absolute figures may be based
on estimates shrouded with uncertainty. Even where fair values are adopted as a basis of measurement of assets and liabilities, this cannot be a guarantee that figures are entirely accurate. And as the financial crisis has shown, business circumstances can change so dramatically that assumptions thought reasonable can lead to figures becoming wholly misleading within a very short time. Degree of certainty Confidence accounting is an approach to measuring the degree of certainty of values in financial statements. This was set out in a paper by Michael Mainelli FCCA and copublished by ACCA, the Chartered Institute for Securities & Investment and Long Finance. He suggested that attributing a single, precise number to assets and liabilities implied more accuracy than may be possible or justified, and proposed the use of probability distributions to represent a range of outcomes for specific items. The addition of probability distributions would serve to acknowledge the state of uncertainty and enhance readers’ understanding by presenting an idea of the likelihood of reliability. The approach would serve the additional purpose of reflecting the entity’s focus on risk by incorporating a direct association with management of risk.
Adrian Berendt FCCA Chair, ACCA Global Forum for Governance, Risk and Performance ‘The accountancy profession is moving toward a better understanding and handling of uncertainty. Accountants are increasingly expected to make judgments about potential conflicts between a single historic cost number and the “fair value” of an item in a forward-looking risk scenario. The problem is particularly acute for audit committees since they are now required to comment on whether financial statements are “fair, balanced and understandable”. A possible solution to the financial reporting dilemma lies in recognising ranges. As well as providing a fair representation of financial results, ranges can mitigate mark-to-market effects, reduce the number of footnotes and aid audit-quality measurement.’
Professor Michael Mainelli FCCA Co-founder Z/Yen and member of ACCA’s Global Forum for Governance, Risk and Performance ‘Confidence accounting presents judgment calls as ranges – for example, revenue recognition, tax liabilities, goodwill and intangibles, asset valuations, share-based payments, or management and performance fees. There are complicated ways of expressing ranges, but one of the simplest ways is simply to state the bottom value, the expected value and the top value, with a judgment on the likelihood that the value is in that range – BET%. As a simple example, a value for freehold land assets might be expressed as B: £5m, E: £6m, T: £8m, with a 98% confidence the value is in that range.’
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accountancy futures: audit confidence accounting
better-equipped boards As well as enhancing the understanding of end users, confidence accounting may also serve to better equip boards of directors, and in particular audit committees, to fulfil their own responsibilities. Emphasis is increasingly being placed by regulators on the comprehensibility of reported information, a good example being the UK Corporate Governance Code’s recent demand that the contents of annual reports must be ‘fair, balanced and understandable’. Audit committees are expected to play a pivotal role in ensuring that this test of comprehensibility is satisfied. This particular application of the concept of confidence accounting is the focus of a new paper shortly to be published by ACCA, written by Adrian Berendt, chair of ACCA’s Global Forum for Governance, Risk and Performance. The paper discusses how a focus on confidence accounting could be adopted so as to enhance reporting quality and thereby help to meet the obligations of boards and their audit committees. It suggests that management could submit a narrative spelling out the range of uncertainty that it feels reasonable to attach to figures in draft accounts. These could vary depending on circumstances and the type of assets and liabilities involved. For example, the degree of certainty attached to the figures for the company’s holdings in cash and government bonds could be recorded as being very high, while cashflows from a high-
risk investment might be given a much wider probability range. This could form a workable basis for the committee to review the reporting process and to satisfy itself as to whether the accounts and annual report provide a ‘fair, balanced and understandable’ picture. Apart from the potential usefulness of the concept generally, there are a number of specific practical reasons why confidence accounting could prove useful to committee members. For example: C ommittee members will not typically be experts in accounting or auditing. T he level of management confidence could be a driver of engagement. The inclusion of probability information would align the reporting process with the oversight of risk management arrangements. A discussion of probabilities may engender the adoption of more prudent judgments. Confidence accounting does not purport to usurp or undermine the place of financial accounting information; instead, it seeks to add meaning to the figures. While it is still at an early stage, it appears to offer real potential for enhancing the credibility and understandability of accounts and reports, and thereby enhancing the position of users. Audit committees are just one of the stakeholder groups who can benefit from this new approach.
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Confidence accounting: a proposal, is available at www.accaglobal.com/ab96
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accountancy futures: CORPORATE REPORTING Interview
Value added Sir David Tweedie, former chairman of the IASB, explains why he’s turned his attention to International Valuation Standards rather than his model railway
‘I
have never felt such fear in the room,’ says Sir David Tweedie, explaining how he has come to his new role as chair of the board of trustees of the International Valuation Standards Council (IVSC). He is describing a meeting of the Financial Stability Forum (now Board) – comprising national finance ministers, central bankers and international financial bodies – a few weeks following the collapse of Lehman Brothers during the financial crisis. ‘You could just feel the tension; there was a genuine fear the whole capitalist system could come crashing down.’ At the heart of the matter was measuring financial derivatives and the fair-value question. ‘I remember the FSF turning to me and saying, “what are you going to do about it?” And my reaction was, we’re accountants; we just report the values.’ To Tweedie’s horror, it turned out nobody was doing the values. ‘I just assumed there was a professional there doing this sort of thing, and there wasn’t.’ And there began the path of the former chairman of the International Accounting Standards Board (IASB) to his current role at the IVSC. Starting life in 1981 as the International Assets Valuation Standards Committee, it changed its name to IVSC in 1994. By 2007 it had grown from a membership of 20 organisations to more than 50. It currently has 78 members in 57 countries and comprises three boards: a board of trustees, a standards board and a professional board. As demand for valuation standards grew, the IVSC underwent a radical restructuring in 2008. Tweedie was invited by his predecessor Michel Prada to speak at the launch. ‘Little did I realise how close my collaboration with the IVSC would be,’ he wrote in the 2012-13 annual report. Approached by Prada a few months after he left the IASB, Tweedie agreed to take on the mantle as chair of the trustees. encourage regulators Anyone familiar with how the IASB evolved will recognise the model of the IVSC. Like the IASB’s predecessor, the International Accounting Standards Committee – which had no means of compelling the use of International Accounting Standards until the
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European Union came along and said everyone in Europe had to use them for consolidated accounts – one of the main objectives for the IVSC is to encourage the regulators to demand the use of International Valuations Standards (IVSs) in asset valuations for prudential purposes and in accounts. Tweedie outlines three key imperatives: more rigour round the valuation of financial instruments and agreement on the best valuations standards; gain compliance and go for full adoption later; and third, identify the key valuation bodies across the world and separate them from the ‘cowboys’. Unlike the accounting profession, which has recognisable qualifications, associations and institutes across the world, this is not currently the case for the valuation industry. ‘Within the US there are a number of professional organisations with members who provide valuation services. Each has its own requirements for membership and credentials,’ says Tweedie. So the IVSC is looking to the model of the accounting profession and is supporting the creation of a strong professional infrastructure around valuation, promoting among the leading valuation institutes global entry requirements, exams, a code of ethics, continuing professional development and disciplinary processes. While valuation standards in real estate are more mature, Tweedie reiterates his concern over financial instruments. ‘There’s a lacuna
Sir David Tweedie qualified as a professional accountant in 1972. In 1990 he moved from national technical partner at KPMG to be the first fulltime chairman of the UK Accounting Standards Board. In 2001 he became the first chairman of the IASB. By the time he completed his tenure the number of countries using IFRS rose from a handful to more than 120. He is a fellow of the Judge Business School at Cambridge University and a visiting professor of accounting in the Management School at Edinburgh University. He chairs the UK’s Royal Household Audit Committee for the Sovereign Grant.
‘Lehmans even had trading
desks trading the same instruments at totally different prices; it was unbelievable’ in the regulatory system: you have prudential regulators, which are saying, “This is what you have to do”; you have the accounts, so people can judge the markets. But in the middle is the bit that affects both of them, and that’s valuation.’ ‘If we aren’t valuing financial instruments accurately, you have spurious profit-and-loss accounts and balance sheets. And anecdotally there are big differences. You’re never going to get everyone within three decimal places, but what we need to do is get that range narrowed
accountancy futures: CORPORATE REPORTING Interview
to within the bounds of acceptability, because the evidence I’ve seen indicates that some of this could move net worth by 3%. Some banks’ equity isn’t much more than that!’ making the right call The IVSC has signed a memorandum of understanding with the International Federation of Accountants (IFAC). IFAC’s International Auditing and Assurance Standards Board sets international standards for auditors and accurate valuations of course are crucial to make the right call on a company’s accounts. ‘The auditor is at risk; sometimes I think they don’t know how much at risk. If a company blows, it’s going to affect the auditor; it’s going to affect the banks, and it’s going to affect the regulators. Lehmans blew because of the valuations. It even had trading desks trading the same instruments at totally different prices; it was unbelievable.’ Tweedie is bringing to bear lessons learnt as chairman of the IASB for 10 years. Apart from the IVSC structure itself reflecting the
IASB model, he says that as when developing International Financial Reporting Standards (IFRS), ‘if Australia has got the best rule, we should all do it. The other thing is seeing people…looking into their eyes and seeing what they’re like.’ He likens it to speaking to industrialists: ‘When they’ve got a purple face and knotted veins, you know they don’t like what you’re doing; it’s better than a letter or phone call.’ That, of course, takes a long time in the early days; Tweedie has lost count of the number of countries he’s visited since January 2014 – all on a nominal one day a week. But he rules out an equivalent of the old IASB’s interpretations committee. And as for the US’s Emerging Issues Task Force (‘I didn’t even understand the title of the issues, never mind the accounting.’) ‘Two things you want to avoid,’ he says, are ‘interpretations and specific standards for industries.’ But one bugbear he doesn’t anticipate is nonacceptance of global International Valuation Standards by the US. ‘The Americans are pretty cooperative on valuation,’ he says. Which of course provokes a comment on the the country’s surprising failure to converge its accounting standards with IFRS, as was always expected during Tweedie’s tenure at the IASB. ‘I was quite amazed that we haven’t got convergence,’ he says, ‘but they’ll come in, they’ll come in’. Lesley Bolton, managing editor
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accountancy futures: corporate reporting interview
Reaching out Building closer links with standard-setters globally is on the agenda for Teresa Polley, president and CEO of the US Financial Accounting Foundation Formed in 1972, the Financial Accounting Foundation has a mission to act as an apolitical, independent organisation focused on establishing and improving financial accounting standards and thus enhancing the information found in financial reports. Today, the FAF oversees the work of the bodies charged with setting privatesector and publicsector accounting standards in the US: the Financial Accounting Standards Board and the Governmental Accounting Standards Board.
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eresa Polley heads up an organisation that describes itself as the most important financial oversight body that most Americans don’t know about. The Financial Accounting Foundation (FAF) oversees the organisations that set reporting rules for both the private sector and the US’s multitude of state and local governments. It is a mission she feels passionately about. ‘We believe that good financial reporting creates a virtuous cycle,’ she says. ‘It enables investors to make the best decisions and allocate capital in ways that fuel growth. The result is a strong and stable economy.’ Yet Polley never planned on a career in public service. She started off in the now defunct accountancy firm Arthur Andersen, which was broken up in 2002 following its handling of the auditing of Enron. ‘It was a great place to start as an entry-level accountant,’ she says. She joined the Financial Accounting Standards Board (FASB) – the rule setter for company reporting – in 1987 only after a private-sector employer delayed too long in making her a job offer. ‘I assumed this would last only a few years before I returned to the private sector. That was 27 years ago.’ The variety of careers at the FAF and the FASB partly explains her decision to stay so long. ‘There was always something stimulating to do,’ she says. During the 1990s, Polley was controller of the FAF, managing its own financial statements and budget. ‘It was rather like being a doctor to doctors,’ she says. Following this, she was the executive director of the Advisory Groups for the FASB with responsibility for communicating between the board and its constituent organisations. In 2008, Polley was appointed as interim president of the FAF, while the organisation searched for a permanent boss. After what she describes as a ‘nine-month job interview’ she was asked to take over permanently. The responsibility is not for the faint-hearted, she admits. ‘What concerns me most is where
‘When we started on
unified standards, I think everyone underestimated the challenges of fitting very different cultures and markets’
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we are heading globally. We are working hard to ensure that we have globally comparable information, but that we do this in a way that does not dilute the high-quality structure we have in the US.’ ‘real milestone’ On the day before Polley’s interview, the FASB announced a rare triumph of global co-ordination – publishing new rules for revenue recognition along with the Londonbased International Accounting Standards Board (IASB), whose International Financial Reporting Standards (IFRS) are used by more than 100 countries. ‘This was a real milestone,’ she says. ‘Revenue is a very important part of the financial statement of any entity.’ The new rules, to be introduced in 2017, will make it far easier to compare US and European companies’ accounts – and help promote international mergers and acquisitions, according to some. Still, the fact that the accord took more than a decade to hammer out illustrates the difficulties. ‘When we started on the path towards unified standards, I think that everyone underestimated the challenges. The difficulty has been fitting the same set of standards to very different cultures and markets.’ One of the basic divides, she says, is that the US is more focused on equity markets, while European regulators are often more attuned to the interests of creditors, primarily bank lenders. One basic cultural difference, she says, is the litigious nature of American investors. ‘If there is any sense that a company has violated an accounting rule, US investors are more likely to sue,’ she says. ‘That creates a demand from companies for a more rule-based system that provides very detailed guidance.’ Meanwhile, auditors are subject to secondguessing by the Public Company Accounting Oversight Board. With less concern about legal action, European companies are more comfortable with a principles-based system that gives more leeway. There have also been specific sticking points, including the debate over the impairment of bad loans. ‘The standard under discussion potentially would result in an increase in bank reserves in Europe but a decrease in the US,’ she explains. ‘In the wake of the 2008
accountancy futures: corporate reporting interview
financial crisis, everyone agreed that this did not make sense.’ European and US standard-setters have also so far failed to agree on a common approach to accounting for leases. ‘On this issue there is a conceptual agreement between the FASB and the IASB,’ Polley says. ‘But the practicalities have been stubbornly hard to resolve.’ While most media attention falls on the FASB, the role of the Governmental Accounting Standards Board (GASB) is no less crucial, Polley argues. ‘This body not only sets the reporting rules for America’s 50 states, but also for every town and village for more than 85,000 municipal entities,’ she says. That’s not only relevant for investors in the US$1.6 trillion municipal bond market. ‘This is also information for citizens and taxpayers that enables them to monitor how their money is being spent and can help determine who they vote for.’ thorny issues This remit, too, is replete with thorny issues. Among the most pressing has been how states and cities account for retirement and health benefits of former workers. As recently as 2012, the GASB brought in rules to compel such entities to include pension obligations on their balance sheets. This, Polley says, will give a more accurate impression of the fiscal health of states and cities. Next on the agenda is accounting for postretirement healthcare spending. ‘The situation here can be even worse than for pensions,’ Polley laments. ‘The private sector has been accounting for this for years and it appears to have caused companies to manage these costs better.’ In a recent survey of 61 cities the Pew Research Center found a US$217bn shortfall between pension benefits and the funding to pay for them. With such a diverse range of users of information, the FAF is constantly aware of the need for openness. ‘The FASB and the GASB always meet in public to ensure we get as much feedback as possible,’ says Polley. ‘In the investment community we have to communicate with the buy-side and sell-side, along with stock and debt analysts. These groups are far less homogenous than the preparers and each uses information differently.’ Polley says that it is important that investors are represented within the standard-setting bodies. Among the FASB’s advisory groups is one solely composed of investors; in addition, several FASB board members are drawn from the investor community. The FAF also keeps a close eye on integrated reporting, including measures of ecological sustainability. ‘We believe all kinds of
information are important,’ Polley says. ‘That said, it is still unclear where integrated reporting will lead. It is important for us to stay on issue and retain our focus on the financial aspect.’ Even after five years in the job, Polley is still looking years ahead. ‘One of our tasks will be to ensure we forge closer links with other standard-setters around the world, not just the IASB,’ she says. ‘The world is tired of this being just a bilateral discussion.’ The FAF has pushed for discussions with standard-setting bodies in such nations as Japan and Germany. Over the coming years, Polley believes the world will make more progress towards common accounting standards. ‘It is our goal to move towards convergence without sacrificing quality,’ she says. ‘This is certainly not an easy task, but I believe that in five years we will be closer to that goal and it will be easier to compare accounts around the world.’ The agreement on revenue recognition is the most powerful sign to date that this vision is realistic. Christopher Alkan, journalist based in New York
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accountancy futures: corporate reporting stock exchanges
Taking stock of sustainability Africa’s stock exchanges have a vital role to play in helping listed companies get to grips with reporting on environmental, social and governance issues
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hen attention turns to sustainability reporting and stock exchange requirements, the Johannesburg Stock Exchange (JSE) will be guaranteed to feature. Not just a beacon in Africa, the JSE is a world-leading stock exchange when it comes to the promotion of reporting on environmental, social and governance (ESG) matters. Sustainability reporting first entered the corporate governance code for listed companies in 2002, and since 2010 the JSE has required them to produce, on a ‘comply-orexplain’ basis, integrated reports that include sustainability and governance information. But what about the rest of Africa and in particular sub-Saharan Africa? Stock exchanges in other countries are not as far along their ESG reporting journey as the JSE, but some have taken their first steps. ‘There is clearly a lot of interest in sustainability reporting in sub-Saharan Africa,’ says Rachel Jackson, head of sustainability at ACCA. ‘There is also evidence of considerable intent to take
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some form of action to encourage or require listed companies to provide information on sustainability issues. It is important to keep the spotlight turned on developments across the region, and not just focus on South Africa, which for a long time has been a leader in the governance and sustainability reporting field.’
The Zimbabwe Stock Exchange is at the forefront of the drive among African countries to encourage listed companies to take on board sustainability reporting.
strong intent As noted in a new ACCA report, Sustainability reporting: stock exchanges and listed companies in sub-Saharan Africa, four countries in particular are showing strong intent in relation to encouraging or requiring sustainability reporting by listed companies: Nigeria, Ghana, Zimbabwe and Mauritius. In October 2013 the Nigerian Stock Exchange (NSE), Africa’s second largest after the JSE, joined the United Nations-backed Sustainable Stock Exchanges Initiative, which is exploring how exchanges can work with investors, regulators and companies to enhance corporate transparency – and ultimately performance – on ESG issues. The NSE has
accountancy futures: corporate reporting stock exchanges
not yet introduced any voluntary guidelines or mandatory requirements, but it does provide support on corporate governance issues. There are also early signs of ESG reporting activity in Ghana, one of West Africa’s top-performing economies, with large listed companies operating in a variety of sectors such as energy, mining, telecoms, pharmaceuticals and professional services. The Ghana Stock Exchange (GSE) sees sustainability reporting as a means of ensuring that the country remains a leading and competitive economy, and initiated plans to develop a framework in June 2013. Alongside this, the GSE and ACCA are planning to run a series of training programmes for CFOs of listed companies. Progress is more advanced in Zimbabwe, where the Zimbabwe Stock Exchange (ZSE) began consulting with stakeholders in November 2013. It proposes amending listing requirements to include a requirement to report on ESG practices and performance, encouraging listed companies to apply the reporting framework developed by the Global Reporting Initiative (GRI), which provides metrics and methods for measuring and reporting sustainability-related impacts and performance. It is not clear when such requirements could come into force, but there does seem to be momentum behind the initiative. The Zimbabwean government has
‘The exchange can act as a
catalyst in the development of guidelines on sustainability reporting’
recognised the benefits of greater corporate transparency in attracting foreign investment, citing the JSE as a good example to follow. ‘Mandatory sustainability reporting in upcoming new listing requirements has the potential to attract foreign investors, improve corporate behaviour and improve sustainable business practices towards a sustainable stock exchange,’ says Rodney Ndamba ACCA, CEO of the Institute for Sustainability Africa; he is also a member of ACCA’s Global Forum on Sustainability, a stakeholder council member (Africa) at the GRI and a member of the ZSE’s listings sub-committee. ‘So far, the number of companies considering sustainability reporting on a voluntary basis is rising. Some have already registered sustainability reports with the GRI database.’ Ndamba sees the potential for stock exchanges to play a key role across the African continent. ‘In Africa, stock exchanges
have great potential to drive sustainability reporting by ensuring that it is part of exchange requirements and the reports are assured,’ he says. ‘Capital markets regulators, governments and investors could drive action to require ESG reporting.’ There are also interesting developments at the Stock Exchange of Mauritius (SEM), which is working to create a sustainability index, drawing on the GRI’s reporting framework. The SEM has also joined with Impact Exchange Asia (IIX) to launch the Impact Exchange trading platform focused on connecting social enterprises with investors. It operates under SEM’s regulatory framework, with IIX providing oversight of the environmental and social requirements and obligations of companies listing on the platform. ‘catalyst’ Interest in sustainability reporting also exists elsewhere in sub-Saharan Africa. Kenya is conducting a review of its corporate governance regime, involving the country’s Capital Markets Authority. ‘One of the likely recommendations will be proposals on the timetable and transition process towards the adoption of sustainability reporting in the country,’ says Paul Muthaura, the authority’s acting CEO. There is also willingness for exchanges to promote sustainability reporting. ‘The exchange can act as a catalyst in the development of guidelines on sustainability reporting,’ says John Robson Kamanga, COO of the Malawi Stock Exchange. ‘This could be done if the exchange can be availed with the knowledge on sustainability reporting. The exchange can also act as trainer and promoter of the ideals.’ It seems likely that pressure for more sustainability reporting in Africa will rise; indeed, says Ndamba, it ‘is increasingly becoming an instrument for investment appraisal and risk assessment by investors seeking safe investment options in Africa. The rising influence of stakeholders demanding sustainability information, particularly communities, civil society and governments, is driving sustainability reporting.’ That many exchanges in sub-Saharan Africa are relatively new by international standards need not be a barrier. ‘A stock exchange need not be well established to have sustainability reporting within its listing requirements,’ says Tom Kimaru, manager, compliance, at the Nairobi Stock Exchange. ‘This is a global trend and therefore should enable investors globally to make prudent judgments through such comparisons. In this regard, any opportunity to have sustainability reporting in the listing requirements is highly encouraged.’
