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ACCOUNTANCY FUTURES CRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 09 I 2014

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Corporate culture Getting your organisation on the right track

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Plus: IFAC president | Robin Cosgrove Prize | Governance | Funding | SMPs | Shared services | Integrated thinking | Ebola effect | Healthcare | Sustainability | Children’s rights | Whole of government accounts | Carbon taxes | Cambodia profession

Think Ahead

Accountancy Futures

Accountancy Futures

Editor Lesley Bolton lesley.bolton@accaglobal.com +44 (0)20 7059 5965 Contributing editors Jo Malvern, Chris Quick, Colette Steckel Sub-editors Dean Gurden, Peter Kernan, Jenny Mill, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar Designers Bob Cree, Robert Mills Production manager Anthony Kay Head of ACCA Media Chris Quick 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 Ecolabel. The mill operates under the ISO 14001 certified environmental management system.

ACCA President Anthony Harbinson FCCA Deputy president Alexandra Chin FCCA Vice president Brian McEnery FCCA Chief executive Helen Brand OBE

The London Tube system is a good example of corporate culture (see page 6).

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.

ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, firstchoice 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 180 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.

Accountancy Futures Edition 10 was published in March 2015.

Accountancy FuturesÂŽ 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 2015 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.

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Think Ahead 2 | Edition 10

Editorial board Sue Almond External affairs director sue.almond@accaglobal.com Chiew Chun Wee Head of policy, Asia Pacific chunwee.chiew@accaglobal.com Arif Mirza Regional head of policy, MENASA arif.mirza@accaglobal.com Ewan Willars Director of policy, ACCA ewan.willars@accaglobal.com Edition 10 | 83

Accountancy Futures

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n organisations, regulations alone are not enough to influence ethical behaviours; this depends on improvements in governance and risk management.

In the case of the London Underground, the culture at the heart of the Tube has been passed on to its users through effective enforcement of its norms and practices. It shows that while regulation is critical, culture influences behaviour, how groups get organised and how norms get passed along. Research by ACCA and the UK’s Economic and Social Research Council examines the influence of corporate culture, regulation and compliance systems in driving organisationsal behaviours. Its conclusions aim to give business leaders innovative guidance on the path to cultural assessment and change. Read the articles on pages 6-13.

Just over one year on from the launch of the International Integrated Reporting Council’s reporting framework, numerous developments are taking place to foster its adoption. Key to this will be encouragement and leadership at board level. Read the coverage beginning on page 33, together with how traditional assurance methods might meet the challenges of this brave new world.

We cover a wide range of other issues in this 10th edition of Accountancy Futures: corporate reporting; confidence accounting and audit; sustainability, including articles on how children’s rights matter for business and on another 10th anniversary – that of the Prince of Wales’ Accounting for Sustainability Project (A4S). We find out about new ACCA research on public sector finances: whole of government accounts. We also hear from senior finance professionals from across the world, including an interview with new International Federation of Accountants president Olivia Kirtley.

Lesley Bolton, editor You can find out more about ACCA’s research and insights activities at www.accaglobal.com/ri

Denotes ACCA’s research and insights reports

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

Chair: Alan Johnson FCCA, Board member, Jerónimo Martins Accountants for Business Global Forum

Chair: Ng Boon Yew FCCA, Executive chairman, Raffles Campus Accountancy Futures Academy

Chair: Faris Dean FCCA, Solicitor, Lyons Davidson Global Forum for Business Law

Chair: Adrian Berendt FCCA, Independent consultant, Global Forum for Governance, Risk and Performance

Chair: Stephen Emasu FCCA, Public financial management expert, IMF Global Forum for the Public Sector

Chair: Robert Stenhouse FCCA, Director, national accounting and audit, Deloitte UK Global Forum for Audit and Assurance

Chair: Rosanna Choi FCCA, Partner, CWCC Certified Public Accountants Global Forum for SMEs

Chair: Lorraine Holleway FCCA, Head of financial reporting, Qatar Shell Global Forum for Corporate Reporting

Chair: Tom Duffy FCCA, Consultant and partner, Affecton Global Forum for Taxation

Chair: Andrea Coulson, Senior lecturer in accounting, University of Strathclyde Global Forum for Sustainability

Chair: Sara Harvey FCCA, Director, Hines Harvey Woods Global Forum for Ethics Edition 10 | 03

06 The right track New research aims to help organisations develop the right corporate culture 10 Better boards How to design and develop effective boards 11 Value myth The Purpose of the Corporation project tackles the ‘myth’ of shareholder value 12 A matter of ethics Two winners of the Robin Cosgrove Prize on ethics in finance share their views 14 Risky business How much should businesses tell shareholders about the risks they face and their plans to address them?

16 Balancing act Corporate governance often neglects to address behaviour

| Smart finance 19 At the crossroads Choosing between alternative financing and bank loans 23 The small time The challenges facing small and medium practices 26 Room at the top?

Shared services is changing the pathway to top finance roles 29 Viewpoints CFOs on the key challenges they face

| Sustainability 33 Integrated thinking Adoption of integrated reporting needs board-level leadership

37 Gathering evidence Traditional assurance methods face a challenge in adapting to integrated reporting

| Corporate reporting 47 Beyond profit Corporate social responsibility is changing the way businesses think about accounting

40 All change Sustainability reporting has transformed the way companies report

| Audit

44 Consider the child Companies need to prove that their supply chains are free from child exploitation

49 Measuring up Why accountancy should be seen as a measurement science

Taking the Tube reveals an

extraordinary journey into British culture... in London people grumble in line 07 04 | Edition 10

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Smart finance | 19 | 20

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Risk and governance | 06 | 07

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Contact details | 02 Welcome | 03

| Risk and governance

68 The Ebola effect Fear of Ebola has devastated the economies of the hardest-hit countries

| Public sector 71 Health risk Can we build a sustainable future for healthcare?

74 The whole story Amid intense scrutiny, governments are trying to work out what they owe and what they own

| Tax 53 Goodbye to all that Audit will never be the same again

| Public value 55 Going global IFAC president Olivia Kirtley on the issues facing the profession

| Global economy 58 Mining for skills Botswana seeks qualified accountants

60 European growth Expansion was a key theme at the seventh CFO European summit

75 Not so green As the first country to repeal its carbon tax, what next for Australia?

News | 82 | 83

Diversity | 80 | 81

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Tax | 75 | 76

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Public sector | 71 | 72

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Global economy | 58 | 59

Public value | 55 | 56

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Audit | 49 | 50

Corporate reporting | 47 | 48

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66 Turning the tide Skilled accountants are making an impact on financial management in Latin America and the Caribbean

78 Time for action As international tax avoidance hits the headlines, the OECD has made swift progress in developing policies to tackle the issue

| Diversity 80 Inclusive role Encouraging greater diversity is high on the corporate agenda – and finance has a key role to play in managing it

| News 82 In brief Celebrating 110 years of ACCA, developing the accountancy profession in Afghanistan, ACCA and IMA team up on future-focused research, and a new breed of adviser. ■

62 Power of ideas Innovation is key to Malaysia’s plan to become a high-income economy 64 Work in progress Cambodia’s economy is growing fast, but its accounting sector still has a long way to go

‘The Ebola epidemic is not

going to dramatically slow the continent’s economic momentum’ 70 Edition 10 | 05

Accountancy Futures | Risk and governance | Culture

The right track

New research looks at how boards can better anticipate potential drawbacks of organisational culture and offers advice on how best to address these, as ACCA’s Pauline Schu explains 06 | Edition 10

Culture | Risk and governance | Accountancy Futures

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n 2014 ACCA and the UK’s Economic and Social Research Council (ESRC) completed an international research project that examined the influence of corporate culture, regulation and compliance systems in driving either functional or dysfunctional behaviour in organisations. The conclusions, outlined in the report Culture and channelling corporate behaviour, aim to provide business leaders with innovative guidance on the path to cultural assessment and change.

Effective channelling If you have ever used the London Underground, the following will all sound familiar to you: please mind the gap; please stand behind the yellow line; please stand on the right; please keep left – in other words, please go with the crowd and do not ever interrupt the flow of movement.

On the Tube system, around a million commuters are trying to make it to work on time every weekday morning.

Securing a smooth and uninterrupted flow of trains and passengers is therefore the main priority of Transport for London (TfL) as an organisation. Effective traffic regulation is needed to channel users’ behaviour, and constant reminders are displayed and broadcasted all over TfL’s routes. At peak times, staff are on the platform, tirelessly repeating that customers should stand behind the yellow line and let passengers off the train first.

London is a particularly cosmopolitan city, bringing together people of various cultural mindsets, yet nearly everyone eventually comes to conform to the ‘herdedsheep’ behaviour that makes the Tube as efficient as it can be, even at peak hours.