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accountancy futures: corporate reporting stock exchanges
It is important to maintain and spread the momentum that now exists in subSaharan Africa behind corporate reporting of sustainability issues. ‘There is no reason why stock exchanges in Africa shouldn’t be moving ahead with sustainability reporting,’ says Jackson. ‘They have the opportunity to take leading roles in developing reporting practice and derive long-term benefits for their economies. If companies are required to measure and manage their environmental and social impacts and report on their
A Maasai man in Kenya stands in front of solar panels. The country is reviewing its corporate governance regime.
governance procedures, this should support their long-term stability. The stock exchanges on which they are listed then become less volatile, which attracts investors. The result is a positive cycle of business development and investment.’ Sarah Perrin, journalist Stock exchanges in sub-Saharan Africa: capturing intent towards ESG requirements is available at www.accaglobal.com/ab108
Jamil Ampomah ACCA MARKETS DIRECTOR, SUB-SAHARAN AFRICA ‘ACCA has been involved in the sustainability debate for over two decades and, through its research programme, engagement with key sustainability and non-financial reporting standard-setters and policy and advocacy activities, has encouraged the introduction of sustainability reporting regulations around the world. ‘We have conducted research into the listing requirements of 10 major exchanges across sub-Saharan Africa and the reporting practices of the largest companies listed on each exchange. Through this research, ACCA aims to highlight examples of good practice from the perspective of both exchanges and listed companies across sub-Saharan Africa. The research also aims to influence exchanges in the region and further afield to increase levels of corporate transparency and accountability around sustainability. ‘This is of particular importance in the sub-Saharan African context as the region is going through a period of significant economic development. In 2013, the region’s economy grew by an average of 4.7% and seven of the top 10 fastest growing economies in the world for 2011-15 are expected to come from sub-Saharan Africa. Much of this growth is dependent on natural resources, which require careful management to ensure future growth and sustainability. The highest level of corporate transparency and resulting investor confidence is a key part of this growth and ACCA is proud to be making a contribution in the region.’
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accountancy futures: corporate reporting stock exchanges
Joined-up thinking Investors are key to supporting emerging markets’ stock exchanges in promoting sustainability reporting by listed companies, says Mindy Lubber
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n June 2014, the London Stock Exchange Group announced that it was joining the Sustainable Stock Exchanges (SSE) Initiative – a collaboration of exchanges, investors and regulators coming together to figure out how to best help companies improve their sustainability reporting and, ultimately, their sustainability performance. This follows the European Union voting into law an accounting directive mandating over 6,000 EU companies to report on issues such as the environment, employee relations, human rights, diversity, and bribery and corruption. Momentum behind sustainability reporting isn’t only seen in more developed economies. Some of the most profound progress by exchanges – and therefore companies – is happening in places like South Africa, Malaysia, Brazil and India. The Johannesburg and Nigerian stock exchanges, for instance, are key partner exchanges in the SSE Initiative, and Johannesburg has set the pace for over a decade. Developing markets’ stock exchanges taking the lead on improved transparency, stakeholder engagement and guidance for companies is no coincidence. Emerging markets have much to gain from adopting best practices in environmental and social disclosures, particularly where they may lack a long-term track record on marketbuilding and robust trading. The increased transparency of sustainability and governance issues by companies in such regions goes a long way towards investors having trust in the exchanges, and where their money goes. However, with the ever-growing consolidation of large pension funds and asset managers, institutional investors now own companies across all markets, in a dizzying array of asset classes. Having comparable information – including on sustainability matters – is important for investment decision-making, benchmarking analysis and engagement. Driven by their need for consistency and comparability, investors came together a few years ago to press exchanges for listing rules on sustainability reporting. The push for more consistent rules led to the Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting. The document includes
Mindy Lubber is president of Ceres, a nonprofit organisation advocating sustainability leadership, and director of its Investor Network on Climate Risk.
feedback from investors from across the globe and focuses on three key provisions for corporate reporting: 1 A materiality assessment in financial filings where management will discuss its approach to determining the company’s ‘material’ sustainability issues (and what kind of stakeholder engagement happened to assist in that assessment). 2 General sustainability reporting under 10 key categories: governance and ethical oversight; environmental impact; government relations and political involvement; climate change; diversity; employee relations; human rights; product and service impact and integrity; supply chains and subcontracting; and communities and community relations (with recommendations to capture policies and procedures, management systems, related initiatives/goals/performance data, legal proceedings and fines, stakeholder controversy, and economic opportunities). 3 A hyperlink in filings to a spreadsheet, based on the Global Reporting Initiative Content Index or its equivalent, describing where various existing company performance indicators, policies and other types of data can be found. The challenge in implementing such a proposal is the unique nature of each market. But investors seem to feel strongly enough about the need for comparability that they have been pressing the World Federation of Exchanges (WFE), with the assistance of Ceres, to address this issue and encourage exchanges to work together to develop some common expectations around reporting. WFE members are commenting on the Investor Proposal, with research slated to be released in autumn 2014 outlining recommendations. Exchanges throughout Africa are encouraged to lead by example, embrace innovation in reporting, and be honest about the challenges they face in getting issuers to improve sustainability disclosures. Across the world, exchanges in general seem receptive to action on sustainability reporting. Whether they can all agree on a uniform solution is yet to be determined. We know one thing – investors pushing exchanges for mandatory reporting is not going away any time soon.
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accountancy futures: corporate reporting integrated reporting
Model practices A recent ACCA-organised roundtable on corporate reporting in Dubai found a region ready to adopt integrated reporting and its value creation benefits
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hat is the value of adopting an integrated financial reporting model and how might Gulf Cooperation Council (GCC) companies introduce such a model into their overall strategy? This was the topic of a roundtable discussion organised jointly by ACCA and the Pearl Initiative, a not-for-profit organisation set up to improve transparency, accountability and business practices in the Gulf. Held in Dubai, the United Arab Emirates (UAE), in March 2014, the event was well attended by financial professionals from across the region and internationally. With traditional financial reporting being largely historical in nature, and sometimes accused of being a limited measure of company performance, the Gulf’s ever more sophisticated financial reporting sector is looking to integrated reporting (IR). This, it is argued, provides insights into an organisation’s value creation over the short, medium and long term, through assessing six types of capital: financial, manufactured, intellectual, human, social and relationship, and natural. These measurements, it is thought, will give investors, customers, partners and others a deeper understanding of the company’s business model and long-term drivers of sustainable value creation, and how these fit into the organisation’s overall strategy. These metrics form part of the International Integrated Reporting Framework, launched in December 2013 by the UK-based International Integrated Reporting Council (IIRC), on which ACCA and the Pearl Initiative play a key role.
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As Jessica Fries, an IIRC board member and executive chairman of The Prince’s Accounting for Sustainability Project told the meeting: ‘IR offers sustainable business for a sustainable economy. An organisation’s strategy on a fundamental level needs to be linked to broader society.’ Feedback from businesses participating in the IIRC’s pilot programme was that IR led 95% to focus on the right key performance indicators (KPIs); presented 95% with a better view of their strategy and business models; helped to connect teams and break down silos (93%); and improved internal processes and produced better data-collection quality (93%), said Fries, whose project was launched by HRH The Prince of Wales.
ACCA president Martin Turner (left) and Saif bin Abed Al Muhairi, chairman, UAE Accountants and Auditors Association, signed a strategic partnership to coincide with ACCA’s Council meeting in Dubai.
Opportunity to leapfrog The event began and ended with an interactive session chaired by Imelda Dunlop, executive director, Pearl Initiative, on the value of transparent IR and what the future uptake might be. The general consensus was that while companies liked the idea, adoption would be a gradual process. Yet, suggested Fries, the Gulf region has an opportunity to leapfrog other countries in adopting this reporting system. The roundtable panel assessed the state of financial reporting in the Gulf. On the panel were Fries; Fred Sicre, managing director of investment company Abraaj Group; KPMG partner Andrew Robinson; Haythem Macki, partner at GrowthGate Capital; and Abdulla Mahmood, general manager of marketing and corporate communication, RAK Ceramics. Moderating the discussion was Lorraine Holleway FCCA, head of financial reporting at Qatar Shell and chair of ACCA’s Global Forum for Corporate Reporting. Robinson said his firm conducts a corporate sustainability survey of the largest companies in the markets where it operates. In 2012, the survey included the UAE for the first time. ‘Only 20 of the 100 companies reported on sustainability,’ he remarked. ‘It is starting to grow, but it’s only a small representation. At the same time there is some excellent best practice. [Those] 20 companies had documented corporate sustainability strategies and targets – so a small but high-quality representation.’
accountancy futures: corporate reporting integrated reporting
Sicre described the huge potential: ‘We’re facing a situation where companies are not always thinking about creating corporate value. This represents a great opportunity for the Pearl Initiative to highlight the benefits of transparency, corporate governance and IR to those firms that are already thinking about these issues but have not… actually produced an integrated report. At the same time, at the Abraaj Group we see a strong propensity to abide by global standards in each of the markets where we operate.’ It is also important, he added, to ensure that IR does not come at the expense of financial returns. Mahmood added: ‘It’s very important to understand the concerns of stakeholders and key decision makers within the organisation and clarify how IR will be of benefit.’ ‘report proactively’ Asked how regional businesses might react to the idea of publishing both good and bad news, Macki cited recent bribery allegations among some listed companies in Oman. ‘Because it was transparently reported in the media it didn’t really affect share prices. A lot of private companies have to report proactively and openly for reputational purposes.’ Robinson agreed it is not simply about issuing a report: ‘Businesses are under constant scrutiny from stakeholders and the marketplace, and a company’s reputation can be destroyed overnight. There’s also been a generational change in many family-owned
Seated left to right: Fred Sicre, Jessica Fries, Andrew Robinson, Haythem Macki, Abdulla Mahmood, Lorraine Holleway.
Dubai landmark for ACCA Council For only the fifth time since 2006, ACCA’s Council met outside the UK and Ireland. Following previous successful meetings and associated events in Kuala Lumpur, Beijing, Prague and Nairobi, March 2014 was the first time the Council meeting had ever taken place in the Middle East. A number of events coincided with the landmark meeting, including the forum on integrated reporting held jointly with Pearl Initiative (see also article on page 96), a member recognition ceremony, meetings with key stakeholders, a dinner for members of the UAE’s accounting, business and academic communities and the signing of a partnership agreement with the UAE Accountants and Auditors Association (AAA). The Council meeting was preceded by a visit by the officers and the chief executive, Helen Brand, to Oman and followed by visits of smaller Council delegations to other key markets for ACCA in the region – Bangladesh, Pakistan and Sri Lanka. These visits provided opportunities for senior ACCA representatives to meet with members, employers and other key stakeholders in those countries. The Council meeting covered a number of important matters, including approving ACCA’s strategy to 2020. This recognises that members are core to ACCA, will create a vibrant future for the organisation and make an even greater contribution to the sustainability of the global economy. A special edition of Accounting and Business focusing on the Middle East and South Asia is available at www.accaglobal.com/ab
businesses in the region to adhere to best practices. They understand it leads to a lower cost of capital, and the ability to attract both capital and talent. The primary point is that the board needs to have a strategy which includes the six capitals within the IR model.’ Mahmood identified social media as another driver. At the same time, asserted Macki, entrepreneurial companies can be difficult to convince in terms of adopting a more IR-driven model because of the time the CEO needs to allocate to it. ‘This is why such an initiative has to be driven from the top,’ he said. Within the business culture, particularly in a region with such a large proportion of familyowned firms, transparent financial reporting is still not widespread. Less so is the openness for sharing both good and bad news – a key feature of IR. ‘We’re talking about social values,’ said Robinson. ‘The culture [here] is very benevolent towards society, but when translated into the business environment there is too much focus purely on financial returns. When looking at ROI [return on investment], companies need to look at the six capitals.’ Julion Ruwette, UAE-based assistant manager, clean energy and sustainability services, EY, was optimistic, saying that while KPMG’s 2012 survey had only a 20% response rate in the Gulf: ‘In 2014, with all the sustainability initiatives being launched across the region, it will be double.’ As Fries asserted, the ambition is that IR becomes the norm, and replaces the more traditional annual reporting, helped by changing technology reinforcing a shift away from hard-copy reports prepared once a year. The jury is still out on how quickly Gulf companies will adopt the IR model. But with its thirst for embracing international best practices, one could suggest a case for the region to be an early adopter. Mark Atkinson, journalist based in Dubai
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accountancy futures: corporate reporting south africa
Maintaining momentum While South Africa has blazed a trail on integrated reporting, there is still much work to be done, finds a new ACCA report
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hen, in 2014, South Africa’s Integrated Reporting Committee officially endorsed the integrated reporting framework as a requirement for companies listed on the Johannesburg Stock Exchange, the move was widely applauded internationally. Noting that listed companies had already been following the principles for several years – following the King III report in 2009 – Ian Jameson, Johannesburg-based senior project manager at the International Integrated Reporting Council (IIRC), suggested that its willingness to comply placed South Africa on a pedestal. South Africa has led the field in the number of integrated reports registered on the Global Reporting Initiative database and is world
The institutional investment
community is beginning to understand more clearly how ESG issues can be material
leader in terms of the strength of its auditing and reporting standards, according to the World Economic Forum’s Global Competitiveness Report – a mantle it has held since 2010. But what do investors think of South Africa’s pioneering position? According to a new ACCA report written by Professor Jill Atkins of the UK’s Henley Business School and Warren Maroun of the University of the Witwatersrand, Johannesburg, South Africa’s institutional investment community has welcomed integrated reporting, despite some concerns, and views it as an improvement in disclosures for investment decision-making. South African institutional investors’ perceptions of integrated reporting found that, compared with more developed economies, the progress in South Africa’s attitude to environmental, social and governance (ESG) issues is slow. ‘The pendulum has started to swing,’ noted one of the 20 respondents, but change remains at an early stage due to a continued reliance on purely financial information. ‘Nevertheless, the interviewees provided substantial evidence that the South African institutional investment community is beginning to understand more clearly how ESG issues can be material,’ the report found.
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Investors acknowledged the link between social, ethical, environmental and governance issues and financial materiality as a core element in integrated reporting, and thereby the overall long-term sustainability of the company. Integrated reports also provide a basis for individual investors to dig deeper into companies’ activities, the interviewees agreed, enabling a clearer picture of both its business model and inherent risks. global thought leader There was consensus that South Africa is indeed a global thought leader, paving the way first in governance and stakeholder accountability, via the King Reports, and now in reporting, via integrated reporting. Integrated reporting, it is assumed, represents a means for South Africa to legitimise its corporations within the global community. Regulation 28 – which now insists that the institutional investment community takes ESG issues into account – is seen as a significant driver of adoption of integrated reporting. The Code for Responsible Investing in South Africa (CRISA) published in 2011, making South Africa only the second country in the world to develop a set of guidelines for responsible investment and institutional investor activism, was cited as another driver of integrated reporting, but its adoption seems to be somewhat piecemeal in practice. Overall, the authors gleaned that it is ‘probably reasonable to conclude from this empirical
accountancy futures: corporate reporting south africa
Professor Mervyn King Chairman, international integrated reporting council ‘Integrated reporting is at a time when there is general consensus that the financial report is not sufficient as it does not tell stakeholders of the “state of play” of the company. This is so because an analysis of the great stock exchanges in the world has shown that at least since the turn into the 21st century, 80% of the market cap of companies is not represented by additives in balance sheets according to financial reporting standards. ‘Boards need to understand the financial and non-financial reports, and extract the material information and explain it in clear, concise and understandable language in the integrated report. To be accountable one has to be understandable. Further, responsible investment has been adopted by the major asset owners and asset managers in the world. In short, this means they take into their investment analysis the environmental, social and governance factors in a company before investing their ultimate beneficiary’s money in the equity of that company. ‘Reality is the other driver of integrated reports. A world of seven billion people with increased demand for products or services with a diminishing natural asset base requires the adoption of different corporate behaviour. Integrated thinking drives the board to apply its collective mind to the resources used by the company – financial, manufactured, human, intellectual, natural and social capital – which includes the company’s ongoing relationships with its stakeholders, business model, and the impact of its product on those six capitals.’ evidence that South Africa has gained a substantial reputation in the global arena for high standards of governance and stakeholder accountability, owing to corporate governance codes of practice as well as corporate efforts to practise good governance.’ There was ‘unanimous endorsement’ of integrated reporting as an improvement which adds accountability and value for companies. Further, the interviewees ‘were in no doubt’ about the decision-making usefulness of integrated reports for investing. As a developing nation, it also gives South Africa a competitive edge.
‘lacking in consistency’ Atkins also pointed to concerns that too much rule-following/box-ticking could potentially stifle integrated reporting. There was an impression that reports were lacking in consistency, and concerns that integrated reporting could lose its intended focus on substance over form. One investment analyst said that reports were simply too long – up to 450 pages in some cases. Another saw the potential for ‘impression management’, whereby a company’s good news is exaggerated and its bad news downplayed.
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accountancy futures: corporate reporting south africa
Colin Melvin CEO, Hermes Equity Ownership Services ‘The International Integrated Reporting Council framework promotes reports that cover all material factors in a reliable and concise manner and ensures comparability of information. It benefits corporate reporting by providing a way to describe the long-term factors underlying the decisions of an organisation, providing a more accurate picture of its activities, and informing investors of its value in a more comprehensive sense. ‘Integrated reporting provides investors with information the company would not have necessarily published otherwise in a format which makes clear its materiality and relevance to the business. This holistic picture of value-creation enables investors to reach better valuation decisions. It also makes it possible for them to assess and price in longer term factors and therefore efficiently allocate capital over a longer time horizon. ‘Furthermore, an integrated report allows investors to assess the quality of management and the viability of a company’s operations. Elements that are valuable to investors are a clear overview of the business model, an indication of timelines for key strategies and a consolidation of interdependent company disclosures. ‘Integrated reporting provides a basis for both investors and companies to lengthen the horizon of their decision-making. In addition, both will benefit from a clear and complete understanding of the factors that influence a company’s performance.’ Other concerns included a lack of financial literacy among trustees and the potential for the audit community to ‘capture’ the process as a money spinner. Overall, though, Atkins said the research confirmed the views expressed by Mervyn King, chairman of the IIRC, that integrated reporting is by no means finished, but is on a journey. ‘The research provides key findings to inform policymakers in further developing integrated reporting, and arguably represents a first step towards engaging the South African institutional investment community
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in the process of improving integrated reporting by South African listed companies,’ Atkins concluded. ‘Further research is crucial if integrated reporting is to continue developing and ultimately provide a more holistic, more decision-useful and more stakeholderaccountable vehicle for corporate reporting.’ Peta Tomlinson, journalist South African institutional investors’ perceptions of integrated reporting is available at www.accaglobal.com/ab109
ACCOUNTANCY FUTURES: SUSTAINABILITY NATURAL CAPITAL
Natural capital comes of age As pressure grows on our resources, companies must learn how to manage, measure, report and disclose on natural capital, says ACCA’s Rachel Jackson
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accountancy futures: sustainability natural capital
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wareness is growing of the dependence of business and society on the world’s natural resources – its ecosystems in the form of forests and oceans, for example, as well as its fossil-fuel deposits. With that awareness comes a growing sense of the need to manage and protect the world’s natural capital; once it’s gone, it’s gone. National governments are increasingly looking at how to assess and preserve their natural capital. Supported by global coalitions such as Wealth Accounting and the Valuation of Ecosystem Services, countries such as Botswana, Costa Rica and the Philippines have taken steps towards accounting for their natural capital such as water, forest and mineral resources. understand and manage For businesses, the challenge is to understand and manage – or reduce – their impact and dependency on natural capital. This requires the development of strategies underpinned by measurement, valuation and reporting. Current developments in this arena include the work of the Natural Capital Coalition (NCC) to draft a harmonised framework for valuing natural capital to enable better measurement, management, reporting and disclosure. Called the Natural Capital Protocol, the framework is intended to be a starting point from which future standards could be developed. The draft protocol has two parts: firstly, a highlevel guide for C-suite executives, particularly CFOs, to explain both the business benefits from managing, accounting for and valuing natural capital, and how they can apply natural capital valuation in business; and secondly, a more detailed document aimed at practitioners in business, policy, consulting and research which addresses topics such as materiality, and techniques and tools for valuing natural capital. Alongside the protocol, two sector-specific supporting guides are being developed for agricultural commodities used in the food and drinks sector, and the clothing sector. The protocol will be pilot tested, with a view to finalisation by December 2015. important step The development of the protocol is an important step in the evolution of natural capital accounting and reporting. It is international in scope, supported by stakeholders from a range of backgrounds but all striving for the same outcome – better natural capital management and preservation. This collaborative approach is essential
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Rachel Jackson is ACCA’s head of sustainability. She is the staff expert on ACCA’s Global Forum for Sustainability, and represents ACCA on a number of external committees and working groups.
for ensuring that the final protocol has maximum buy-in and that it complements other initiatives, not least the International Integrated Reporting Council’s Integrated Reporting Framework, which contains a natural capital strand. These need to be harmonised in order to avoid creating a confusing reporting landscape for businesses – one they would then ignore. The need for harmonisation appears to be accepted by the NCC and the Natural Capital Declaration (NCD), a finance-sector initiative – supported by ACCA – to integrate natural capital considerations into loans, equity, fixed income and insurance products as well as in accounting, disclosure and reporting frameworks. The NCD has established four working groups focused on understanding, integrating, accounting for, and disclosing and reporting on natural capital. It is collaborating with these working groups in order to avoid duplication and ensure consistency in approaches. The NCD is also seeking the participation of investors, encouraging them to ask more questions about natural capital impacts and management. Another international development of note is the proposed expansion of the scope of the Climate Disclosure Standards Board’s climate change reporting framework to include water and forest commodities. The scope expansion reflects the growing interest among investors and others in organisations’ use and management of natural capital, as well as their greenhouse gas emissions. acca’s role ACCA is contributing to the international debate on and developments of natural capital accounting and reporting. We are, for example, working with KPMG and biodiversity conservation organisation Fauna & Flora International (FFI) to improve understanding of the accountancy profession’s role in accounting for natural capital. The second in our series of joint briefing papers, Business and investors: providers and users of natural capital disclosure, provides a rationale for reporting on corporate impacts and dependencies on natural capital, including examples of current practice in reporting by companies such as Nestlé (on palm oil), Coca-Cola (sugar) and Unilever (soya). future pressure Even if businesses don’t take the initiative to investigate natural capital accounting techniques now, they will almost certainly need to do so in future due to
accountancy futures: sustainability natural capital
Sweet stuff: how companies report on sugar One of Coca-Cola’s first major steps in moving towards sustainable sourcing was through its work with Bonsucro – a global non-profit, multi-stakeholder organisation fostering the sustainability of the sugarcane sector through its metric-based certification scheme – to implement a standard for sustainable production. This has involved evaluation against sustainability criteria related to sugarcane production based on criteria, including active management of biodiversity and ecosystem services. Meanwhile, agricultural group and Bonsucro member Bunge has undertaken some innovative projects on farmland at one of its processing plants. This includes studying issues such as fertiliser dosage, water use, species variety and harvesting seasons. The long-term project aims to inform sustainable practices in sugarcane plantations in the future. Bacardi, also a Bonsucro member, has committed to sourcing 100% of its sugarcane-derived products from certified sources by 2022. In 2013 it updated its target to source 40% of cane-derived product from sustainable sources by 2017. Its target for 2014 was to ensure that at least one of its key sugarcane suppliers is covered by either a European Union- or US-recognised sustainability certification chain of custody. investor pressure, regulation or customer demand. Some businesses are, however, already setting themselves challenging goals and developing strategies through which they can become ‘net positive’; rather than simply neutralising their impact on natural capital, they seek to have a positive impact on biodiversity. Innovation and creativity by companies in their approach to natural capital is welcome, enabling an evolutionary process through which the best approaches to measurement, management, accounting and reporting can
emerge. Also welcome are the many initiatives highlighted here. It is important, however, that business and other efforts are supported by governments and regulators so that they feed through into public policy. Only when natural capital reporting becomes integrated into other business requirements will it truly have come of age. Business and investors: providers and users of natural capital disclosure is available at www.accaglobal.com/ab97
Dr Zoe Balmforth Senior Technical Specialist, Business & Biodiversity, Fauna & Flora International ‘There is increasing evidence that companies with the highest environmental, social and governance scores outperform their peers, which is encouraging investor focus on these issues. The more investors factor company approaches to natural capital into their decision making, the more companies need to disclose on the subject. This in turn drives companies to improve their natural capital performance. The better they perform, the more benefits they receive through value added to investment decisions and through reduced risk of supply chain disruption, harm to brand and reputation, and costs of “catching up” with tightening legislation. Natural capital in the business world may not yet have come of age, but it is developing fast.’
Pieter van der Gaag Interim Executive Director, Natural Capital Coalition ‘The Natural Capital Coalition brings together leaders from business, accountancy, government and civil society in a unique collaboration to draft the Natural Capital Protocol. The intent is to build on the front runners that already exist, fill the gaps and enable a period of experimentation. It is anticipated that the resulting framework would be the starting point to inform future standards. In providing a global, multi-stakeholder accepted methodology, business knows it will be focusing its resources on the right questions, and will know it will communicate with society in a commonly understood language.’
Dr Stephanie Hime Lead Natural Capital and Water Specialist, KPMG in the UK ‘When it comes to natural capital, businesses still face two fundamental challenges. The first is identifying which natural capital issues are most material to them. The second challenge is reporting on natural capital. The tools and techniques available to businesses are constantly evolving with updates and developments in line with new initiatives at national and regional levels. ‘Although the field of natural capital has started to receive more attention, the pace of change is fast and the field is still evolving. Organisations must address these complexities to ensure that there is transparency on risk between managers and investors.’
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accountancy futures: sustainability energy
Beat the blackout With energy prices continuing to rise, former UK Liberal Democrat energy spokesman Lord Redesdale is committed to helping business manage risk
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f you think your organisation’s power bills are high today, here’s a scary fact: in five years’ time they will probably have doubled. But despite the formidable risks associated with rising energy costs, the likelihood is that your organisation has done nothing to address them yet. ‘FDs know very little about energy,’ observes Lord Redesdale, former UK Liberal Democrat party energy spokesman and now CEO of the Energy Managers Association. ‘It affects profit margins drastically, it could threaten the survival of the company and yet boards aren’t discussing it.’ Redesdale puts this down to energy having been ‘cheap for a very long time so people haven’t realised that things are about to change badly’. Nevertheless, we are all going to have to start waking up to the uncomfortable fact that the era of cheap power is about to be consigned to the history books. A lack of generating capacity is the primary reason why energy costs in the UK will rise. A third of our coal-fired power stations are due to close by 2016 in order to meet European Union air-quality legislation but the planned new nuclear plant at Hinkley Point C is not due to start generating power until at least 2020. According to the National Grid, we’ll have just 2% excess capacity in the winters of 2016/15 and 2016/17 – in other words, we are just 2% away from running out of power. Indeed, 80% of EMA members believe that the country will be hit by brown-outs (a restriction in the availability of power in certain areas) in 2016/17. ‘We are using more and more power, but we have less and less generating capacity,’ says Redesdale. And he’s sceptical about some of the quick fixes that have been identified as potential solutions to our energy woes. For example, it may not be possible to extract shale gas cheaply in the UK and even if it is, and extraction began today, supply of the gas is only likely to last until around 2020. As for buying energy from other countries such as Russia, we’ll face competition from China, India and other markets that are even heavier consumers of energy than we are. ‘In Europe, we’ve been used to getting everything first,’ Redesdale notes. ‘We won’t in future.’
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Energy-saving strategies The rising cost of energy will be a major threat to the survival of businesses going forward, Redesdale believes. But accountants can help to mitigate this risk by advising their boards on the necessity of energy efficiency. And as IT is the greatest consumer of power within most organisations, this makes energy efficiency a clear issue for finance directors since the IT function often falls within their remit. Redesdale recommends that every technological device in the organisation – including computers, servers and printers – should be fitted with a meter that allows the FD to measure its energy consumption. ‘There’s an enormous amount of financial risk associated with not knowing what’s using energy in your company,’ he says. ‘Meter up the entire organisation so that you know what you’re spending.’ He also recommends that businesses invest in energy-efficient devices, if necessary by using the services of energy performance contractors, which can provide finance for upgrading technological kit. Your organisation also needs to look closely at the type of data it keeps and where it keeps
Lord Redesdale founded the Energy Managers Association in 2012 to act as the voice of the UK energy management profession. He also set up UK bodies the Low Energy Company, the Carbon Management Association and the Anaerobic Digestion and Biogas Association. From 2000 to 2008 he was energy spokesman for the Liberal Democrats in the UK’s House of Lords, and from 1991 to 2008 he was a member of the Liberal Democrat front bench.
‘There’s an enormous
amount of risk associated with not knowing what’s using energy in your company’ it. Big data might get your marketing team excited but it gobbles up energy. Holding data electronically is already expensive and, as energy prices increase, it will only become more costly. Meanwhile, something as simple as storing emails with attachments can be a significant drain on power – Redesdale reveals that someone who stores over 10,000 of these will release more carbon than they do through their winter fuel bill. Behavioural change is a major part of driving energy efficiency and even little actions can make a big difference. London-based Barts Health NHS Trust succeeded in shaving £100,000 from its energy bills by encouraging staff to do three simple things: turn off unused equipment, switch off lights and close doors. Since education is crucial to changing behaviours, Redesdale believes that all
accountancy futures: sustainability energy
staff members should be trained in energy efficiency. He argues that even basic training in energy efficiency can save 2%-3% in energy costs, while more in-depth training can save 10%, and training combined with metering could potentially save up to 20%. But while training is important, a qualification in energy management is set to become essential for IT managers. ‘In five years’ time, you will not hire someone in IT who does not have a qualification in energy management,’ Redesdale predicts. creating a profession Recognising the absence of formal qualifications in energy management, Redesdale founded the Energy Managers Association in 2012. Its aim is to create a profession by equipping individuals with the relevant skillsets to do the role. ‘We have to create a profession where people do it as a part-time job,’ says Redesdale. ‘Our goal is for everyone in the team to have an energy management qualification.’ Accountants need to understand not only how the rising costs of energy will affect their own company but also how they will impact on their supply chain. ‘If energy costs increase by 30%, you have a 30% increase in energy costs that your suppliers will want to pass on to you,’ Redesdale says. ‘Can you pass that on to your supply chain? If you can’t, that comes out of your profit margin.’ He adds that businesses could soon find that their customers include energy efficiency among their procurement criteria for this very reason. On a positive note, those companies that react promptly to rising energy prices will find they have a competitive advantage. Energy prices are the biggest variable financial risk that FDs will face in the next 10 years, according to Redesdale. ‘As energy becomes short, there will be variable tariffs with energy becoming more expensive at different times of day,’ he predicts. This will mean that companies may only be able to afford to carry out certain activities at certain times, while shops may need to close for periods of the day. Redesdale also believes that decisions about building stock will be increasingly based on energy efficiency rather than the cost of rent. Ultimately, there’s a heavy cost to doing nothing about rising energy costs. ‘Companies have gone bust when the energy bill has turned up,’ concludes Redesdale. ‘This is not a savethe-planet issue. This is a core financial risk.’ Sally Percy, journalist For more on the EMA’s Level 1 and 2 standards, visit www.theema.org.uk
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accountancy futures: sustainability water
Taking water into account Water security must get on the board’s agenda – with accountants playing a critical role as ‘awareness experts’, say Roger Burritt and Katherine Christ
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ccess to water is a growing concern globally, bringing with it significant economic and political challenges. According to the World Economic Forum, while population grew fourfold in the 20th century, demand for water grew by a factor of nine. The forum’s Global Risks
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2013 report ranked water supply as a topfive risk, with freshwater demand expected to exceed current supply by over 40% by 2030. According to the forum’s Water Initiative, in Asia agriculture currently uses 70% of annual global freshwater withdrawals and up to 90% in some parts of the region; furthermore,
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enough? And third, does water merit separate attention from the general movement towards natural capital accounting? The answer to these questions depends on a range of considerations including the business’s source of water, type of business, size, production processes, skills and, above all, leadership from CFOs. Reap the benefits Multinational corporations in different sectors have much to gain, especially in agri-business where 70% of water is used for irrigation. But manufacturers will also reap the benefits of better water management. Coca-Cola and Campbell Soup Company are well-known examples; the Pacific Institute and VOX Global survey adds corporates such as AT&T, MillerCoors, Cummins, The Hershey Company and Union Pacific Railroad. However, it is only relatively recently that risk and opportunities associated with water supply have been recognised as financially important. With a broad perspective, the United Nations Global Compact CEO Water Mandate looks to business to help achieve the UN’s goals on water, ensuring that wastewater is properly treated, thereby helping communities, water catchments, corporate reputations and CFOs reach their goals. Likewise, under the Carbon Disclosure Project – an international organisation that enables companies to measure environmental information – corporate water stewardship is seen as good business which will: ensure social and legal licence to operate in a specific location prevent or react to operational crises caused by inadequate availability or management gain competitive advantage or help ensure competitive survival assure investors and markets that operations will remain profitable uphold corporate values and ethics.
* * * * * Rice fields in Bali, Indonesia, are dependent on water. Globally, water supply is ranked as a top-five risk.
governments in the region will require on average 65% more freshwater by 2030 to meet national growth aspirations. Businesses are starting to become aware of the implications for supply chains, production and future investment decisions. A survey of major US corporations by the Pacific Institute and VOX Global found that for nearly 60% of responding companies, water could negatively affect business growth and profitability within five years, with over 80% saying that it will affect where they locate in the future. Meanwhile, ACCA has produced several reports that raise questions for the CFO. First, is water the next carbon? Second, is disclosure
Integration challenge Accountants are ‘awareness experts’ par excellence. In the case of water they can support businesses purchasing from different regions, operating in different countries or selling products to consumers anywhere in the world. However, as accounting professional bodies worldwide work to incorporate sustainability measures, evidence suggests that there has been difficulty integrating aspects of natural capital, such as water, into accounting practice for a number of reasons: Accounting for water surplus and shortage requires transdisciplinary teamwork; meteorologists, hydrologists, engineers,
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Case study: Campbell Soup Company In a bid to halve its operational water use per tonne of food produced by 2020, Campbell Soup Company is re-evaluating its production processes. The US producer of canned soups and related products has achieved a 20.7% reduction in operational water use in 2013, against a 2008 baseline. In 2013 it reduced water use by 2.6% per tonne of food produced and, since 2008, total cumulative water savings have been in the order of 4.8 billion (US) gallons. The company now wants to sustain this by standardising its most water-intensive operations that produce soup, sauce and juice products. On a wider level, Campbell’s has undertaken a water-scarcity mapping exercise. Each year it performs a site-by-site mapping of water usage, cross-referenced with the World Business Council for Sustainable Development’s global water tool and taking account of facility water intake, recycled water and wastewater extraction procedures. lawyers and finance professionals must work together to predict rainfall, its capture, storage, distribution, waste, cost and impact on company value. Accountants and assurance providers need to be trained in internal and external disclosure of perceived risks and opportunities. Integrated reporting for natural capital is a good start but is not enough; the need is for a proactive board, led by the CFO, guided by water-related accounting information for management as well as external stakeholders of whom investors, employees and the community are an important foundation for leadership. Water markets and water banking are rapidly developing and can be advantageous to companies with unused water rights or excess groundwater in the ‘bank’ or store which can be sold or transferred to others in need of the right for water. Understanding the financial implications of water financials can provide critical savings and competitive survival as well as a reputation advantage. Water stewardship standards for companies and water footprints, while in an early stage of development, should be followed closely. Professional associations provide the necessary self-regulation link between government and business interests through codes, voluntary agreements and certification schemes. Organisations such as ACCA encourage the accurate measurement by companies of all natural capital assets, including water, with the aim of improving the efficiency with which they use such assets; they also encourage the reporting by companies of material impacts and dependencies on natural capital. CFOs need to lobby their professional bodies to ensure that the future development of water accounting is strongly influenced by selfregulation steered by professional bodies. Where and when water is seen as critical then separate water accounts are justified, with accountants providing guidelines.
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Available tools The World Business Council for Sustainable Development’s report, Water for business: initiatives guiding sustainable water management in the private sector, contains an up-to-date and comprehensive list of tools. Current options include generic initiatives such as water footprint assessments and lifecycle assessments, as well as guidelines developed for specific industries – for example, the Beverage Industry Environmental Roundtable Water Footprint Working Group. Water accounting needs to be tailored to the specific activities undertaken within individual organisations. Of vital importance is how information is used, and for what purposes; of itself, a water footprint analysis achieves nothing. Organisations need to move beyond a focus on legitimacy and reputation building and embrace an internal management approach if they are going to add value to their businesses by realising the full range of economic and environmental benefits made possible via improved water use, the reduction of risk in times of water shortage or surplus, and grasping opportunities. Boards are becoming concerned about water shortages in droughts, water surpluses in floods, quality when supplies are polluted, and building resilience for sources and uses in the face of extreme weather events which increase insecurity. The accounting profession can get back to basics, working with other professionals, focusing on effective long-run decision-making. Water: the next carbon? is available at www.accaglobal.com/ab93 Disclosures on water is available at www.accaglobal.com/ab94 Is natural capital a material issue? (with Fauna & Flora International and KPMG) is available at www.accaglobal.com/ab95 Water for business: initiatives guiding sustainable water management in the private sector is available at http://tinyurl.com/ wbcsd-report
Roger Burritt is professor of accounting and sustainability at Macquarie University, Australia, and specialises in environmental accounting.