The behaviour of others significantly influences the behaviour of individuals. On the Tube, standing on the wrong side of the escalator or blocking opened Tube train doors by standing right in front of them causes protest and remonstration. Generally, though, people will remain standing or moving with everyone else and comply with TfL’s exhortations.

Taking the Tube reveals an extraordinary journey into British culture (or at least its clichés). While some cities experience chaos during peak traffic jams, or when workers go on strike, in London people grumble in line. The culture at the heart of the Underground system has been passed on to its users through the effective enforcement of its norms and practices. Rules and procedures are critical in ensuring appropriate conduct, and the constant reminders of the staff on platforms prove effective tools

Pauline Schu is policy and research officer at ACCA and manages ACCA’s culture and channelling corporate behaviour work.

»

Points for consideration by the board * * * * * * *

Align and embed core values at the very top.

Watch out for the trickle-down effect and dynamics in groups.

Track how decisions are being made.

Be honest about the value of regulation and codes.

Beware of unintended consequences attached to any incentive structure.

Find out what motivates people.

Anticipate trends.

Edition 10 | 07

Accountancy Futures | Risk and governance | Culture

Is there a role for audit?

The Institute of Internal Auditors has built a strong case for the involvement of internal auditors in ethics; a recent report notes that the audit of cultural indicators should move beyond processes and controls, and combine hard data with intuition.

Culture and the role of internal audit: looking below the surface can be downloaded at tinyurl.com/iia-culture

Insights from ACCA’s research Through its global membership and extensive network, ACCA is in a unique position to capture cutting-edge thinking and practice, and to deliver value-adding and practical insights to business and finance leaders. The latest research on corporate culture and its impact on behaviour and ethics is an example of ACCA’s ability to draw on emerging issues and communicate them to a range of audiences. In so doing, ACCA challenges assumptions, but also provides a framework to enable a range of practical applications for its partners and members.

Read the latest thinking at www.accaglobal.com/culture 08 | Edition 10

in channelling passengers functionally.

London Underground shows that regulation is critical to functional organisations. It also reveals how culture influences behaviour, how groups get organised, and how norms get passed along to newcomers. Finally, it demonstrates how this is a day-to-day job. Signs throughout the stations, members of staff everywhere and recorded traffic updates flawlessly aired all contribute to channelling functional behaviours that allow the smooth and organised movement of crowds.

Regulation, together with softer behavioural ‘nudges’, provides an effective system of control.

Similarly in organisations, regulations on their own will remain powerless to influence ethical behaviours until governance and risk management improve. Filling the office with stickers proclaiming ‘I love ethics’ will not help, but creating an environment where people can

Culture | Risk and governance | Accountancy Futures

Robert Woll Speaking at the ACCA Hong Kong CFO Summit 2014, Robert Woll said that to make corporate culture work well, CFOs should align incentives for managers and employees, and ensure that they do not create subcultures. ‘CFOs and other leaders should take a holistic approach to compensation and incentive structures to ensure that employees’ behaviour is in line with the overall values of the company.’

Partner at law firm Deacons

comfortably discuss their concerns may. A safe and effective whistleblowing procedure should also be seen as a key safety valve for the organisation.

Limits of rules In the UK’s banking sector, the Libor scandal, which involved the manipulation of interbank lending rates, highlighted how extensive rules, procedures and compliance systems failed to create the conditions for ensuring appropriate conduct in some of the largest financial institutions. The sub-prime crisis and the mis-selling of a wide range of financial products to businesses and individuals likewise showed how rules and procedures did not protect customers and certainly failed to regulate ethics in finance.

Implementing ethical practices in business is difficult. The definition of ethics is subjective and often works on a caseby-case scenario. Yet sound corporate governance and internal control can help promote ethical behaviour – as long as that is what the organisation wants. During the inquiry into the Libor scandal, it was argued that misconduct was not solely characteristic of a small number of traders but much more deeply entrenched. Investigations into banks’ business practices also concluded that both their incentive structures and control systems were ‘so defective that they incentivised traders to benefit their own book’ – behaviour made possible because management ‘turned a blind eye to the culture of the trading floor’.

In the UK, the Financial Stability Board now expects boards of financial institutions to assess their risk culture, and boards in other sectors might soon be required to do so too. In Culture and channelling

Sound corporate governance and internal control can help promote ethical behaviour – as long as that is what the organisation wants

corporate behaviour, ACCA proposes a framework to help organisations understand the drivers of behaviour (in terms of risk, challenge or reward), and explains how to go about assessing their own culture.