Katherine Christ is undertaking a PhD with the Centre for Accounting, Governance and Sustainability at the University of South Australia.
accountancy futures: global economy moocs
MOOC magic Massive open online courses could revolutionise university and professional education programmes, especially if they have sound accreditation
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very year advances in technology improve manufacturing productivity, lowering prices and boosting profits. Now a similar process might start to take hold in education. Internet-based education – and especially massive open online courses (MOOCs) – could sharply lower costs and raise quality. ‘It’s been over 900 years since Oxford was founded and almost 400 years since Harvard was set up,’ points out Alex Tabarrok, an economics professor at George Mason University in the US. ‘Yet there has been almost no real improvement in the productivity of university tuition. It’s still a very labourintensive business, with lots of professors and expensive buildings.’ That is all about to change, he argues, with universities experimenting with online tuition. In the US, Georgia Tech is already offering whole programmes online, and FutureLearn, owned by the UK’s Open University, has
partnered with more than 20 other universities to start offering online courses. ACCA recently launched an accredited business course via the FutureLearn MOOC, developed with academics at the UK’s University of Exeter. Clare Minchington, ACCA’s executive director for strategy and development, says ACCA will give credit to those who complete the course and pass an exam invigilated at a FutureLearn centre. ‘So far, many MOOC courses have just been ends in themselves,’ she says. ‘Giving real recognition towards a professional qualification is therefore a very important step.’ barriers to mainstream entry Yet barriers remain. Most online courses are not accredited and do not lead to degrees. With no tangible prize at the end, nine out of 10 students drop out. The question is whether such courses can really enter the mainstream. The economic incentives to make MOOCs work
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are powerful. Research by former Princeton University president William Bowen suggests that the internet can cut course costs from 37% to 57%. That doesn’t include the savings from fewer buildings or the elimination of travel time. What’s more, more students can be taught with almost no extra cost. Such savings would be welcome after years of rampant price inflation. ‘The soaring cost of university education has become a potential economic menace,’ says Neal McCluskey, an education expert at thinktank the Cato Institute in Washington. ‘Students are emerging from university with large debts in the US and Britain, and many are failing to get good jobs. Poorvalue education is also a drain taxpayers can ill afford at the moment.’ In the US the cost of a university education has climbed by 72% since 2000, according to educational organisation association the College Board. Meanwhile the average pay for an American with a bachelor’s
‘The soaring cost of
university education has become a potential economic menace’ degree has dropped 15%, the UK’s Institute for Public Policy Research has reported. Yet cost savings would be a poor bargain if quality plunged; online advocates believe this won’t happen and that results could actually improve. For a start, the higher dropout rate appears to reflect the fact that most courses don’t lead to credits or formal qualifications. Bowen’s research suggests that when online and classroom courses are measured head to head – both with accreditation – the net-based classes perform just as well in terms of test scores and dropout rates. rise of the celebrity professor? Better still, online courses and MOOCs could eliminate low-quality teaching. ‘At present a brilliant professor can only teach, at most, a couple of hundred students a day, the capacity of a large lecture hall,’ says Tabarrok, who has set up his own online learning site for economics, Marginal Revolution University. ‘Now the very best educators can reach more students in a single day than Socrates, or any other great teacher, could have reached in a lifetime. Education would move to a more winner-takes-all system, with a few celebrity professors getting paid more like sports stars.’ One illustration of this star-effect has already been seen at the Khan Academy, which offers more than 4,000 mostly school-level micro-lectures. ‘Since few maths teachers
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can match Salman Khan’s ability to explain concepts, they might just have students watch these online courses and then work through examples with them,’ says McCluskey. Khan Academy reaches about 10 million students a month, delivering 300 million lessons. The other reason to hope for superior outcomes from online education is that it makes lectures more easily assessable. ‘It is possible to use two different versions of a lecture for different groups of students and then measure which delivered the best test results,’ says Tabarrok. ‘Such randomised trials, which are hard to carry out in normal classrooms, can ensure that courses keep improving.’ More revolutionary still, artificial intelligence can be applied. ‘Systems are emerging that can detect where students are lacking knowledge or understanding, and guide them to materials that will fill the gaps,’ says Tabarrok. However, not all universities have much incentive to bring down costs, points out Vance Fried, professor of entrepreneurship at Oklahoma State University. ‘Unless colleges are losing students and money, they might not see the need to offer more value for money,’ he says. ‘At present there are not enough lowcost options to put pressure on conventional schools.’ Also, many students and parents see price as an indicator of quality and are willing to pay top dollar, even for mid-ranked colleges. That is changing, he says, but gradually. First the low-cost options are increasing. In the US, Western Governors University, for example, offers entire degrees online that are good quality, while Grace College and Brigham Young University are working to increase value for money. But the process may take years to filter through to mainstream education costs. It is also unclear who will be the dominant providers. Contenders include EdX, a non-profit MOOC founded by Harvard and MIT. Yet prestige institutions might be hobbled. ‘The exclusivity of a Harvard degree would be compromised if the university ends up offering too much content for free or making it available to less famous institutions,’ Tabarrok says. He believes reputable mid-tier universities are better placed: ‘They will have excellent content and be less constrained about widespread distribution.’ This could up-end the system. ‘Universities with massive distribution networks may be able to pay top dollar for the very best teachers.’ Even the most ardent proponents of online education admit that change will come only gradually. But big changes could be around the corner. By 2020 education may be both lower cost and better quality. Christopher Alkan, journalist
accountancy futures: global economy moocs
Make way for the MOOCs The growth of massive open online courses is set to take off in Asia as enrolment rates rise across the region
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ever before has the thirst for knowledge piqued such interest in Asia. Enrolment rates in higher education have risen markedly across the region, as budding professionals prepare to make their mark in this, the Asian century. Theirs is also the mobile generation, not one to be compartmentalised into traditional forms of learning. Asian institutions have been quick to recognise this, hence their early adoption of massive open online courses, or MOOCs. One of the first was the National University of Singapore (NUS), which in 2013 partnered with Coursera, one of the major US-based online providers, and continues to innovate by introducing new courses. The advantages, says Professor Tan Eng Chye, NUS deputy president (academic affairs) and provost, are manyfold. Via the internet, students can access all the usual learning tools but also participate in an online community of peers, professors and academic supports. This has also spawned a propensity to meet-ups in cafes and libraries where students discuss their online courses. Access to a rich academic content, on an open online platform, will accelerate knowledgesharing in higher education both across the region and globally, Tan says. Top Chinese institutions apparently concur. The list of mainland and Hong Kong universities offering MOOCs continues to grow, Tsinghua University, Peking University, Shanghai Jiao Tong University, Hong Kong University of Science and Technology and The University of Hong Kong among the latest. International collaboration International collaboration is gaining ground, too. China’s largest online learning portal, XuetangX, is powered by EdX, the MOOC platform founded by MIT and Harvard University. South Korea’s Seoul National University and Japan’s Kyoto University are now linked with EdX. Chinese internet company NetEase has also partnered with Coursera, a social entrepreneurship company offering online courses through top global universities including Stanford, Yale and Princeton, to provide the content in the Chinese language. Both the Coursera and EdX courses are free.
Meanwhile Canadian-founded Udacity, another major MOOC platform (and also non-profit), reportedly has a huge following in India. MOOCs are thriving in Asia because the model fits the demographic. The region, in general, is digitally connected, with take-up of ICT (information and communications technology) in Asia among the highest in the world. And most existing institutions simply cannot keep up with increasing demand for degrees.
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Helen Brand Chief executive, ACCA ‘Being innovative is in ACCA’s DNA. Since our founding in 1904, we have worked consistently to find solutions to open up access to the accountancy profession, while also modernising to ensure the ACCA Qualification is relevant for the world of business and the public sector for those seeking a rewarding career in accountancy and finance. ‘How we learn and study now is so very different to 20, 10 or even five years ago – and that’s been driven massively by technology and the demand of the end user. Quite simply, we want to study and learn differently nowadays. ‘According to the European Commission, there are now 2,625 massive open online courses (MOOCs) globally. MOOCs utilise the immediacy of the online world, providing the opportunity for someone to study something from a huge range of diverse, interesting, challenging and thought-provoking subjects. So I’m really proud that ACCA is the first accountancy body to sponsor a MOOC. Called Discovering Business in Society, this has been created with FutureLearn and developed by academics at the University of Exeter, so the quality and the potential of this MOOC is indeed truly massive.’
Robin Mason Dean, UNIVERSITY OF Exeter Business School ‘Let me start with a confession: I do not know exactly how online learning is going to change education in the future. And I am slightly suspicious of anyone who thinks they do know. What I am sure of, however, is that there are huge shifts ahead and it is wise to be prepared for change. That is why we are collaborating with ACCA on our MOOC, Discovering Business in Society – part of our broader approach of embracing innovation in education in all shapes and forms. ‘I suspect that online education will allow powerful brands to have greater reach. While education serves a higher purpose – of transforming lives through the embrace of knowledge – increasingly, it has to be business-like in its approach. Part of this is the increasing importance of brand. MOOCs, for example, give a very powerful way to reach a lot of people and showcase the best education offers. Those brands may be institutions, such as my own university or ACCA. More controversially, they may also be individual educators. ‘I also suspect that online education will make large lectures a thing of the past. These have been a very efficient way of broadcasting knowledge but are limited in allowing two-way exchange of view, and ensuring depth of understanding. When done well, online learning can be far richer, allowing students to pause when they need to think harder; to follow links to additional material; and to interact with others (who could be anywhere in the world). This should allow universities such as Exeter to focus on their comparative advantage: using high-quality faculty to facilitate discussion among very smart students, working in small groups – the flipped classroom. But I could be entirely wrong, and I’m looking forward to learning more as we deliver our MOOC with ACCA.’ It’s been reported that, among courses available during 2012/13, students from Asia accounted for 21.4% of global participation in the three MOOC platforms. Opportunities and challenges MOOCs in Asia offer both opportunities and challenges. Their ability to bring higher education to the masses notwithstanding, MOOCs should not be introduced at the expense of existing local service provision, says Naubahar Sharif, who teaches science, technology and innovation at Hong Kong University of Science and Technology (HKUST). HKUST has developed a MOOC on science, technology and society in China, but Sharif says that his first responsibility would always be to students enrolled on campus. ‘Once the MOOCs are modified for local use, then there is definitely greater possibility
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for the introduction of a blended model,’ he says. ‘In fact, based on my MOOC, I am developing a blended course for HKUST students.’ Dr Tian Belawati, rector of Universitas Terbuka in Indonesia, agrees that the MOOC is ‘not just hype’, and will eventually find its niche and be incorporated into formal education. There’s a belief that, in Asia, many heads of educational institutions are adopting a ‘wait-and-see’ position. For advocates of open and distance learning, however, MOOCs are the vehicle that will show how higher education can be achieved at a distance, using ICTs. Sumathi Bala, journalist To find out more, visit http://tinyurl.com/ acca-mooc
accountancy futures: global economy the future
Future-proofing business Faced with rapid innovation, the finance function faces exciting times, a series of ACCA conferences heard. ACCA’s Chiew Chun Wee reports
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T&T, a telecommunication giant in the US, approached a well-respected global research firm in the 1980s to assess the mobile phone market potential. The research firm made what it probably thought was a bold prediction then – that there will be 900,000 devices worldwide by 2000. In reality, the figure was 109 million. This anecdote was shared by Luciano Pezzotta, managing partner of ECSI Consulting, who was speaking in Kuala Lumpur during ACCA’s series of conferences held in Beijing, Shanghai, Guangzhou, Hong Kong, Kuala Lumpur and Singapore in May 2014. Megatrends, opportunities and pitfalls were some of the themes addressed by business and finance leaders and other experts, who identified emerging trends and shared their views on how delegates could leverage on developments and mitigate related risks. New technological innovations have become vital game-changers for many corporations against the backdrop of continuous globalisation and new business models. Finance professionals will quite reasonably be worried about how new businesses need to be accounted for and how their jobs can be made easier with technological
advancement. The bigger challenge comes from finance professionals’ renewed mandate to drive innovation themselves. To do that, they require more than a passing interest in new business models and in what their IT colleagues are doing. Technology plays a vital part in keeping the profession competitive and relevant by moving accountants’ work higher up the value chain, said Kenneth Yap, chief executive of Singapore’s Accounting and Corporate Regulatory Authority. Related to this, the profession faces a talent challenge due in part to the perception that accountancy and auditing work is timeconsuming and laborious. ‘Technology can play a huge part in improving that,’ Yap noted. ‘There are a lot of ways to help the industry to step up productivity… there is huge potential to leverage on technology to automate processes and improve the productivity and value of an accountant’s work.’ And yet it is clear that while technology plays an integral role in future-proofing businesses and the profession, there are other core considerations as well, as pointed out in Singapore by Sanjeev Agrawal, CFO, Singapore and Southeast Asia, Standard Chartered Bank.
Chiew Chun Wee is ACCA’s head of policy, Asia Pacific. He has worked in audit methodology and policy for a Big Four firm and has more than a decade of experience in public accounting in Singapore.
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‘Technologies are great enablers and tools,’ he said. ‘One can have the best instruments but the instruments by themselves cannot make the music. They need the [right] attitude and culture.’ ‘MAKE YOURSELF INDISPENSABLE’ A 2013 study by the University of Oxford’s Oxford Martin School suggested that the jobs of accountants and auditors are at high risk of computerisation within the next two decades. Wen Zhao, managing editor of the Economic Observer in Beijing, noted that finance professionals have to make themselves an indispensable part of the entire value chain. ‘If your value is purely in number crunching, you don’t have to wait 20 years. Computers today can replace you.’ ‘With big-data analytics, computers have the power to discern and have very good pattern recognition, and hence have the potential to displace certain jobs,’ Chng Sok Hui, CFO of DBS Group, said in Singapore; she also pointed out, however, that ‘activities requiring a high degree of creative and social intelligence are less likely to be replaced. Specialist roles that are cross-discipline are also very difficult to replicate.’ Chng believed that a finance function can make a significant contribution to stay relevant. She cited the role of finance in driving organisational alignment and measurement of businesses’ outcomes, and helping to link business drivers to shareholders’ value creation. TCL’s vice president and CFO Huang Xubin, who spoke in Guangzhou, said the company does not allow the finance function to hole up in the office. ‘The expectation is that the finance function spends more than 60% of its time outside the office… the finance department should have diverse expertise in such areas as product planning, market research, design, R&D, manufacturing, sales and after-sale services,’ he said. Ride on the Megatrends Senior vice president and CEO of Neusoft Corporation Zhang Xiao’ou, in Beijing, saw the ‘disruptive’ significance of big data and new business models. ‘The innovative business models emerging through such companies as Alibaba, Tencent and Amazon have drastically altered consumers’ purchasing habits and business models of their competitors. Today, the focus is on social media, on instantaneous information exchange,’ Zhang observed. Jason Liang, CFO of PayPal in China, told delegates in Shanghai, ‘Big data presents challenges to CFOs, but at the same time it presents a great opportunity as CFOs are in
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the perfect position to connect all information from within and outside the organisation. Information is king. CFOs who transform successfully will become indispensable in organisations of the future.’ Eddie Chiu, national managing partner, enterprise risk services at Deloitte China, echoed this sentiment in Beijing. ‘A CFO should transform into the chief information officer – one who owns all the information and data in the organisation including those that are not traditionally considered financial like sales data and market information,’ he said. In Kuala Lumpur, Pezzotta moderated businesses’ expectations of big data. ‘The most disruptive ideas often are developed through some intellectual spark rather than an in-depth analysis or incredible amount of data,’ he said. ‘I would like to emphasise the power of exploration, in particular the power of observing, interacting, talking to customers to understand their needs and frustrations. When we see frustrations, we find great opportunities for innovation.’ Pezzotta also recommended that delegates invest in growing and training creative capability. ‘Studies have shown that IQ tends to be genetic but innovation is linked to EQ [emotional intelligence], which can be nurtured and developed.’ Also in Kuala Lumpur, Andrew Olah, head of industry at Google Malaysia, expounded the importance of having the right company culture, one that drives innovation. ‘We do have a lot of products that do not make it past a couple of months. And that’s okay. Google’s philosophy is to launch, iterate, have a crack at it and, if it fails, learn from it. The key is to put the new product in front of the consumers, get their feedback, and then improve on it. It is all about putting the users first,’ he explained. What’s in it for smaller businesses, though? It was argued that new technologies and business models also benefit smaller businesses by creating a more level playing field. Dr Toa Charm, founder and chairperson of BI and Big Data SIG, Hong Kong Computer Society, pointed out that SMEs can utilise third-party services available in the cloud. ‘It would be a big advantage for SMEs,’ he noted. Speakers added that manufacturers and exporters can also leverage on services available from websites such as Alibaba.com, or develop their own sites at a low cost, stay connected with customers and reach out to other ones on myriad social media software tools. Evaluation of New Technologies The business environment has changed and finance needs to move away from management
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techniques that were developed in the days when management’s priorities were controls and efficiencies. Pezzotta highlighted two pitfalls: ‘Planning and budgeting processes based on past baseline instead of allocating resources according to potentials of existing strategic options; CAPEX processes that require strictly quantitative returns – the net present value or internal rate of return – when very often returns would be difficult to quantify for attractive new markets. Sometimes just because we are not able to quantify, [the new opportunities] don’t make the cut.’ TCL’s vice president and CFO Huang Xubin, in Guangzhou, held the same view. ‘Finance has traditionally favoured certainty. We tend to only loosen the purse strings when there is 98% success rate; we don’t like investing and borrowing. However, a matured and stable market translates into higher costs. While ensuring a proper control and risk management framework remains as critical as ever, there is a need for CFOs to seek a balance and be more proactive in pursuing business opportunities. Just staying put and not seeking expansion is, in my mind, the biggest risk in today’s business environment.’ Chen Hu, vice president of ZTE and a panellist in Shanghai, was of the opinion that forecasts cannot be relied on to evaluate feasibility of new projects. He suggested looking at the ‘time’ factor: ‘Firstly, how much time and resources does the organisation need to commit? Secondly, how much time will your consumers end up spending on your new initiative? The more time you can occupy, the higher your valuation.’ Diversifying Skills The advent of shared service and outsourcing arrangements and, more recently, global business services have transformed the finance function in many corporations, said Chen. As such arrangements relieve finance professionals of many of their traditional duties, they need to diversify their skills and scope of work to contribute greater values. ‘Finance professionals need to turn data into information and intelligence; find the interconnectivity between data and operations and non-financial information,’ said Chen. ‘Can you talk business? This is a critical junction. Those who fail to transform will get swept away by the seas of change; those who undergo this important transformation will become the CFO. Why are we called “CFO”? It’s one stroke less than “CEO”, one stroke more than “CTO” and “CIO”.’ In Shanghai, David Yu, general manager of HP Software Greater China, pointed out that
the chief finance technology officer (CFTO) will need an adequate appreciation of cloud computing, ‘including knowing the distinction between private, public and hybrid cloud’. In terms of big data, CFTOs should be able to ‘differentiate structured data from unstructured data’ and so on, bringing IT literacy for a finance professional to an entirely new level. ‘As a CFTO, you need to grasp the implications of technological innovations that revolutionise businesses,’ said Yu. ‘Without that appreciation, you will not be able to function. You will not even be able to do your basic accounting properly.’ Finance professionals should continuously seek to diversify their exposure and knowledge in anticipation of disruptive changes. Sophia Pang in Kuala Lumpur shared her experience. An accountant by training, Pang is now the Performance Management Solutions lead, ASEAN at IBM. ‘Dare to try and think something that is totally different and unrelated [to your current duties]. Never think that you’re going to start something that is totally unrelated… it will probably help change your mindset and think outside the box.’ Data Security On the rise is the usage of big data and data analytics by organisations in such areas as market demand forecasts and consumer behaviour research. Ideally, data analytics can help deliver enhanced customer value and experience by matching baskets of market
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preferences for ‘cross-selling’ and ‘up-selling’. Leveraging SoMoClo (social, mobile and cloud technologies) is an important business imperative but companies must bear in mind the regulatory framework, said Steve Tan, partner and deputy head for technology media and telecommunications, Rajah & Tann in Singapore. ‘Before an organisation can undertake profiling and data analysis, they will have to seek the consent of the individuals in question. Previously there was no explicit need to.’ The existing and potential regulatory requirements will add on considerable business costs: for example, ‘companies will require an internal tracking system about their usage of personal data’. This was mentioned in light of the Personal Data Protection Act’s access obligation imposed on organisations, which allows individuals to seek information on how the organisation has used or disclosed their personal data in the year prior to their access request. Tan also observed that ‘central to the ability of SoMoClo to burgeon further is the ability to do data-analysis profiling of consumers’. In Beijing, Eddie Chiu, national managing partner, enterprise risk services, Deloitte China, highlighted that internal data security is also of concern. ‘It is not sufficient for a company to set up a firewall, store its most confidential data in the office and not go online. Even a complete cut-off from the outside is not enough to guarantee the security of a corporation’s internal data,’ he noted. ‘The trend is BYOD – bring your own device. Once an employee’s USB is plugged into
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and connected with his company’s computer system, the company’s central data centre will be affected even though it is not connected with the internet. The issue is that too many employees connect their own devices with their companies’ intranet. Raising awareness of data security among employees is crucial.’ In Hong Kong, KPMG partner Roy Leung said: ‘Data and cybersecurity is no longer just a technical issue. It is a risk management issue in which CFOs should get actively involved in.’ Standing Up to the Challenge There are great opportunities for finance to make a significant contribution to the futureproofing of businesses, to ensure sustainable growth. The underlying message from the many debates held during the conferences was that finance professionals should embrace change and seek to go beyond the routine and mundane. In doing so, they would make a difference – not just in financial terms but in their own professional fulfilment as well. Also speaking at the conferences in Beijing and Shanghai, Faye Chua, ACCA head of future research, presented the findings of ACCA’s report, Digital Darwinism: thriving in the face of technology. ‘As the trusted guardian of corporate assets, in such a turbulent and mobile environment, what the finance professional brings is the ethical leadership and stewardship,’ she said. So are our finance leaders ready? The ACCA/IMA report, Digital Darwinism, is available at www.accaglobal.com/ab87
Faye Chua, pictured at ACCA’s event in Singapore, explained the importance of developing technologies, and urged finance professionals to gear themselves up for change.
accountancy futures: global economy Ethiopia
Time for action It’s time to implement recent recommendations and move the accounting profession forward in Ethiopia, argues Dr Belete Jember Bobe FCCA
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Dr Belete Jember Bobe FCCA is lecturer in accounting at the School of Accounting, Economics and Finance, Faculty of Business and Law, Deakin University, Australia. Originally from Ethiopia, he chairs the Australia and New Zealand ACCA Members Panel. He was the founder and former president of the Certified Accountants Students Society in Ethiopia in the 1990s, fully supported and funded by ACCA.
orruption, mismanagement of public resources and accounting irregularities are huge challenges in developing countries like Ethiopia. A strong accountancy profession will undoubtedly contribute positively and significantly to the fight against these chronic problems. Several studies have been conducted in Ethiopia assessing the level of the accountancy profession; almost all made recommendations which ended up being shelved. These included studies by ACCA in 2005 and the Reports on the Observance of Standards and Codes (ROSC) in 2007, a joint initiative by the World Bank and the International Monetary Fund (IMF). ACCA conducted a study for the Ethiopian Federal Ministry of Trade and Industry on the development of accounting and auditing standards. A ‘road map’ was produced with recommendations for the establishment of a standard-setting mechanism, the development of a set of Ethiopian accounting standards, the implementation of International Standards on Auditing (ISA) in Ethiopia, and an investigatory and disciplinary system for audit quality control. ROSC reviewed the corporate sector accounting, auditing and financial reporting practices and supporting infrastructure. The review was conducted in consultation with key stakeholders including governmental and non-governmental institutions, and made the following recommendations: revise the Commercial Code 1960 and other relevant laws and regulations enact a financial reporting law establish a National Accountants and Auditors Board set accounting standards mandate ISA for all auditors establish a strong professional accountancy body, with membership of the International Federation of Accountants (IFAC) establish a local professional and technician accountancy qualification enhance the capacity of all regulators to enable them to effectively discharge their responsibilities and to handle International Financial Reporting Standards-related issues in the regulation
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* conduct awareness campaigns and related
programmes. Over seven years there had been efforts to implement ROSC’s recommendations, with steering committees established and financial reporting law and a charter for the establishment of a professional body drafted, and, on 14 June 2014, the House of Representatives passed the Financial Reporting Proclamation. Now that the government has enacted a financial reporting law, donors and all others concerned in the advancement of the accountancy profession in Ethiopia should work towards making the recommendations realities. These will lead to the education of professional accountants locally, the improvement of the monitoring of private and public audits, the development of ethical culture, and the production of quality and timely financial management information. It does take more than a strong accountancy profession to fully deal with wastage and corruption, and Ethiopia is not unique in this. However, a concerted effort by all concerned to put in place the legal and institutional framework urgently will be the right start.
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False profits Throughout history, nations that rose on the back of good accounting practice have fallen just as spectacularly, as a recent book illustrates
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ccounting is all very well, but it is easy to forget that it exists for rather more than technical expertise and efforts at precision. The important part of accounting is accountability – to take the results and hold somebody to account as a result. The purpose, as Sir David Tweedie (see page 42) used to say when he was chairman of the International Accounting Standards Board, is ‘to keep capitalism honest’. But accountability is even more powerful than that. It is the means whereby a society, a nation, a state or a political construct stays in business. Without accountability at their heart, they founder. And the examples roll down through history to prove this point. A recent book by Jacob Soll, professor of history and accounting at the University of Southern California, documents all this amid a rollicking narrative. Here’s a taste: ‘Over and over again, good accounting practices have produced the levels of trust necessary to found stable governments and vital capitalist societies, and poor accounting and its attendant lack of accountability have led to financial chaos, economic crimes, civil unrest, and worse. All this is every bit as true in our own day of multi-trillion-dollar debts and massive financial scandals as it was in the Florence of the Medici, Holland’s Golden Age, the heyday of the British Empire, and, of course, 1929 on Wall Street.’ The consequences of a disconnect between accounting and accountability are grave. Soll
writes: ‘Capitalism and government, it seems, have flourished without massive crises only during distinct and even limited periods of time when financial accountability functions. People have known how to do good accounting for nearly a millennium, but many financial institutions and regimes have just chosen not to do it. Those societies that have succeeded are not only those rich in accounting and commercial culture but also the ones that have worked to build a sound moral and cultural framework to manage the fact that humans
The balance of account books, he argued, represented the moral equilibrium of God
have a regular habit of ignoring, falsifying and failing in accounting.’ Soll shows that you can find a failure to understand this point echoing down the years in the same way as it has resounded over the last few decades. Back in the late 1500s, financial institutions under King Philip II of Spain failed to share information, reforms were not implemented and, although Philip had ‘realised that one can fire one’s accountant, but the problems do not go away’, it all went to hell in a handcart. The great Spanish Armada, the failed invasion of England, was a financial disaster as well as a naval one.
Technology further hinders accountability ‘Considering that there have been centuries of struggles over financial accountability,’ writes Jacob Soll in The Reckoning, ‘our own recent inability to effectively audit and hold companies and governments accountable seems incomprehensible. And yet, our predicament follows a historical pattern: no sooner is any accounting reform made than we find a way to resist it. Indeed, the rise of technology has made the task of accountability even more daunting, as regulators and even auditors come up against labyrinthine big numbers and financial logarithms, high-speed trading, and complex financial products such as bundled mortgages.’
Accountants perceived ‘inexpert’ after Enron ‘From the Renaissance to the 19th century,’ writes Soll, ‘great artists and philosophers painted and discussed accountants and their complex role in society. But great artists don’t paint accountants any more. It is not surprising. In the wake of fiascos like Enron, accountants have come to be perceived not only as boring but also as venal and inexpert. Few political and financial commentators discuss accountants or accounting. Due to their dour image and the indecipherable aspects of their profession, accountants have become separated from everyday culture.’
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In the great Medici days of Florence in the 15th century, the dynasty ‘showed the power of good finance but fell prey to the temptations to ignore accounting’. As Soll puts it: ‘The great masters of the Medici bank used accounting to create a financial machine that allowed them to dominate their age, both culturally and politically, like no family before them. Yet one generation later, they had almost lost it all, not simply by bad accounting, but because they no longer considered accounting as an essential branch of knowledge for themselves and their heirs.’ countdown to revolution The Sun King of France, Louis XIV, put his confidence in finance minister Jean-Baptiste Colbert, who provided pocket account books. And, writes Soll: ‘For the first time...accounting and traditional learning were used together to manage a large government.’ But then Colbert fell ill and died, the financial information dried up or was suppressed, and by Louis XIV’s death in 1715 the country ‘was bankrupt, with no effective accounting system’. The long countdown to the French Revolution had begun. And so it goes on. Dominican friar Luca Pacioli, for years more famed for being a friend and mathematical mentor to Leonardo da Vinci, published the first manual of double-entry bookkeeping in 1494. The balance of account books, he argued, represented the moral equilibrium of God. ‘If transactions were kept
This sketch of Raymond Auguste Quinsac Monvoisin’s most famous work, Le 9 Thermidor, illustrates the arrest of Maximilien Robespierre, one of the crucial events of the French Revolution. While the reign of Louis XIV had seen the introduction of an effective accounting system, this had vanished by his death, eventually leading the country into the bankruptcy that paved the way for revolution.
faithfully,’ says Soll, ‘that would not only help merchants but also put them in good stead with God, for they would be “trustworthy” and “upright”.’ It opened the skills up to the world. And yet the lessons learned down the centuries continually fall out of favour and are ignored, landing the world in financial chaos, disaster and ruin once more. Charles Dickens, in his novel Little Dorrit, put the bare bones into fiction. Soll writes: ‘For Dickens the wilfully opaque accounting and management of the Victorian Treasury pointlessly ruined honest men like Dorrit and opened the doors for swindlers like Sadleir, whom Dickens immortalised as Mr Merdle.’ On a personal note I enjoyed the huge coincidence that I was in New York at the time of the arrest of the mass-swindler Bernard Madoff – the same week as a TV dramatisation of Little Dorrit back in Britain had reached the point where Merdle realised the game was up with his swindling and committed suicide. For me, it simply reinforced the case that when it comes to accountability and scandal the same problems come round time and time again, with no lessons learned or remembered. And this, essentially, is Soll’s message: knowledge is eroded, and the same mistakes are made. Josiah Wedgwood, the china magnate and giant of the Industrial Revolution, was the grandfather of Charles Darwin, who made plain the logic of evolution. Both were orderly men who believed in the order imposed
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by accounting. Wedgwood taught it to his sons and daughters; Darwin kept detailed account books for all his activities. culture of accountability In conversation, Soll stresses the need for a culture of accountability. He feels we had it and then forgot it. And that is why we are prey to so many financial disasters. ‘It was a key element of European culture, and we have lost it,’ he told me. His reading of history tells him that if you don’t have a population that is literate in accounting, then it cannot judge what is right and wrong within the
Campaigners at a property in Oakland, California, which is threatened with mortgage foreclosure. Jacob Soll suggests that if the public had had a better general knowledge of accounting they would not have taken out unaffordable home loans.
We are living, globally, in a new dark age when it comes to accountability and understanding economy, both domestic and across the world. ‘People used to write everything down from Renaissance times until the 1950s and then we let go of it.’ The great debate about how to restore trust in business, which we have seen burgeon since the financial crisis, is tied up with all this. Without society understanding how accountability works, then business will not be understood and, as a result, will be mistrusted. Soll told me: ‘Everyone needs to learn double-entry.’ Had people in general possessed a knowledge
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of double-entry ‘then they wouldn’t have taken all those home loans out’. And he is scathing about the error-strewn nature of public accountability. When ratings agency S&P downgraded US Treasury debt for the first time in 70 years there was, famously, a US$2 trillion error in the calculations. ‘That would not have cut the mustard in the 18th century,’ Soll pointed out to me. What we learn from this immensely lively chronicle is that we are living, globally, in a new dark age when it comes to accountability and understanding. Soll cites the International Accounting Standards Board as describing government accounting as being in a stage of ‘primitive anarchy’. As with the financial crisis, much of this is so because the public is disengaged from accountability and the knowledge and understanding that would empower such accountability. It would be hard to disagree with one of Soll’s conclusions: ‘If there is any historical lesson to be learned here, it is that those societies that managed to harness accounting as part of their general cultures flourished.’ Robert Bruce, accountancy commentator and journalist The Reckoning: Financial Accountability and the Making and Breaking of Nations, by Jacob Soll, is published by Allen Lane.
ACCOUNTANCY FUTURES: GLOBAL ECONOMY SPACE EXPLORATION
Promising the Moon With the 21st-century space race accelerating, the economic benefits of lunar exploration – from resources to transportation – are becoming apparent
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he closest many of us will get to outer space is playing the Angry Birds game, Fry Me to the Moon. However, those not content to merely play at lunar exploration could soon get much closer. Advances in technology have put what used to require the unlimited budget of a superpower within the reach of private enterprise, and a 21st-century space race has begun. Between now and 2020, we will see years of research, development and dreams becoming commercial realities that could turn the Moon into the launch pad for an explosion in space science, exploration and commerce. ‘We are beginning a new era of commercial lunar exploration,’ says Bob Richards, CEO of Moon Express, an earlystage lunar transportation and data services company, based in Silicon Valley in the US. ‘By exploring the Moon as entrepreneurs, we are opening up a new economic sphere for humanity. Instead of using up all the
resources of Earth, we can reach out to the Moon and use the resources there.’ The bounty is expected to include Helium-3, platinum group metals and other elements that are rare on Earth. Moon Express is one of the start-ups developing robotic space vehicles to make their exploration and exploitation more economical.
‘By exploring the Moon as entrepreneurs, we are opening up a new economic sphere for humanity’ Commercial space ventures are not new. Even during the original space race (see box), the governments of the USSR and the US used contractors. However, in recent years the space economy has expanded to include both established and emerging space agencies and a burgeoning commercial sector.
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Traditional specialists such as Airbus Defence and Space (Europe), Boeing (US), China Great Wall Industry Corporation, and Rocket and Space Corporation Energia (Russia) have been joined by space start-ups from across the globe, all chasing contracts from space-faring nations and the commercial possibilities created by emerging technologies and the Google Lunar XPRIZE (see box). LUCRATIVE REWARDS The potential rewards are lucrative – and dwarf the US$30m XPRIZE. Research from London Economics lists a growing range of opportunities including: existing markets such as payload hosting and scientific and technical data; emerging markets, such as asteroid mining, lander systems, planetary rovers, lunar orbiters and launch pads; and technology transfers to non-space markets.
Hurdles such as lack of funding and technical problems have already reduced the number of teams competing for the XPRIZE from 33 to 18. However, not all space entrepreneurs are so easily discouraged and not every earlystage company with its sights set on the Moon is an XPRIZE competitor – though the philanthropic XPRIZE Foundation does cast a long shadow. The foundation has directly and indirectly spawned and supported a number of lunar and space start-ups and entrepreneurs, including Nobu Okada. Although the founder of Astroscale, a Singapore-based start-up, is on a mission to remove space debris, when his company makes its first foray into space it will do so in collaboration with XPRIZE competitors. A Japanese company, Otsuka Pharmaceutical, is paying Astroscale to get a can containing
There are many associated revenue-generating
opportunities, such as brand exposure and other types of advertising and marketing, contracts for television programmes and space tourism And, as lunar and space start-ups and earlystage companies have the potential to capture the public’s imagination and attention, there are many other associated revenue-generating opportunities, such as brand exposure and other types of advertising and marketing, contracts for television programmes – on Earth and in space – and space tourism. Space products and services take time and money to develop and even pockets as deep as China’s can’t prevent ‘technical problems’. Since December 2013, when its Chang’e-3 probe helped the Yutu rover make the first soft lunar landing since 1976 (to survey natural resources and geology), the latter’s functionality has gradually deteriorated.
a powdered serving of its ‘Pocari Sweat’ energy drink – and 120 plates that have been laser-engraved with children’s messages – to the surface of the Moon, and Astroscale is paying technology company Astrobotic to deliver it, when its Griffin Lander makes its planned 2015 Moon landing in pursuit of the XPRIZE. Many runners in the 21st century space race are reliant on international collaboration and corporate sponsorship. As well as delivering Pocari Sweat, Astrobotic has payload contracts to deliver: human ashes to the Moon for Celestis, a ‘memorial spaceflight’ company; plus a robotic self-assembly house for the Swedish artist Mikael Genberg and
Eyes on the XPRIZE The Google Lunar XPRIZE will be awarded to the first teams to build robots that land on the lunar surface, explore it by moving 500 metres and return high-definition video and imagery, by the end of 2015. With prizes totalling US$30m, the competition has attracted national teams from Brazil, Canada, Chile, Germany, Hungary, India, Israel, Italy, Japan, Malaysia, Spain, and the US; as well as a Danish team with members in Italy and Switzerland and an international team made up of more than 30 countries including Bhutan, Tonga and Russia.
Who owns the Moon? The 1967 Outer Space Treaty prohibits sovereignty claims over Earth’s lunar satellite or any other celestial body by occupation, use or any other means. More than 100 nations have signed it, including the only three to make a soft landing on the Moon: China, the US and USSR. However, the treaty focuses more on space militarisation than on property rights and leaves plenty of scope for space lawyers to debate whether it prohibits, or allows, private ownership on celestial bodies.
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his crowdfunded ‘Moon house’ project, which aims to create the first lunar art installation. ‘Think of us as FedEx to the Moon,’ quips Astrobotic chief executive, John Thornton. As well as its various payloads, the company has contracts with the US National Aeronautics and Space Administration (NASA) which will be worth millions of dollars, if Astrobotic can successfully deliver data on how to land at precise locations, how to avoid unexpected lunar obstacles and how to survive the twoweek deep freeze that is the lunar night. PIGGY-BACKS IN SPACE Like Astroscale, there’s plenty of piggybacking in the future plans of Astrobotic. To deliver its payloads, complete the mission set by Google and deliver the data NASA hopes for, Astrobotic will need the support of Elon Musk (entrepreneur and XPRIZE trustee) and his space transport company SpaceX, which designs, manufactures and launches reusable rockets and spacecraft, and is the only private company ever to deliver cargo to space and then return to Earth. Previous XPRIZE winners also have a role to play. Astrobotic team member Scaled Composites won the first XPRIZE with piloted flights to the edge of space, showing how such prizes can spawn new industries and attract new types of funding; Sir Richard Branson turned a Scaled Composites vehicle into the basis for the spaceflight company Virgin Galactic. Virgin Galactic has yet to fly a customer to space, but its plans for commercial space travel have persuaded around 700 aspiring space cadets to make deposits worth US$80m. ‘In this first chapter of commercial space travel, we will help make space accessible and inspire countless more people to join us in the pursuit of space exploration and science innovation,’ says Branson, who will be a passenger on the first commercial flight (scheduled for late 2014 at the time of writing). Longer term, Virgin Galactic also expects its fleet of reusable spacecraft to deliver scientific research payloads, make day trips to the Moon, and take holiday-makers to space hotels. Although the notion of off-world hotels on the Moon or farther afield may seem farfetched, Branson is not the only entrepreneur who sees them just over the horizon. After making his money in hotels and property, entrepreneur Robert Bigelow has decided to pursue accommodation in space as his next venture. The Bigelow Aerospace start-up already has a contract to supply astronaut habitats for NASA; he has also declared his intention to build habitats on the Moon – if
Space race with a difference In some ways the space races of the 20th and 21st centuries are alike; in others they are not. The former focused on the military dominance of the US and USSR, while the latter is more focused on technology dominance. But both involve battles for hearts, minds and money. Although some see China’s growing ability to counter US space capabilities as a threat to the latter’s military superiority, the Cold War rivalry of the 20th century space race has been superseded by a more international, more commercial and much more collaborative affair. The US still has regulations which prohibit the export of weapons and weapons technology for use by its enemies. However, the rules can also disadvantage US companies, as commercial entities in many other countries are willing to share space technology with each other and with China. space law can protect his investment. ‘It is time to get serious about lunar property rights,’ says Bigelow, who wants governments to clarify property rights in space (see box). It’s a matter that’s screaming for attention and for international consensus; there’s a lot of money to be lost and made. According to the Space Foundation, the global space economy was worth US$314.17bn in commercial revenue and government budgets in 2013, with an increase of 4% on 2012 driven by commercial activity such as space products and services, commercial infrastructure for space agencies, and the burgeoning commercial sector. The 21st-century space race has only just begun, but the Moon has never seemed so accessible or appealing. Let’s hope those Angry Birds don’t destroy it before the rest of us have a chance to do more than play at lunar exploration.