The report lists a number of trade-offs that need to be balanced by the boardroom and by staff. For example, is there openness to mistakes or is there zero tolerance and a blame culture? Is the organisation innovative or is it tightly controlled? Does profit rule or does public value matter more?

In the City, boards of financial institutions are now expected to assess their risk culture.

The model is a first step towards developing other tools for behavioural analysis. It is hoped that both businesses and academia will contribute to advancing this new and important area of research. ■ Read Culture and channelling corporate behaviour at www.accaglobal.com/culture.

The report was co-authored by Pauline Schu and Paul Moxey, former head of corporate governance and risk management at ACCA. Edition 10 | 09

Accountancy Futures | Risk and governance | Culture

The drive for better boards Dr Sabine Dembkowski and Dr Stefan Wegener, co-founders of Better Boards, are bringing together the thinking on how to design and develop effective boards How to build a better board 1 Composition It is crucial to understand how different specialists, preferred roles and personality styles complement each other.

2 Leveraging strengths It’s important to understand the individual strengths of members and how they can be leveraged to create something bigger than the sum of the individual parts.

3 Clarity about roles and responsibilities Substantial grey areas are the norm rather than the exception on many boards. The most effective ones are crystal clear about roles and responsibilities.

4 Common vision A clear common orientation at the top is pivotal.

5 Resolving conflicts Effective boards and their members understand how to resolve conflicts between the board and the next management levels.

6 Organising work The organisation of the executive committee’s work depends critically on the board secretariats and the interplay between the chairman and CEO. Effective boards understand how to structure their work.

7 Regular reviews Regular timeouts, where board members can connect with each other and reflect on their work, are crucial to success.

Dr Sabine Dembkowski and Dr Stefan Wegener are co-founders and managing partners of Better Boards, a consulting firm dedicated to developing effective boards that make a superior contribution to the value creation process in their organisation. Find out more at www.betterboards.co.uk 10 | Edition 10

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lmost daily we read on the business pages about fallouts or failures of boards. In fact, recent research highlights that 58% of all CEOs lose monies for their investors and, during the course of a holding of a private equity firm, 63% of board members are replaced. So what is going wrong?

Dr Sabine Dembkowski, co-founder and managing partner of Better Boards, highlights the fact thawt the majority of executive development programmes tend to stop one or two levels below the board. ‘Having worked with heads of business units or department heads in the past, it has often become clear that the problem lies elsewhere,’ she says. ‘In fact, what we saw on this level were beautiful examples of the mirroring effect in action in large organisations.’

Dembkowski explains that members of boards may be more closely observed than they realise, with those working

for them displaying behaviours that are interpretations of what they see at board level. ‘To address this issue, more and more organisations all over Europe conduct management and board audits. We have seen hundreds of such reports and designed, delivered and/or participated in numerous feedback sessions,’ she says.

The outcome of all this is that Better Boards has developed its own online board audit tool. ‘We bring together thinking from industry, management consultancy, investors and private equity, and focus on top executive development, effectiveness and value creation,’ says Dembkowski. ‘Our reports are designed in such a way that it is easy and obvious what the specific actions should be without any interpretation on our side.’ ■ Pauline Schu, policy and research officer, ACCA

Culture | Risk and governance | Accountancy Futures

What is a corporation for?

The Purpose of the Corporation project takes on the ‘shareholder value myth’, as Paige Morrow of public interest law firm Frank Bold explains

W Paige Morrow is head of Brussels operations for Frank Bold, a public interest law firm specialising in environmental, energy and commercial law.

hat is the purpose of a corporation? To satisfy customers, pay employees living wages, generate returns for investors, create social good, or some combination of all four?

The Purpose of the Corporation project is an apolitical, multi-stakeholder platform that brings together business, academia, civil society and trade unions to answer the question and develop a pragmatic vision for the future of publicly listed companies.

The project takes on the ‘shareholder value myth’, as it was termed by Lynn Stout of Cornell Law School in her book of the same name, which challenged the dogma that directors are legally obliged to place the interests of shareholders first through a single-minded focus on earnings and share price. The dominant belief, dating back to Milton Friedman in the 1970s, was that the only role of corporations in society was profit maximisation.

In fact, as far the law is concerned, a corporation may choose to maximise quarterly returns but boards may equally decide to reinvest profits, increase wages or research new products.