Watch this space: Virgin Atlantic aims to complete its first commercial flight this year using a SpaceShipTwo space plane (pictured) released at its 15,550m launch altitude from a mothership to fly on into the upper atmosphere before gliding back to Earth for a conventional runway landing.
Lesley Meall, journalist
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Meet the MINTs What is a MINT country and how does it differ from a BRIC? Jim O’Neill, inventor of the BRIC acronym, explains how he identified tomorrow’s powerhouses
Jim O’Neill is a visiting research fellow to thinktank Bruegel, conducting research on aspects of global trade, global governance and targeting higher sustainable economic growth. He is the former chief economist and head of asset management at Goldman Sachs. He is on the board of a number of research organisations and is one of the founding trustees of the UK educational trust SHINE. He serves on the board of a number of other charities specialising in education and in 2013 he became a non-executive director of the UK’s Department of Education. O’Neill is to lead a panel of experts in a UK government review into the use of antibiotics.
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I
n early 2014, I tried to encourage business people and others to focus on another group of important emerging economies that I call the MINT countries, namely Mexico, Indonesia, Nigeria and Turkey. I did this via a BBC Radio 4 series, MINT: The Next Economic Giants, following a week of travelling around each country and interviewing a whole variety of people in each. What is a MINT country, and how do they differ from the BRIC countries? It is nearly 13 years since I dreamt up the BRIC acronym and the rise of Brazil, Russia, India and China has certainly been much bigger than I thought possible back then. China has become the second largest economy in the world – well before my initial prediction that 2015 would be when the country overtook Japan; indeed, the Chinese economy is now not far off twice the size of Japan’s. Brazil got to be larger than Italy about 10 years faster than I had assumed, and India and Russia are just inside the top 10 economies of the world. Collectively, the BRIC economies are not far off becoming as large as the US, something they will probably achieve by the end of 2015. For many years, I was frequently asked what made these countries unique in the emerging world. After all, they are not the only ones with large populations and the potential for productivity catch-up – the criteria I used to project their future rise. I tried to suggest that for any others to be regarded as ‘BRIC-like’, they needed either to already account for 5% of global GDP or have the potential to do so in the medium term. Many years ago, together
with my then colleagues at Goldman Sachs, I looked at the BRIC-like potential for the 11 most populous emerging economies after the four BRIC countries. (We didn’t include Ethiopia for reasons I don’t really recall.) I call this diverse group the Next11. They vary from OECD members such as Mexico and South Korea to those much smaller – at present, at least – like Bangladesh and Vietnam. Some years later I tried to encourage business people to stop thinking of the largest emerging economies as traditional emerging economies – their size made them different – and to define the eight whose US$ GDP was more than 1% of world GDP as ‘growth economies’; this was not to suggest that they would always grow and never have any problems, but that they needed to be distinguished from the rest of the emerging world and had as many opportunities in the developed world. Four of the eight – Mexico, Indonesia, South Korea and Turkey – were on the Next11 list. South Korea is a particularly interesting economy because it is reasonably wealthy and not far off enjoying the same wealth as peripheral European countries such as Portugal and even Spain. To think about it as an emerging economy at all is quite insulting to South Koreans. The country offers a lesson to many lower-income emerging countries that aspire to higher wealth; just 40 years ago, South Korea, too, was a low-income country. So I thought that South Korea doesn’t really belong in a ‘MIST’ group and, when approached by the BBC, I decided to replace the S with an N for Nigeria, as this African country, home to over 15% of the continent’s population, has the potential to be very large. NIGERIA Nigeria is in the news for all the wrong reasons, with terrorism in the north getting much understandable attention. Even without this, many people were shocked that I would include such a ‘corrupt’ nation along with the others. Nigeria has massive challenges perhaps even to stay together as one nation, but if it can it has huge potential. Its population of 173 million is young and its demography suggests a big jump in the workforce in the future. Its people have great ingenuity and I regard the net positive returnees of the most educated
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living overseas as a good leading indicator of growth potential. If it can implement the power reforms announced in 2013, the country could easily grow by more than 10% for years. And please listen to the iPlayer discussion I had with the now ousted central bank governor Lamido Sanusi, one of the most sophisticated discussions about corruption I have ever had. MEXICO All the MINT countries have challenges with corruption, as do most countries. Mexico, which is at the opposite end of the spectrum in terms of popular investor mood from Nigeria, also suffers from it, along with a massive informal sector. I enjoyed a fascinating session with a woman who ran her own children’s
clothing stall on the huge Tepito market in the middle of Mexico City; unless the government can encourage people like her to join the formal economy, its much-hyped reforms won’t lead to much. I also met many of the top government policymakers including the president; their reforms are so deep and wide they make former UK prime minister Margaret Thatcher’s attempts seem like those of a pussycat. Throw in vastly rising competitiveness improvements as China goes up the cost and value chain, and Mexico faces a much better future. INDONESIA Indonesia is a country that is positively surprising me since the programme finished. Of the four MINT countries, I found it most difficult in Indonesia to get the ‘wow’ factor. Where is your Samsung?, I kept asking
everyone. What is your edge to the world (other than commodities and 250 million people)? At the time, they were under the cosh from the markets due to a current account deficit. Yet by mid-2014, Indonesian equities were one of the strongest-performing markets in the year to date with hopes high that Jakarta governor Jokowi, an outsider who does not come from the oligarchical elite, might be able to boost growth, battle corruption and spread the wealth. It is a tall order, but I am hopeful he can move Indonesia to a better place. TURKEY As for Turkey, it was the first place we travelled to last October, not too long after the summer protests, and we were not especially embraced
by policymakers in contrast to the other MINT countries, which was perhaps a sign of things to come. The political brouhaha that has now engulfed the country concerns me, with lots of incursions into aspects of the democratic lives I thought Turkish people were being encouraged to enjoy. The remainder of 2014 is going to be interesting: will Erdogan try to push for an additional term and keep down opposing forces or will he relinquish control? Turkey also probably has the most challenging cyclical imbalances of the MINT countries, with its high inflation rate and current account deficit. Against that, it has much going for it in the longer term, especially a geographical location that allows its best businesses to reach in all directions of the changing world and boost their trade, and many are already doing so with considerable success.
Listen to MINT: The Next Economic Giants at http:// tinyurl.com/ BBCmint
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Mexico
World Bank’s forecast: ‘Mexico is the second largest economy in Latin America... Economic growth in 2013 fell to 1.1%, compared to the strong recovery experienced between 2010 and 2012 (annual average growth of 4.3%). Deceleration in economic activity was driven by weaker export demand and a contraction in domestic investment, largely in construction. A gradual recovery of economic activity with more dynamic exports as the US economy gains steam and normalisation of public expenditures should bring economic growth back to a range of 3% to 4% over the next few years.’ Economist Intelligence Unit’s verdict: ‘After pushing through most of his structural reform agenda (including the energy reform) in 2013, the president, Enrique Peña Nieto, will focus on implementation, as well as on boosting growth, creating more jobs and reining in drugrelated violence. After slowing to 1.2% in 2013, GDP growth will pick up to an annual average of 3.8% in 2014-18. The country’s outlook will remain closely tied to that of the US, despite efforts to diversify trade links.’ Just as Turkey is able to look both east and west for trading partners, so Mexico bridges the gap between the US and Canada and growing economies in South America. But it is also a big exporter to the rest of the world. ‘The economy is growing, but the start/stop nature is inherent for any emerging economy,’ says Lucia RealMartin, director of emerging markets at ACCA.
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The accountancy profession is relatively mature and is seen as one of the best organised professions in the country. All the big firms have been present in Mexico for decades, while most of the main mid-tier firms have representatives or associated firms there. For the last decade Mexico has been working to incorporate international standards into domestic accounting and auditing standards: in 2009 the Mexican Banking and Securities Commission issued modifications to the securities and exchange laws to adopt International Financial Reporting Standards by listed companies. This has been mandatory since 2012 except for financial institutions. ‘All sectors are driving growth in the demand for accountancy services and qualified accountants,’ says Ricardo Lopez, partner in RSM Mexico, adding that the greatest potential lies in the private sector. Transnational private companies that have invested in Mexico have pushed growth in the demand for professional and specialised services from accountants.’ Mexico is, says Lopez, going through a number of changes in its regulatory environment. Some are expected to have a favourable impact, such as energy and telecomms reforms. Others, such as anti-money laundering laws and recent changes to fiscal regulations, have brought new challenges to entrepreneurs and their service providers. Real-Martin adds: ‘The adoption of IFRS ahead of its immediate neighbour could make Mexico a significant player, and if they are able to drive that they will be driving development of the profession throughout Latin America.’
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Indonesia
World Bank’s forecast: ‘Indonesia is now one of Asia Pacific’s most vibrant democracies that has maintained political stability and emerged as a confident middle-income country… However, considerable challenges remain. Out of a population of 234 million, more than 32 million Indonesians currently live below the poverty line and approximately half of all households remain clustered around the national poverty line set at 200,262 rupiahs per month (US$22).’ Economist Intelligence Unit’s verdict: ‘Indonesia has the potential to maintain a rapid rate of economic expansion until the end of the long-term forecast period, and real GDP growth is forecast to average 5.2% a year in 2012-30. The fact that the country’s population is relatively young will facilitate growth in the working-age population. Steady progress in improving the business environment, and notably in reducing corruption, will encourage investment and increase productivity.’ Here are some more interesting comparative statistics that just about sum up what is happening in Indonesia at the moment. With the largest economy in South-East Asia, Indonesia’s annual GDP stood at US$868bn for 2013. Its population currently stands at 240m. And yet there are only 15,500 qualified accountants in the country. Compare that with the UK’s US$2,500bn GDP, 64 million
population and some 327,000 accountants. In neighbouring Singapore, with a similar GDP and a much smaller population (5.4 million), there are 37,000 accountants. Quite a difference. ‘This is a real risk for the country,’ says Reza Ali, ACCA’s head of emerging markets for Asia. ‘Even though it has slowed down in recent months, a rapidly booming economy with rapid growth has not been matched by an increase in the number of accountancy professionals. This poses a structural risk for the country; it is building high but without the deep foundations.’ Highlighting the severity of the situation, Ali points out that, out of the 15,500 qualified accountants, 2,100 are CPAs in public practice, and of this 2,100, 60% are over 50 years old. If not enough is done to promote the profession, then in 10 years’ time the practising profession will halve.
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Nigeria
World Bank’s forecast: ‘With a population of 158 million people, Nigeria is the largest country in Africa and accounts for 47% of West Africa’s population. It is also the biggest oil exporter in Africa, with the largest natural gas reserves in the continent. With these large reserves of human and natural resources, the country is poised to build a prosperous economy, significantly reduce poverty, and provide health, education and infrastructure services to meet its population needs.’ Economist Intelligence Unit’s verdict: ‘The business environment in Nigeria is unlikely to improve significantly over the forecast period, although it could quickly deteriorate if political instability rises. Systemic problems in infrastructure and the labour market mean that Nigeria’s position remains towards the bottom of The Economist Intelligence Unit’s business environment global rankings for the forecast period, at 76th out of 82 countries.’ There are now in excess of 60,000 qualified accountants in Nigeria and more than 250 accountancy firms in the country. According to Ladi Smith, a partner at RSM correspondent firm SIAO, accountancy services are increasingly being demanded in the energy, agriculture and oil and gas sectors due to a variety of reforms in these markets. ‘Private equity entities are also on the increase with the intention of investing in these sectors,’
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he says, pointing to the recent unbundling and privatisation of the power sector, which has created immense opportunities and accounting outsourcing services. In addition, according to Smith, the profession has seen an uptake in its services for audit and assurance, tax and mergers and acquisition services, again as the result of government reforms and increased foreign direct investment into the country. But, like the other MINT countries, International Financial Reporting Standards (IFRS) adoption is also placing a significant demand on the profession’s resources. In 2010, the Nigerian government announced that 1 January 2012 would be the effective date for IFRS adoption. By 2014, all companies, including SMEs, fell under the regime, though micro-sized businesses can opt to use the Accounting and Financial Reporting Guidelines for Small and Medium-sized Enterprises (SMEGA) Level 3, issued by the United Nations Conference on Trade and Development. The public practice sector of the profession is dominated by the Big Four accountancy firms – Deloitte, PwC, KPMG and EY – a fact recognised by the World Bank’s ROSC report in 2011. It warned that unless the smaller practices merged, they would continue to face problems in keeping up-to-date with developments in the profession, with an adverse effect on audit quality. Smith says that his firm is one of the few in the country that are seeking to compete in this environment.
accountancy futures: global economy mints
Turkey
World Bank’s forecast: ‘With a gross domestic product (GDP) of $786bn, Turkey is the 18th largest economy in the world. In less than a decade, per capita income in the country has nearly tripled and now exceeds $10,000... While Turkey’s economic outlook remains favourable compared to the rest of Europe or indeed the MENA [Middle East and North Africa] region, the country’s medium-term challenge is to increase productivity and competitiveness while simultaneously reducing its reliance on foreign savings to make growth less volatile and more sustainable throughout the country.’ Economist Intelligence Unit’s verdict: ‘Turkey’s economic growth performance is expected to surpass that of the EU27, as a result of its favourable demographic profile and larger productivity increases. But, at an average of 3.8% a year in 2013-30, GDP growth will be well below the performance recorded in 2004-07 and in 2010-11… Greater improvements in the policy environment could produce substantially better results, but uncertainty remains about Turkey’s future political and institutional framework and its commitment to reform.’ Turkey, much like Mexico, is geographically well placed to look to two directions – west towards the European economic trading bloc, and east towards the Middle East and Asia. ‘The accountancy profession is at a strong stage of development,’ says Lucia Real-Martin, ACCA’s director of emerging markets, ‘but
there are challenges as Turkey seeks to realise its potential as a regional and international player.’ This means that as corporations adopt a more globalised outlook, so the profession – traditionally based in public practice and tax areas – must adapt to give necessary support. One of the key areas for support is in the use of International Financial Reporting Standards (IFRS), which will help to attract foreign direct investment into the country, as well as those seeking to build their export markets. Under the Turkish Commercial Code 2012, all public entities will need to be IFRS compliant by 2018, covering up to 3,000 companies. This will subsequently be extended to more than 300,000 other companies. The key question therefore is whether the pool of qualified accountants will be big enough and relevant enough. ‘The traditional accountant is a tax accountant,’ says Real-Martin, ‘often based in a small practice. But the role of the accountant [in Turkey] has changed over time, and accountants are now retraining and upgrading themselves, to take on other roles as Turkey’s economy takes its next steps. For the new professional accountant, they will need to understand global standards, speak the business language of English and start to think strategically, pushing the profession into the frontline.’ However, Real-Martin is optimistic that in the long term Turkey will be a strong driving force. Acceding to the EU will be a strong validation, but businesses are also looking towards Asia. Philip Smith, journalist
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accountancy futures: global economy afghanistan
Seeds of hope As NATO troops start their withdrawal from Afghanistan, the country will need to build an accounting profession as part of its economic recovery
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fghanistan, a country with a population of 30 million, has barely 1,000 certified accountants, not even 200 of whom are Afghans, says the American University of Afghanistan (AUAF); nor are there any national accounting regulations. Over 30 years of conflict has left the Afghan economy in shambles, and with all foreign troops set to withdraw by 2016, developing the accountancy sector and domestic regulations is a priority for underpinning sustainable growth. ‘There is a massive gap in skilled, qualified accountants. Several years ago, there were just two ACCA-accredited accountants, and now there are 12,’ says Feroz Raqif, the first to be accredited in the country and currently CFO at Afghanistan Holding Group (AHG), which provides professional business services. ‘There is a bit of a brain drain, but there’s not really an accounting pool for people to drain from,’ he adds. ‘In fact, accountants can make more money here than in Pakistan or Dubai because of the shortage to cater to the country’s 17 banks, five major telecommunication companies, and hundreds of non-governmental organisations (NGOs).’ While small accountancy firms exist, international and Pakistani firms do the majority of international-standard accounting in the country. Hedayatullah Yahya, CEO of Afghan United Bank, says: ‘Accredited accountants are either at foreign companies, banks or NGOs. Basically, the government and business don’t use qualified accountants but rely on those with an MBA qualification, which is very different from an accounting qualification.’
The high-profile Kabul Bank scandal in 2011 did nothing to enhance the reputation of accountants. Both PwC and Deloitte faced criticism following the revelation of a US$900m fraud. ‘The scandal left a sour taste, as very few people now trust the banking system,’ says Sanzar Kakar, chairman of AHG. ‘A further negative was that there were a number of knee-jerk reactions, with, for example, more regulations needed to open bank accounts and get financing, which is almost non-existent, as to get a loan requires 300% collateral and other requirements.’
‘The lack of a standardised
approach towards accounting is hindering the sector’
Economic recovery Afghanistan has been racked by conflict for decades, but the economy is getting back on its feet. The Asian Development Bank has forecast GDP growth at a robust 3.5% for this year and 4.5% in 2015. The biggest economic sector is agriculture, followed by mining and services. Afghanistan harbours huge veins of lithium, copper, iron, cobalt and gold worth an estimated US$1 trillion, according to US government data. Extracting such resources, including oil and gas, could generate for the Afghan government more than US$2bn a year – equal to the country’s entire GDP in 2001. By 2013, GDP had risen to US$45.30bn, and per capita income had reached US$1,100. At the 2012 Tokyo Conference on Afghanistan, international donors pledged US$16bn in development aid to 2015.