The share price offers a deceptively simple metric for business and managerial performance. Pay for performance schemes often create perverse incentives to engineer short-term performance through share buybacks, mismanagement or accounting fraud. The collapse of giants like Enron and Arthur Andersen were glaring examples of this, but the effects may not be immediately self-evident. The pervasive practice of

repurchasing shares diverts cash that could be invested in innovation or expansion into new markets. In 2013, US companies in the S&P 500 index bought back US$500bn of their own stock. A study recently cited by The Economist concluded that a doubling of buybacks was correlated with an 8% fall in spending on R&D. Corporate scandals have been a factor in the push by consumers and civil society for increased corporate engagement with environmental, social and governance (ESG) issues. Is there a trade-off between companies doing well and doing good? New research by Robert Eccles (awarded honorary ACCA membership in December 2013), George Serafeim of Harvard Business School and Ioannis Ioannou of London Business School suggests that sustainability and corporate performance may be mutually reinforcing. Their analysis of 180 US companies from 1993 to 2010 compared a portfolio of businesses with a high commitment to ESG matters to rival businesses with very similar performance, size, capital structure and growth opportunities in 1993 but which failed to show a commitment to sustainability. Whereas US$1 invested in a highly sustainable company yielded US$22.58 in 2010, the same US$1 returned only US$15.35 when invested in a low-sustainability business.

Their research has practical implications. About 6,000 large European Union companies will be required to report on ESG matters when the directive on nonfinancial reporting becomes effective in 2018. The EU is also contemplating a shareholder ‘say-on-pay’ similar to the one already in force in the UK. Responsible shareholders could then pressure companies to develop executive bonus plans linked to non-financial indicators in addition to share price.

Social and legal expectations have evolved to require companies to do business responsibly. Many successful global companies, such as Dutch consumer product giant Unilever and Danish pharmaceutical Novo Nordisk, have unlocked the value creation potentially associated with integrating sustainability into core business strategy. Through roundtables, policy briefings and research papers, the Purpose of the Corporation project fosters this discussion of how corporate governance can best advance the interrelated objectives of corporate performance and sustainability. ■ Find the Purpose of the Corporation project and its publications online at www.purposeofcorporation.org and @purposeofcorp Edition 10 | 11

Accountancy Futures | Risk and governance | Culture

A matter of ethics

The Robin Cosgrove Prize promotes ethics in finance. Here, two previous winners of the prize look at technology in finance and personal accountability

G Prabhay Joshi is a financial services consultant at PA Consulting Group and former winner of the Robin Cosgrove Global Prize for Ethics in Finance.

Rafael Gomes is a risk consultant at Accenture and former winner of the Robin Cosgrove Global Prize for Ethics in Finance.

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ood business relies on good ethics. ACCA has partnered with the Robin Cosgrove Prize as part of its global commitment to promoting ethics in finance. Robin Jarvis, special adviser to ACCA, has been a member of the prize jury since 2012. ACCA was the first accountancy body to introduce an ethics paper; since it was founded in 1904, ACCA has strived to promote integrity, opportunity, diversity, innovation and accountability.

Over the past few years ACCA has been conducting research into corporate governance, organisational culture, and behaviour in the boardroom, and supports this global prize as part of its aim to ensure that the conversation around ethics in finance is not limited to any one region or group of stakeholders.

Here, two previous prizewinners from 2013 have contributed short essays on ethics in finance. The views they express here are their personal views.

the Financial Conduct Authority (FCA) have consulted on a ‘senior managers regime’ to improve individual accountability at the top of an organisation and bring the prospect of criminal prosecution to senior managers in the event of reckless misconduct in their area.

Rafael Gomes, another 2013 laureate (see below), presented an interesting angle to this question: is it not banks’ duty to act in the spirit of the law, rather than the letter of the law? Public opinion seems to be consistent in this regard: banks have a systemic importance in the economy, and their conduct (irrespective of regulation) needs to reflect this responsibility.

It is a real honour to have had the opportunity to make a contribution, however small, to Robin Cosgrove’s legacy. I would recommend anyone with an interest in the subject to submit an essay and contribute to the growing global debate around ethics in finance.

Prabhay Joshi: Ethics and loyalty

Rafael Gomes: Technology in finance

A year and a half on from my experience with the Robin Cosgrove Prize, it is clear that the debate around ethics and regulation in finance is still firmly in the limelight. I was delighted to be recognised for my contribution in 2013, and it is great to see that the prize is continuing to grow with the support of ACCA. My essay concerned the interplay between individual decision-making and an organisation’s cultural values.

One of the key themes I explored was an employee’s loyalty towards their company, and the potential dangers of this from an ethical perspective. If an individual’s values become too closely aligned with those of the business they work for, they may lose their ability to make independent ethical decisions.

The role of regulation is left as an open question following on from this: can technical regulation ever serve as the complete remedy to a problem that revolves around individual ethical decision-making? I suggest that a skilled finance professional who wants to manipulate the system will always find some way of doing so, no matter how comprehensive the regulation is. The focus of regulation therefore should be on instilling a sense of personal accountability in these individuals.

Last year saw changes in the UK’s banking landscape designed to bridge this accountability gap. First, the inception of the Banking Standards Review Council, chaired by Sir Richard Lambert, will aim to measure UK banks against a set of conduct benchmarks. More recently, the Prudential Regulation Authority (PRA) and

Finance is increasingly a digital business. It is also a business under scrutiny for ethical misconduct.

Here are four fintech trends that will force us to think creatively about ethics in finance.

1 Robots. To have a healthy sales relationship with customers, banks must choose products that are suitable for those buying them, and use fair and transparent sales techniques. The advent of a new robotic generation should therefore give us pause for thought. One product, for example, advertises itself as an ‘artificial-intelligence-powered personal assistant’ and promises to hold ‘real conversations’ with customers on behalf of banks. But how would a virtual concierge know how to sell the likes of payment protection insurance (PPI) suitably? Or how would a granny describe her risk appetite to a virtual concierge in a way that both parties understand it? Programming robots to sell financial services will pose an ethical challenge.

2 Financial automation. High-frequency trading (HFT) – ultra high-speed algorithms that detect when an order has been placed in the market and race to fulfil it first – has become a wealthy segment of the capital markets industry. US and European regulators are examining whether HFT is akin to front-running, the illegal practice of placing a trade ahead of a customer order when it is known that the customer’s order will probably move prices. Yet HFT is not really about traders’ conduct – it is circuitry. It would be considered unethical for traders to eavesdrop on

Culture | Risk and governance | Accountancy Futures

their competitors with hidden microphones, but HFT uses automated artificial intelligence. Decisionmaking is literally hardwired into the technology infrastructure. If information advantage has always been a tricky subject for regulators and economists, then technological automation and speed are set to multiply the ethical challenge.

3 The surveillance bank. Compliance departments increasingly use surveillance technology to detect potential untoward behaviour within banks. But much misconduct happens across different banks, not within them. While it might make sense for banks to share surveillance data, it would be extremely complex to do so. The answer may be to extend employee surveillance outside the banks’ walls.

Banks often analyse social media data to understand which customers are high risk before they provide them with a loan. Will they conclude that monitoring employees’ LinkedIn, Facebook and Twitter accounts would help them identify high-risk workers too?

4 Crowdfunding. Peer-to-peer (P2P) platforms enable users to bypass traditional banks and transfer money between themselves as loans, equity, insurance and payments. In October 2013 the Financial Conduct Authority (FCA) began the process of designing regulation for crowdfunders. While these digital services will undoubtedly bring long-term benefits, they also pose ethical risks. Conflicts of interest are often intrinsic. P2P platforms benefit from high transaction volumes, so they may have an incentive to claim that borrowers pose lower risks than they

The Robin Cosgrove Prize The Robin Cosgrove Prize is awarded in an essay competition designed to promote ideas on trust and ethical behaviour in all aspects within the finance sector. The prize is biennial and is awarded to the best innovative ideas for ethics in finance.

The award honours the vision of Robin Cosgrove, a bright investment banker, who died at the age of 31. He believed passionately that the lack of integrity and ethical practice in banking and finance could be a major barrier to sustainable economic development.

The prize is managed by the Observatoire de la Finance, a Swiss not-for-profit foundation in Geneva, and Dr Carol Cosgrove-Sacks, Robin Cosgrove’s mother, in partnership with ACCA. The award is available internationally, and entries may be written in English or French. For more information, visit: www.robincosgroveprize.org

actually do. A truly fraudulent platform could even socially engineer borrowers and transactions, as other online businesses have done, to encourage traffic. The crowdfunding industry should take this threat seriously because a single rogue platform could send risk-averse customers racing back to more traditional, traceable competitors.

So what is to be done? In November 2014, professor Stephen Hawking warned of the danger of technology evolving beyond our ability to use it responsibly.

Bankers, regulators, accountants and advisers will increasingly rely on technological nous to deliver effective and ethical capital. Over time, more of us will need to learn how technology systems are built, how financial data moves between them, and what makes these increasingly smart machines tick. ■ Edition 10 | 13

Accountancy Futures | Risk and governance | Reporting

Risky business

In business just about anything could happen – in theory, at least. But does that mean you should tell your shareholders all about it and how you intend to address it?