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Despite the scandal and a World Bank-funded project at the finance ministry in 2012 to develop an accounting law and set up an accounting body to govern the sector, no significant progress has been made to date. Abdul Hakim Waziri FCCA, an accounting lecturer at the American University of Afghanistan (AUAF), says: ‘The lack of a standardised approach towards accounting is hindering the sector as different organisations follow different standards of accounting, which often leads to confusion and misinterpretation of accounts. There is a need to change this as quickly as possible because in the coming years, there will be greater demand for people specialising in accountancy and financial management.’ Accountants are hopeful that once there is resolution around a new government following the elections in the first half of 2014, this drawback will be overcome, but there is a great deal on the national to-do list. Kakar says: ‘The issue for investors is security – fiscal security – and corruption in the government. Accounting is not anywhere near being a top issue to tackle.’ Abdurrahman Al-Hashimi, a consultant with a Dubai logistics firm who was the second Afghan to achieve ACCA affiliation certification in 2009, suggests that any new law should take into consideration the accounting standards used in major trade partner countries. He says: ‘We need GAAP for Afghanistan and ultimately to develop our own standards,
accountancy futures: global economy afghanistan
including by working with accounting bodies in the region, particularly Pakistan, India and the United Arab Emirates.’ That said, Afghan institutions such as the AUAF, Mashal Institute of Higher Education and Bakhtar University are running specialised courses offering qualifications from ACCA and others to bolster the number of Afghani accountants. Some 280 students are enrolled on the AUAF’s ACCA programme, and a further 2,500 in ACCA courses. The AUAF is expanding outside of the capital Kabul – an important move as just 22.6% of Afghanis live in urban areas. Following a survey last year that indicated clear demand for accountants in the private sector, the AUAF has opened branches in Kandahar and Herat, and plans to open in Mazar-i-Sharif, Balkh and Jalalabad, too. ‘We expect to train 5,000 accountants over the next four to five years,’ says Ahmad Reshad Popal, executive director of the AUAF’s Professional Development Institute. This will not be easy, partly because classes are taught in English rather than in local languages such as Dari and Pashto, so students
British soldiers chat with children following the opening of a new school in Naqelabad Kolay in Helmand province. With NATO soldiers set to withdraw from Afghanistan by 2016, the country is moving away from a donor-based economy, offering opportunities to develop the accountancy sector.
first have to learn English to a proficient level. A further obstacle is that few companies offer internships, making it hard to acquire accounting experience, something compounded by the poor economy. Yahya says: ‘Companies are not taking on many interns due to there being costs attached and the majority of projects were in construction, but these projects have slowed down, so requirements for accountants and interns has decreased.’ As Afghanistan sees NATO troops withdraw and the economy moves from being donorbased to private, Afghan accountants believe that there are grounds for optimism, especially if an accounting law is put in place. ‘No matter how bad business is in Afghanistan, the experience of emerging markets globally shows that accounting firms always emerge to do much better,’ says Al-Hashimi. ‘The shift from donor-funded projects to the private sector means there is potential for the sector, especially as there will be huge demand from the mining and agricultural sectors.’ Paul Cochrane, journalist
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accountancy futures: global economy junior stock markets
A fine balance Lack of funding for SMEs is a major challenge in Africa and Asia. One answer lies in junior stock markets, but there are risks, says ACCA’s Manos Schizas
E Manos Schizas is a senior economic analyst at ACCA and also works in the SME policy team. He leads ACCA’s Research and Insights programme on access to finance, and is the editor of ACCA’s Global Economic Conditions Survey.
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quity finance is risk capital in the truest sense and probably the most important type of funding for rapidly growing businesses the world over. It offers all the risks and rewards of ownership, providing funds for the business to grow without obligation to provide a return on that capital now or in the future. It is, however, often difficult and expensive for small and medium-sized enterprises (SMEs) to access in public markets. Over 50% of SMEs in Asia and Africa that took part in the ACCA/IMA (Institute of Management Accountants) Global Economic Conditions Survey last year highlighted financing as one of their major challenges. In economies where other forms of business finance, such as bank lending and government support, are under pressure, the ability of SMEs to generate future economic growth will depend increasingly on making sure they can draw more readily on a wider variety of sources. Equity has a critical role to play in this funding mix. The pressing need to encourage enterprise and enable more SMEs to expand is beginning
to be answered with the appearance of specialist stock markets that target SMEs. In the wake of some well-known examples in the developed world, including the Alternative Investment Market (AIM) in London and the Nasdaq exchange in the US, the past few years have seen an upsurge in so-called junior stock markets around the world. In the past two years alone, a dozen new SME equity markets have been established in countries ranging from India and China to Kenya and Tanzania. capital cheer This activity is extremely encouraging because in regions like Africa the small group of dynamic mid-market companies that are at the forefront of economic recovery and growth face the greatest difficulty in accessing growth capital. This is because of the higher risk associated with lending to smaller businesses with short track records and few if any assets, and also because the banking systems in emerging markets tend to be underdeveloped and tied to a weak savings base that leaves them short of funds to lend.
accountancy futures: global economy junior stock markets
A new road: highway under construction in Kenya, where an SME-targeted equity market was launched in 2013.
However, the emergence of new SME-focused equity markets also highlights the many challenges involved in enabling businesses to obtain this type of funding. SMEs are often owned by families or small groups that are unwilling to give up control or make the governance changes that would give outside minority investors the confidence that their interests will be protected. The companies themselves are often young and do not have a long enough trading record to qualify for a public listing under the rules of the major stock exchanges, which target larger, more established businesses. Often there is little financial information available to help potential backers make investment decisions about small businesses, and coverage by analysts is patchy at best. The markets for SME shares can be thinly traded and illiquid, particularly where there is little or no tradition of retail investment in the stock market, and their risk profile is often closer to venture capital or early-stage investment than traditional stock market ownership. eerily quiet The challenges for countries that have set up junior stock exchanges are significant. The remains of previous efforts to set up markets attractive to smaller issuers lie scattered throughout Africa and Asia – eerily quiet exchanges with one or two listed companies that trade rarely and almost never return to the market for more funds. This time round, exchange operators and regulators have changed their rules and governance requirements so smaller, riskier companies can list. Stock market operators also have a difficult balance to strike. On the one hand they wish to develop their own business by enabling more companies to benefit from selling their shares on the public market. But they must also ensure they retain the confidence of investors by ensuring companies that do list are managed to high standards and have robust governance and disclosure processes. Striking the right balance has involved easing the regulatory focus in some areas,
while increasing it in others. For example, companies are often allowed to list on the basis of a much shorter trading history and with a much weaker record of profitability than is required for listing on a main stock market. They are also often allowed to have fewer shareholders and a smaller ‘free float’ of shares. follow the Nomad In other areas, though, high standards of governance still apply even if these may be achieved by alternative means. The Growth Enterprise Market Segment in Kenya, for example, has adopted the nominated adviser (nomad) model. This obliges a company that intends to list to appoint an approved firm of professional advisers to advise it on governance and disclosure issues for as long as it remains listed. Nomads are directly liable for the conduct of their clients and so have a strong incentive to safeguard the interests of investors and the integrity of the market. Similarly, listed SMEs have had to maintain high standards of financial disclosure, using International Financial Reporting Standards and producing audited annual accounts. Stock exchange operators are always quick to deny that reporting requirements have been weakened, although some purely administrative duties – such as publishing a hard copy of company accounts – may be waived. A very few markets (notably in Italy and Nigeria) have even gone so far as to subsidise analysts to report on listed firms. In other new exchanges, standards are higher than in established junior markets; for example, controlling shareholders may be ‘locked in’ for a long period after listing to prevent them window-dressing the company for sale and then exiting. Directors of SMEs that join many of the new junior exchanges have to undergo training to ensure they understand the rules and operations of capital markets and issues surrounding investor relations. And fiscal incentives to listed firms are often contingent on them not de-listing for as long as a decade, and may even be subject to clawbacks.
Moremi Marwa CEO, Dar Es Salaam Stock Exchange ‘Since we introduced the Enterprise Growth Market in November 2013, we have already listed two companies. Between them, these two transactions – one for a start-up commercial bank and the other for an oil and gas exploration company – raised about TZS12bn [US$7.2m] and received strong support from investors. We also have three more applications in our approval process. Tanzania has more than three million SMEs employing more than five million people, most of which face difficulties in raising capital. The Enterprise Growth Market will be part of the solution to addressing this challenge.’
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accountancy futures: global economy supply chain finance
Unlocking the SME? With small businesses grappling with late payment and cashflow concerns, a new ACCA study examines supply chain finance, reports ACCA’s Rosanna Choi
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Rosanna Choi FCCA is chair of ACCA’s Global Forum for SMEs, an ACCA Council member, former chair of ACCA Hong Kong and a partner at CPA firm CWCC.
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sk any small business what its biggest financial headache is and there’s a high chance that late payment and poor cashflow will come out near the top. These issues are a perennial problem for small companies, particularly those that supply very large customers, who are increasingly setting standard payment terms of 60, 75 or 90 days and beyond. These longer payment terms have inevitably squeezed smaller businesses’ cashflow from one side, while things have simultaneously become more difficult from another: regulatory changes following the financial crisis have made it more expensive and difficult to finance short-term working capital via bank overdrafts. It is hardly surprising, therefore, that recent years have seen growing interest in financing techniques that can help to alleviate the pressure on smaller companies’ cashflow, among them supply chain finance (SCF). The Breedon Review, commissioned by the UK government and published in March 2012, examined ways to improve access to finance for small and medium-sized enterprises (SMEs) and identified the professional accountancy bodies, including ACCA, as natural partners in the drive to promote awareness of SCF. As part of this, ACCA has published research that for the first time answers a key question that sceptics raise about this type of financing – who really benefits? Before diving in, it’s worth taking a moment to define what we’re talking about. SCF is a loose term covering a variety of financing structures, many of which involve advancing short-term funding by using discounted trade receivables as the assets that back the advance. The specific technique that ACCA has focused on – known variously as reverse factoring, confirming or approved payables finance – provides funding backed by trade receivables that have been pre-approved for payment on a set date by the customer, typically a large corporation. It’s a clever technique. The large company gives an undertaking to pay, effectively matching the supplier’s trade receivable to an approved payable. Once in possession of the approved payable, the supplier can raise finance against this asset at a rate that is more closely related to the credit risk of its large customer than its own. SMEs therefore access cheaper finance
than they could obtain on their own account, while the large customer is able to extend its payment terms and/or secure a discount without financially compromising its suppliers. a problem of perception In theory at least, everyone should be happy – but not necessarily in practice. For a start, SCF has suffered image problems, being viewed as a way to enable big companies to pay late and get their suppliers to pay for the privilege, effectively rewarding bad corporate behaviour. This may be partly due to poor understanding of how SCF works, but it remains a problem. If the general perception is that SCF only benefits large companies, some will shy away from using it even though it might also help their chain of smaller suppliers. This is where ACCA’s research offers a particularly useful contribution to the debate. The study interviewed market participants to generate ‘consensus figures’ for the split of benefits between those involved in reversefactoring transactions. Using figures from finance providers, SCF technology suppliers, consultants and corporate treasurers, the research indicates that 35% to 50% of the benefit of reverse factoring flows to the large corporate customer, while 25% to 45% goes to the supplier in cheaper financing costs and improved cashflow. The precise split will depend on how concerned the customer is to facilitate its suppliers’ finances compared with its desire to improve its own finances via extended payment terms. The remaining 20% goes to service providers, mainly to the financier, although up to 5% can also flow to the technology provider. Being able to put numbers around the typical benefits of an SCF programme should prove helpful, both in making the business case for implementation in large companies and in demonstrating that smaller businesses do in fact benefit financially from these arrangements. And the case for SCF needs making carefully – not just because of the accusation that it legitimises late payment but also because SCF is seen as something of a panacea for financially strained supply chains. In fact, getting it to work in practice is more complex and includes more sources of risk and cost than is usually recognised.
accountancy futures: global economy supply chain finance
making scf work For this reason, the paper sets out a detailed checklist for companies that want to pursue an SCF programme as well as providing some useful rules of thumb to help evaluate the likely financial benefits to a particular business. This, it suggests, involves using a figure of 20% to 25% of the company’s payables outstanding as a rough benchmark against which to evaluate the likely costs. One of the best examples of reverse factoring’s ability to increase access to working capital comes from Mexico, where the Cadenas Productivas programme, backed by the state-run development bank Nacional Financiera (Nafin), has been running since 2001. This enables suppliers to some 450 large companies to raise finance against approved payables from around 20 Mexican banks and financial institutions that use the online platform, which has so far arranged finance for more than 80,000 small suppliers. The Mexican example is striking, but how large is the global market for this type of finance? Figures from the International Factors Group covering 65 countries suggest that reverse factoring accounts for less than 4% of global factoring volumes, worth about US$85bn to US$90bn a year. The ACCA research used two distinct methodologies to estimate the potential market size globally and arrived at figures of between US$255bn and US$280bn a year. Of this, suppliers could capture anything from US$60bn to US$120bn. It’s clear that this type of reverse factoring has a good deal of growth potential. ACCA’s report, A study of the business case for supply chain finance, can be found at www.accaglobal.com/ab111
Gabriel Low FCCA CFO, GEA Westfalia Separator, Singapore Supply chain finance can allow large corporates to better manage their balance sheet debtors by converting debtors to cash earlier. For small businesses it releases, at a price, cash earlier to a seller which in turn allows the cash to be utilised for the next business cycle, creating a multiplier effect. Member of ACCA Global Forum for SMEs
Matthew Hancock MP UK Minister, Business and Enterprise ‘Although, as this report states, supply chain finance only represents 4% of the total global receivables financing market, increasing use of receivables as assets to secure finance presents a strong alternative to more traditional forms of finance.’ Hancock writes the foreword to the report
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accountancy futures: public sector audit
A new responsibility As administrations across the globe adjust to the long-term impact of the 2008 financial crisis, a stronger public audit function is emerging
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he consequences of the 2008 financial crisis still play out around the world. Currency turmoil in early 2014 was caused by the withdrawal of the US Federal Reserve’s special measures to increase liquidity – sharpening questions about the future of the liberal trading regime and international cooperation. In many countries, public finance is undergoing harsh adjustments, felt through lower spending and reduced social support at a time when demographic change has increased demand. But crisis has spurred fresh thought among public auditors. They are developing stronger roles promoting accountability and improvement. The mood among professionals across the globe is bright. Public auditors are eager to assume a new responsibility. They recognise they must intervene earlier in the processes by which money is allocated to departments. This can limit the impact of administrative failures, preventing these snowballing into significant value-for-money failures. So audit looks ‘upstream’ to how decisions are made within government departments and agencies. It must also look ‘downstream’, to how services are delivered. Yes, it’s tricky to prove a causal link between audit and performance, and more must be done to measure audit’s own effectiveness. Also downstream is the outsourcing of public services to private firms. Auditors should ‘follow the money’, and in the UK the trail leads straight into the performance of such firms as Serco and G4S. The private sector is heavily involved in delivering public services in the UK, but its accountability could be improved. To manage service-failure risks and boost public trust requires stronger accountability and transparency. Better public sector financial management needs to be matched by developments in audit. This is recognised by the European Court of Auditors, which is to focus on the results of spending programmes. Auditors have a role in recommending how to improve performance. It is for public bodies to take responsibility for improving services, and auditors must intervene sparingly and modestly. But auditors can be catalysts for improvement, advising parliament, departments and agencies on
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how money is best spent. Their roles include spreading lessons learnt across governments that are not always joined-up and drawing on the wealth of past audit experience. And auditors must follow this up to ensure that recommendations have been followed. Increasingly, audit has width. Auditors may be the only people able to look across the piece. That may mean following every pound across the tiers of government. Auditors – working with scrutineers, inspectors and regulators – take a key role in advocating ways in which public bodies adapt and change to new circumstances.
Auditors can be catalysts
for improvement, advising on how money is best spent Audit must flag up government spending decisions with consequences for the distant future – for example, on pensions or energy. That makes the auditor an advocate of comprehensive statements of assets and liabilities. England is pushing whole-ofgovernment accounts but other countries, including Scotland, need state-wide pictures of commitments. The public need to know that elected politicians make the decisions, while being aware of what auditors can accomplish. Credibility is an issue. In England the demise of the Audit Commission means that public bodies will appoint their own auditors, compromising independence. And audit’s effectiveness depends on the law and conventions that constrain bribery and corruption. Engage and educate The law, however, can only ever go as far as public opinion wills. Auditors general must therefore use audit to engage and educate the public. Advocacy of governance reform by the accountancy profession is insufficient; civil society needs to increase citizens’ awareness. A central link in the chain of accountability is that between professional auditors and parliaments and legislatures. Parliaments’ public accounts committees can ‘add value’ to audit reports when they scrutinise executive performance to assess value for
accountancy futures: public sector audit
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accountancy futures: public sector audit
Caroline Gardner Auditor general for Scotland ‘Detroit is a striking example of the failure of public financial management and scrutiny: 40% of street lights don’t work and 90% of crimes are unsolved. In July 2013 Detroit became the largest US city ever to file for bankruptcy, owing US$18.5bn. Bad governance and poor financial stewardship went unchecked for decades; when the global financial crisis hit, the city had no chance. European countries such as Spain and Greece suffered for similar reasons. ‘The global financial crisis revealed problems with many governments’ understanding and reporting of their position; the International Monetary Fund calculates that a quarter of the increase in government debt in the 10 countries most affected was due to governments’ “inadequate understanding” of their finances. Better reporting enables us to see where public finances are heading. New Zealand’s government produces an investment statement which looks over the public sector’s assets and liabilities, how they have changed and will change, explaining how new investment is funded. I have cited this as a model for the Scottish government. ‘Strong public audit promotes transparency, with a full picture of assets, investment and liabilities, including pensions and other longer-term liabilities. It helps government to be clearer about the long-term consequences of decisions. The Scottish government has used public-private partnerships to fund major capital projects but not always reported the full financial commitment. I have called on it to do so. ‘Audit identifies opportunities for improvement. It provides comprehensive information to underpin financial and economic decision-making. It can provide independent evidence about choices on tax and spend. It can enable politicians and citizens to hold the executive to account, increasing confidence in public services and trust in government. If auditors worldwide do that, we can help prevent another Detroit.’
James Ralston former comptroller general of Canada (retired july 2014) ‘The Government of Canada introduced a new internal audit policy in 2006 that applies to more than 100 federal departments. It requires auditors to follow international standards for all assurance engagements. Chief audit executives (CAEs) are expected to hold an internal audit designation and report to their department’s deputy minister (equivalent to a UK permanent secretary). ‘CAEs are now seen as trusted strategic business advisers who understand their department’s business. They must develop and execute risk-based audit plans based on consultations with management, risk indicators raised in recent audits and their professional business knowledge. The new policy requires deputy ministers to create departmental audit committees with a majority of members from outside the federal public administration that provide objective advice and recommendations on internal audit assurance. Committee members include chief executives of major private sector enterprises, senior academics and former government senior executives from all levels of government, including auditors general. ‘Deputy ministers are now designated as accounting officers. This has affirmed deputy ministers as responsible for delivering departmental programmes in compliance with government policies and procedures, maintaining effective systems of internal control and the signing of accounts preparatory for the Public Accounts of Canada among other duties assigned by statute. ‘The renewed internal audit function was soon tested by the global economic crisis of 2008, to which the Canadian government responded with a stimulus package, the Economic Action Plan. Some $63bn was invested quickly. The internal audit sector of my office gave information and guidance to CAEs to assist them in providing support to those designing stimulus measures. CAEs ensured that sound controls were built into measures and that their design and implementation was auditable. ‘Internal audit’s transformation was the result of increased professionalism and independence. Canada is now in a period of cost containment, returning government spending to pre-stimulus levels. Internal audit has evolved into a flexible management tool, but its primary goal has remained to support and provide assurance to accounting officers and public service managers, ensuring the sound management of Canadians’ tax dollars.’ money. Parliamentary discussion increases public awareness of what departments do, exerting pressure for improvement. This requires investment in specialist committees. Too often, government responses to committee
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recommendations comprise a formal note a few months later. If recommendations are accepted but not implemented, or if the guilty walk free, there is little that public accounts committees can do.
accountancy futures: public sector audit
John FS Muwanga FCCA Auditor general of Uganda ‘Public audit is being tested as a mechanism for promoting accountability and transparency within government, especially in developing countries. Protests about service delivery are growing, but what is the auditor’s role? All public bodies, including supreme audit institutions (SAIs), are under pressure to provide more information and to be more publicly accountable. ‘Under the International Organisation of Supreme Audit Institutions’ (INTOSAI) rules, national auditors must report on their activities and use of resources. They should assess their operations and performance, reporting on the efficiency and effectiveness with which they use public resources. International principles specify the use of performance indicators to assess the value of audit work. ‘The audit profession has battled for years with the expectation gap between what citizens, parliaments and others expect to find and what is actually reported by SAIs. Through stakeholder engagement we can address the expectation and information gap. But there is also a gap between service delivery improvements triggered by audit reports and service users’ satisfaction expectations. ‘Is it enough just to fulfil statutory obligations and submit audit reports to parliament? Do our reports help make government more efficient and provide better services to its citizens? Does our work make a difference to people’s everyday lives? ‘Public sector auditors need to see beyond their statutory obligations. We need to question the adequacy of government policies. Perhaps we need to broaden our responsibilities beyond issuing audit reports. We should reconsider our audit mandates. We should consider the benefits of audit report findings and recommendations. The recommendations may be less important than how they are implemented.’