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unning a business is inherently risky – there are the small everyday risks (one of your suppliers goes bust, or the price of a commodity rises sharply), and then there are the risks that you think will never happen but sometimes do (a fire, a worldwide credit crisis, a ship loaded with your stock sinking).

Boards (good ones, at least) routinely discuss what could go wrong and what to do about it. But how much of all this should they tell their shareholders?

A series of high-profile corporate failures and incidents in recent years (the BP Deepwater disaster and Sony’s recent hacking experience, to name two) have given more teeth to the argument that companies need to do a better job of explaining the risks they face to their shareholders and other stakeholders.

Opening up The financial crisis has seen that argument bite deeper, and prompted a range of legislation (including IFRS 7, Financial Instruments: Disclosures, and the recommendations of the Enhanced Disclosure Task 14 | Edition 10

Force of the Financial Stability Board) aimed at improving risk disclosure in the financial sector. The 2008 crisis certainly raised the profile of risk reporting and brought discussion of risk more into the open.

According to a new report from ACCA, though, formal risk reporting by companies still has a long way to go.

ACCA’s Risk reporting study details the views of a range of senior risk experts representing preparers, users and regulators. It argues that all sides recognise that risk reporting needs to improve. The real question is how to make that happen.

Many of the experts consulted agree that progress has been made since the financial crisis. But too much risk reporting today is unnecessarily generic, compliance-driven, bland. Or, as Eric Tracey, consulting partner with investment manager Governance for Owners, witheringly says, it covers ‘everything but the kitchen sink, in which case it becomes completely useless’.

At the root of the problem is a fundamental difference between what users want and what preparers are

Reporting | Risk and governance | Accountancy Futures

Simon Constant-Glemas ‘There has been a huge increase [in regulation faced by multinationals] since the financial crisis, and the question is whether that drives better risk management or not. There have certainly been unintended consequences; at Shell we are captured by criteria that are not intended for us, simply because we are large.

In my view that has the potential to distract organisations from good risk management.

‘My main concern is that the raft of new regulatory requirements could result in organisations seeing risk reporting as just another box-ticking exercise, rather than driving better risk management. We have to be careful that we’re not reporting risk in order to satisfy a process, but that risk management is used effectively as a way to differentiate the business.’

VP corporate and UK country controller, Shell

Frank Curtiss ‘I’ve seen a lot of progress in risk reporting since the financial crisis. Risk has now become something that can be discussed, when previously it was a four-letter word. The better [risk] reporters are telling us something useful about risk – the levels of disclosure used to be terrible across the board, but now there are plenty that are not.

‘The big challenge now is the mass of companies whose risk reporting is inadequate at best. There are some shining examples, good reports that tell the story honestly and in the voice of the company. The trick now is to get the others up to speed.’

Head of corporate governance, RPMI Railpen Investments

prepared to give. To put it simply, users want to see more discussion of the risks a company faces, while preparers want to say as little as possible for fear of spooking the horses.

Companies fear that providing too much detail about risks could scare off investors or reveal sensitive information. The latter is an argument that analysts scoff at. ‘It’s a fantastic smokescreen to hide all sorts of things,’ says Tracey. ‘You ought to be able to describe your risks without giving away something you should keep secret. It’s precisely because it is sensitive that something should be reported to shareholders.’

So what do users want to see? The report details a wish list that includes a discussion of the risks that really matter to the company, preferably in order of priority. Users want to know why management believes that these risks are critical and what it plans to do to mitigate them. They also want to know of any new risks that have emerged since the last risk report. Above all, users want candour – an honest discussion of risk within the context of the company’s strategy and business model.

Putting a price on risk But could risk reports go further still? Journalist and financial analyst Jane Fuller raises the more controversial possibility of quantifying risks. It would be more useful for analysts, she argues, if management explained that a particular event (such as the risk of litigation) rarely happened but put a figure on the potential financial impact on the company if it did

(based on, for example, actual litigation payouts in similar cases).

‘This approach might cause migraines in many a boardroom,’ she says, ‘but it would result in a far more useful discussion about risk.’

The march towards better risk reporting seems to be gaining momentum, in some countries at least. At the end of last year, the UK’s governance regulator, the Financial Reporting Council, announced changes to the corporate governance code so that it recommends that directors include ‘a robust assessment of the principal risks facing the company’ in their annual report, along with an explanation of how these risks are being managed.