Pamela Monroe Ellis FCCA Auditor general of Jamaica ‘In 2008, after the collapse of Lehman Brothers, world leaders came together to take collective crisis action. The G20 has since established a framework of policies to promote growth and create jobs. Robust public financial management (PFM) systems are central to this in fostering citizens’ trust and inspiring investors’ confidence. ‘PFM uses information, processes and rules to integrate how public funds are budgeted, spent and managed. Sound PFM ensures accountability and efficiency. It asks whether the budget is realistic. Are fiscal risks monitored and managed effectively? Are spending controls in place? Are records maintained that help decision-making and enable proper reporting and auditing? Is the system transparent, allowing proper scrutiny of government? ‘PFM addresses the causes of debt unsustainability and mitigates the impact of spending reductions that make debt sustainable. Unsustainable debt can bring lower growth, high debt service costs and damage investor confidence. Dealing with these consequences is particularly difficult in developing countries if they lack capacity to undertake structural reforms; where governance may be weak, unethical behaviour may be tolerated and PFM may be inadequate. ‘The global financial crisis highlighted that in the absence of robust PFM systems, governments may squander public resources. Supreme audit institutions must determine that government gets value through value-for-money and performance audits. The auditor’s focus is not only on historical data but also on impending threats. Professional qualification and training for auditors must be robust, including in fiscal sustainability and risk management analysis and mitigation. Developing countries’ governments often overlook the need to employ the brightest and the best in audit to drive an effective PFM system.’ go wide or deep? Perhaps we need a comprehensive re-evaluation of the system within which audit, scrutiny, inspection and regulation rub shoulders. Or perhaps, instead of going wide, we need to go deeper. Canada’s federal government has created departmental audit committees with external expert representation, leading to tighter risk and control frameworks that provide assurance earlier in the life-cycle of policy and decision-making.
While there are differences in various countries, they have a unity of purpose. Few countries stand outside the public finance squeeze. What’s under pressure is not just money, services and taxable capacity, but also systems of government. Auditors have become key players – counting and assuring what governments do and taking greater responsibility for improvement. That is a heartening message. David Walker, journalist, broadcaster and author
Breaking out: public audit’s new role in a post crash world is available at www. accaglobal.com/ ab107
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accountancy futures: public sector china
On the move Reform of China’s government accounting will have wide-reaching benefits for collaboration, consultation and education, says Prof Dr Jianfa Li
I
n the process of China’s rapid economic growth, there has been a heavy reliance on bank financing, with local governments becoming exposed to huge potential financial risk. The reckless exploitation of land and other natural resources has resulted in environmental pollution and seriously hampered sustainable development, while incomplete budgets and fiscal information disclosure have had dramatic consequences such as low efficiency and poor performance in public finance management. In response, China has proposed to: introduce the balance sheet at national and local government level; research the feasibility of a natural resources balance sheet; establish accrual-based comprehensive government financial reporting systems; monitor financial
China has accelerated the
pace of reform by drawing on the successful experience of enterprise accounting activities; encourage the government to use public finances efficiently; prevent credit risk; and protect natural resources. Government accounting had been dominated by budget accounting, adopted at the foundation of the People’s Republic of China. The objectives were to serve budget management; recognise, measure and record budget execution; and report the flows of financial resources and budget balance during the reporting period. Since the opening up of China, local governments and public administrative units have been permitted to raise funds. A large amount of off-budget and unaccounted financial revenues and expenditures, as well as the Social Security Fund, were not included in national budget management, leading to chaos in fiscal management and consequent calls for reform. Long-standing reform In fact, China has long attached great importance to government accounting reform. In 1997, the country implemented a major reform of budget accounting in order to establish a government accounting system in line with the public finance system. This
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included recognising, measuring and recording the on- and off-budget funds; establishing the concepts of accounting elements; reforming the cash basis; adopting the accrual basis for some transactions and events; replacing the fund balance sheet which provides information about an entity’s budget execution with one that shows its financial position; and developing standards for administrative units as well as establishing systems such as general budget accounting for government finance, administrative units accounting and statesponsored institutions accounting. In 2004, China implemented the accounting system for private, not-for-profit organisations with the aim of promoting their development, strengthening their financial management and regulating their activities. In the past two years, China has accelerated the pace of reform by drawing on the successful experience of Chinese enterprise accounting and international public-sector accounting practices. Measures include setting up the Government Accounting Standard Committee; developing a conceptual framework; adopting accrual basis; recognising and measuring accounting elements; preparing government balance sheet and statement of income and expenditure; and establishing a government financial reporting system to provide information about economic sustainability of public finance, quality and level of service, accountability, budget execution, performance of public fund allocation, costs of management and service, and government financial risks. Meanwhile, in order to clarify the relationship between central and local governments, regulate local governments’ financial activities and fundraising, and prevent financial risks, China’s central government recently granted Beijing, Shanghai, Zhejiang, Guangdong and six other local governments permission to issue local government bonds. They are required to fully disclose information about the balance of assets and liabilities, income and expenditure, and financial risks, and engage external agencies to audit government financial reports. This means that China will gradually open up the government and public sector auditing market to external agencies which provide auditing, bond rating and management consultation services.
accountancy futures: public sector china
Prof Dr Jianfa Li is vice chairman of the University Council and vice president of Xiamen University in Fujian, China. He is also, among other roles, vice director of the Accounting Society of China; vice chair of the Accounting Education Society of China; a consulting expert for the China Accounting Standards Committee; and deputy director of the Accounting Education Committee of the Ministry of Education. He also served as deputy mayor of Ganzhou in Jiangxi province.
Challenges Inevitably, China faces several challenges in reforming government accounting, including: development of government accounting and financial reporting systems that are converged with international standards establishment of accrual-based government accounting and financial reporting systems identification of the extent and scope of accrual basis adopted in government accounting and financial reporting harmonisation of the standards across budget, accounting and financial reporting recognition and measurement of public facilities, cultural heritage, state-owned enterprises’ equity and social security liabilities coverage of government entities in the comprehensive financial reports preparation of financial reports at various levels of government establishment of objectives of financial reporting and quality characteristics of government accounting information development of government accounting education and capacity building.
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Research on these issues will be vital for accelerating and developing government accounting reform and practices. Going forward With the accelerating pace of government accounting reform and the gradual opening up of government auditing and management consultation to external agencies, China needs to strengthen its linkage with the International Public Sector Accounting Standards Board and other national accounting standard-setters; promulgate and implement international standards; encourage collaboration with international bodies; and provide training in government accounting, auditing and finance management so as to develop professional accountants with an international perspective. In conclusion, government accounting reform in China not only requires a high level of collaboration with international public-sector accounting standards-setters, international accounting professional bodies and accounting firms, but it also creates potential markets of government auditing, management consultations and accounting education.
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accountancy futures: public value gulf region
Towards best practice Developing a culture of corporate best practice is crucial for family businesses, says the Pearl Initiative’s Imelda Dunlop
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s regional businesses increase the level of international trade, there is rising pressure to remain competitive. Weak transparency and accountability can deter international investors, leaving institutions open to the risk of poor management and, potentially corruption. The Pearl Initiative is an independent, not-for-profit institution working across the Gulf region of the Middle East to influence and improve corporate best practice. Established in 2010, our organisation plays a vital role in highlighting the business case for implementing transparency, accountability and good corporate governance through research, events and sustained business partner engagement. Developed in cooperation with the United Nations Office for Partnerships, we have created an impressive network of the region’s leading businesses, brought together through commitment to driving joint action and sharing knowledge towards implementing higher standards. We aim to change corporate culture and break down internal and external barriers, and raise awareness of the benefits of good corporate governance. We focus on the private sector and design programmes that place emphasis on the business case behind raising standards of governance and integrity. We understand that our business partners share our desire to build a competitive and vibrant regional economy in which accountability and transparency are fundamental for investment, value creation and sustainable economic growth. Our region is unique in that 80% of nonoil GDP is generated by family firms. Often these have grown from small entrepreneurial entities to vast conglomerates with complex organisational structures in just a few decades. It is estimated that US$1 trillion of assets will be handed over to the third generation of the region’s family businesses over the next five to 10 years, and yet global statistics suggest that only 15% of family businesses will continue to generate value beyond this transition. Governance can go a long way to aiding smooth leadership transition. Proactive action to guard against corruption, bribery and poor business practice ensure the continued success of family firms.
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Exposed to risk In 2013 we published a report based on interviews with over 100 family firm leaders across the Gulf Cooperation Council countries. Of these, 63% were found to have a code of ethics in place but only a third of those implemented the code, leaving them exposed to risks that could significantly affect their long-term success. As these organisations grow, the related risk grows. Our research indicated that 55% of family firms intend to raise finance, a move that requires due diligence as lenders look to minimise risk. As a result, stakeholder engagement must be at the forefront when considering strategic plans. Although one size doesn’t fit all, a recent survey by McKinsey stated that about 80% of institutional investors said they would pay a premium for a well-governed company. In 2013 we signed a strategic partnership with the United Nations Global Compact that will help us to drive joint governance programmes in the Gulf. This agreement enables us to reach more organisations and drive commitment to best practice through dedicated activities and research. As part of this, we hold interactive roundtable sessions in family firms to share research insight and to discuss the experiences and challenges leaders face in implementing better practices. Representatives from some of the region’s most prominent businesses speak openly and inspirationally about their own perspectives and experiences on corporate and family governance. These events create a real feeling of community among our members and inspire a shared desire to grow the regional economy and create vital jobs. Leadership crucial We understand that more governance legislation can increase compliance but it is our belief that this approach leads to boxticking. Although regulation drives firms to commit to meet legal requirements, it does not create a sustainable movement towards greater accountability and transparency, and this is why private sector leadership is so crucial. Through our programmes and events, we encourage organisations across the region to voluntarily surpass minimum requirements, and embed an ethos of good governance into
accountancy futures: public value gulf region
Women in finance
Imelda Dunlop is executive director of the Pearl Initiative. She is a former director of the World Economic Forum and previously worked at consulting firm Monitor Company.
Anecdotal evidence shows that women in the region outperform their male counterparts at graduate level but, as they progress their careers, lifestyle expectations and family commitments mean that they withdraw from the workforce rather than reach board level. The Pearl Initiative and ACCA have a shared commitment to highlighting the importance of gender diversity. A roundtable hosted by ACCA in January 2014 brought together the region’s leading female finance professionals to discuss how to encourage the number of women in leadership positions to grow. It was agreed that by actively supporting diversity and inclusion within finance teams, creating a more flexible approach to working and improving policies such as maternity leave, mentoring programmes and networking initiatives, regional firms will be able to retain talented women through the spirit of inclusion.
Integrated reporting A joint forum hosted by ACCA and the Pearl Initiative in March 2014 discussed the value of adopting an integrated financial reporting model and how Gulf Cooperation Council companies might introduce such a model into their overall strategy. See page 50.
their organisations and those with whom they engage. For example, anti-bribery and corruption are key topics. We conduct frank and open discussions on the challenges of operating in difficult markets, exchanging strategic imperatives and regionally relevant practices with our member firms. These discussions often emphasise the need for organisations to embed values and minimise unethical behaviour throughout a company’s culture and code of conduct now, to facilitate benefits in the long term. Our founder, Badr Jafar, managing director of Crescent Group, recently spoke on a panel alongside Jordan Belfont, the reformed ‘Wolf of Wall Street’, to advise an audience of over 400 delegates about the importance of acting with integrity and the potential destruction that unethical behaviour can cause. Holistic approach We also discuss the development of integrated reporting and the need to improve reporting standards in the region. Including aspects outside of a company’s financials brings greater cohesion and efficiency to the reporting process. Comprehensive reporting that includes integrated aspects provides a forward-thinking view of performance, producing a holistic approach to the firm’s strategic goals. It also goes hand in hand with corporate governance practices as each policy is outlined and clearly explained. Engaging and understanding the priorities of stakeholders from a local – and cultural – perspective is important, and clearly demonstrating an organisation’s key strategic
issues within a report presents the firm as a genuine going concern, which is vital if its reputation is to be protected. To communicate this, we bring IR experts to the region to talk to members about the extra level of assurance to stakeholder groups that IR provides. A company will gain competitive advantages over its peers by embedding governance practices into its mode of conduct, attracting capital, customers, business partners and employees. Our work in reaching private sector organisations to communicate the message of good governance continues, and in the next few months we will launch a new report analysing the governance practices of five of the region’s more prominent family firms. We will also unveil the findings of an international survey examining the challenges of embedding gender diversity at the highest levels of business, and we will continue our student programmes, encouraging our future leaders to adopt and embrace good governance so that they may apply these principles throughout their careers. We have made excellent progress in raising the need for good governance up the corporate agenda but we have a long way to go. We have many goals in our sights based on the need to drive awareness about the business case for best practice and, in doing so, we will continue to help companies adopt best practices in governance through our partnerships. Our vision is to cultivate a belief among Middle Eastern firms that ethics and accountability create value and performance so that we may eradicate corruption and poor performance for the benefit of our economies, and the residents within them.
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accountancy futures: news IN brief
Challenge cultures A report commissioned by ACCA and IMA (Institute of Management Accountants) says boards and chief executives must set the tone from the top. The report, A risk challenge culture, looks at the need for organisations to develop and implement effective risk oversight in the wake of the 2008 financial crisis, which exposed serious weaknesses in risk management. It says: ‘When a subordinate is afraid to ask senior management about perceived risks, that is not a challenge culture.’ The report is available at www.accaglobal. com/ab123
ACCA membership An increase of almost 5% in member numbers has resulted in ACCA increasing its membership to almost 170,000 in 2013–14. The number of students increased to 436,000 – of which 384,000, an increase of more than 12,000 on the previous year, were studying for the ACCA Qualification. ACCA asked employers for their overall perceptions with 95% saying ACCA was a respected brand and 89% saying that ACCA was a world-class organisation. ACCA chief executive Helen Brand said: ‘The opinions of employers and learning providers are critical to us. We are delighted that their feedback continues to show overwhelming endorsement and support and we will continue to work closely with employers to ensure that ACCA continues to meet their needs.’
ACCA has published its integrated report for 2013–14. Its cover picture shows ACCA members and students in Myanmar, where ACCA opened its 91st office in April 2014.
ACCA’s integrated report is available at http://annualreport.accaglobal.com
For more on ACCA and INCP, go to www.accaglobal.com/ab122
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The UK Consultative Council of Accountancy Bodies (CCAB), of which ACCA is a member, has published the first comprehensive international study into financial reporting for not-for-profit organisations (NPOs). Conducted by academics from four different prominent universities, the study revealed an appetite for an international standard for financial reporting in the not-for-profit sector, with 72% of respondents agreeing that it would be useful. The study was launched by CCAB chairman and ACCA deputy president Anthony Harbinson at the UK Houses of Parliament. He said: ‘Based upon the research, CCAB has called for more study into what is needed in this area and further consideration of what an international standard for financial reporting in the not-for-profit sector could look like.’ The CCAB report is available at www.accaglobal.com/ab124
Colombia move The growth and development of the accountancy profession in Colombia has been bolstered by a memorandum of understanding being signed between ACCA and INCP (Instituto Nacional de Contadores Públicos de Colombia), Colombia’s national accountancy body. The MoU will help more people into the accountancy profession, through ACCA’s support of implementing International Financial Reporting Standards (IFRS) in Colombia, as well as training and certification in IFRS and international audit through ACCA’s online certificates and exams.
Not-for-profit study
Five years on ACCA deputy president Anthony Harbinson.
Threats to long-term economic stability remain as countries recover from the global economic crisis, according to a five-year review of finance professionals’ economic insights. Any recovery may also be limited to just a few ‘islands of financial stability’, warns the review based on five years of the largest economic survey of the ACCA/IMA (Institute of Management Accountants) Global Economic Conditions Survey. The Global Economic Conditions Survey is available at www.accaglobal.com/ab125
ACCOUNTANCY FUTURES Editor Chris Quick chris.quick@accaglobal.com +44 (0)20 7059 5966
Editorial board
Managing editor Lesley Bolton Contributing editor Colette Steckel Sub-editors Dean Gurden, Peter Kernan, Jenny Mill, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar Designer Robert Mills Production manager Anthony Kay Pictures Corbis Printing Wyndeham Group Paper Antalis Ltd. This magazine is produced on paper that contains certified fibres and is manufactured under strict conditions that allow the grade to carry the EU Eco-label. The mill operates under the ISO 14001 certified environmental management system. ACCA President Martin Turner FCCA Deputy president Anthony Harbinson FCCA Vice president Alexandra Chin FCCA Chief executive Helen Brand OBE ACCA Connect Tel +44 (0)141 582 2000 members@accaglobal.com students@accaglobal.com info@accaglobal.com A list of ACCA offices can be found on the back cover.
Sue Almond
External affairs director sue.almond@accaglobal.com
Chiew Chun Wee
Head of policy, Asia Pacific chunwee.chiew@accaglobal.com
ACCOUNTING
FOR THE FUTURE
Dr Afra Sajjad
Head of education, emerging markets afra.sajjad@pk.accaglobal.com
ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 170,000 members and 436,000 students in 173 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of over 91 offices and centres and more than 8,500 Approved Employers worldwide, which provide high standards of employee learning and development.
CONFERENCE 2014 Four days of on-demand videos and webcasts
Accountancy Futures Edition 09 was published in September 2014. Accountancy Futures® is a registered trademark of ACCA. All views expressed in Accountancy Futures are those of the contributors. The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication. Copyright ACCA 2014 Accountancy Futures. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA. Accountancy Futures is published by Certified Accountants Educational Trust in cooperation with ACCA. ISSN 2042-4566. 29 Lincoln’s Inn Fields, London WC2A 3EE United Kingdom +44 (0)20 7059 5000 www.accaglobal.com
PG02 EDITION 09
Cover illustration: A protester against military rule gestures during a protest in Bangkok in June 2014, one of many political protests around the world during the year.
ACCA’s Accounting for the Future is a worldwide event that ran in early September which has created four days of on-demand content exploring the role finance professionals will play in building a strong and successful global economy. It will be available free of charge until the end of 2014 at the URL below. The event brings together finance professionals from around the world to share with their peers. Our experts share the latest insights on how businesses need to adapt to meet the future needs of stakeholders, regulators, the economy and the public. Access the content at: www.accaglobal.com/accountingforthefuture
Sponsored by:
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ACCOUNTANCY FUTURES CRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 09 I 2014
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ACCOUNTANCY FUTURES I EDITION 09 I 2014
ACCA offices
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*ACCA HEADQUARTERS 29 Lincoln’s Inn Fields, London, WC2A 3EE, UK +44 (0) 20 7059 5000
Stephen Heathcote Executive director –
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Lucia Real-Martin Market director – emerging markets lucia.realmartin@accaglobal.com
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markets stephen.heathcote@accaglobal.com
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employer relationships stephen.shields@accaglobal.com
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Andrew Steele Market director – partnerships & recognition andrew.steele@accaglobal.com
stuart.dunlop@accaglobal.com
Electronic and iPad versions of Accountancy Futures are available at www.accaglobal.com/futuresjournal
POLITICS, PROTEST AND PILLAGE A NEW WORLD OF RISK FOR MULTINATIONAL BUSINESS
PLUS: KPMG GLOBAL CHAIRMAN I MINT ECONOMIST I SIR DAVID TWEEDIE I NATURAL CAPITAL I THE NEW SPACE RACE I CONFIDENCE ACCOUNTING I CEO/CFO RELATIONSHIP I PUBLIC AUDIT I AFRICAN SUSTAINABILITY REPORTING I DAWN OF THE MOOC I CHINA FINANCE INNOVATION