The experts consulted for Risk reporting agree unanimously that better risk reporting is beneficial to companies as well as users, with one contributor pointing out that risk reporting has now moved on from a focus on mitigation to a way of adding value to the organisation.

Ewan Willars, director of policy at ACCA, thinks that good risk reporting gives investors greater confidence: ‘We believe that greater disclosure of risk is not a threat, but a chance to demonstrate the strength of the company’s controls and management.’ ■ Liz Fisher, journalist Risk reporting is available at www.accaglobal. com/ab/161 Edition 10 | 15

Accountancy Futures | Risk and governance | Research

Balancing act

Good governance balances rules and flexibility, but joint research from ACCA and KPMG shows that behaviour is too often neglected

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Research | Risk and governance | Accountancy Futures

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orporate governance is a matter of balancing the need for enforcement with the need for flexibility, according to a 14-month collaborative research study by ACCA and KPMG. But at the same time, the most important aspects of good corporate governance – the behavioural elements pertaining to areas such as communication, evaluation and risk governance – are often less well defined, making them difficult to articulate, let alone enforce.

The study, Balancing rules and flexibility, examined corporate governance requirements across 25 markets and turned up several interesting results, says Irving Low, head of risk consulting for KPMG in Singapore.

‘One of the most interesting findings is that emerging markets scored very highly for the clarity and completeness of their corporate governance frameworks,’ he says. ‘India, Russia, Brazil: does it seem counterintuitive? In fact, on closer examination you will see that these markets have recently revised their corporate governance frameworks. On paper, they have all the right rules and requirements, but whether they have yet implemented these requirements is another matter.’ The study ranks India’s corporate governance framework on a par with Australia’s, and Russia’s with Hong Kong’s.

Low, who presented the findings internationally in November 2014, points out that similar discrepancies can be found in developed markets. But while issues with emerging markets may be attributed to implementation or enforcement, problems in developed markets are more usually related to human behaviour. For example, the US has a relatively mature corporate governance framework and placed second among the markets studied, but has seen multiple corporate scandals over the years.

‘This is a people-related issue,’ Low says. ‘What makes the world go round is behaviour, and that’s not very well covered in most corporate governance frameworks.’

Rigour versus flexibility Additional rigour in corporate governance frameworks might seem an obvious way of preventing corporate scandals. It is easy to assume that raising the number of requirements and making them mandatory should compensate for human inclinations to behave badly.

But Low is sceptical of this easy way out: ‘A corporate governance framework should not simply focus on having more requirements,’ he says. ‘It should attempt to achieve a balance between rules and flexibility.’

The entire point of having rules, he says, is to safeguard stakeholders’ interests; to this end, the rules in a corporate governance framework should be more purposeful and decided. But at the same time, the framework must allow for some flexibility, as different companies will face different circumstances. If companies are subject to too many prescriptive requirements, doing business will become very difficult for them, and a ‘compliance culture’ of doing the bare minimum may result. Too little enforcement, on the other hand, may lead to companies simply ignoring the guidelines.

‘Why have rules if they are not mandatory?’ asks Low rhetorically. ‘For the same reason we have speed limits.’ He points out that many jurisdictions, including Singapore, adopt a balanced approach, extracting the most important of the requirements and making them mandatory by adding them to the listing rules. Such codified requirements typically safeguard stakeholder and shareholder interest. The rest of the framework is voluntary, on a ‘comply or explain’ basis.

Singapore’s corporate governance code, for example, contains provisions to indicate that requirements are guides and principles rather than codifications. Some companies, says Low, have chosen not to comply with requirements such as those related to remuneration, and have indicated so in their financial statements, which is an acceptable form of non-compliance.

‘On the other hand, if a big company doesn’t comply with some very basic requirements such as internal controls, that would be too glaring for stakeholders and shareholders to accept,’ he adds.

It is possible, he says, to determine how effective an individual market’s governance framework is by examining how the framework and its implementation correlate to market performance. The ACCA/ KPMG study, however, did not examine levels of compliance with corporate governance frameworks or outcomes for companies. The study finds that behavioural requirements such as risk governance and stakeholder engagement are typically less well defined in frameworks. In comparison, well-known structural requirements such as the remuneration committee and director independence are usually well set out. Yet it is the behavioural requirements that have been identified as critical for improving corporate governance adequacy and effectiveness.

Again, the obvious answer might seem to be to enhance the corporate governance framework. But Low cautions here against focusing too much on such

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Irving Low Irving Low is head of risk consulting for KPMG in Singapore and co-author of the ACCA/KPMG Balancing rules and flexibility report. He is also the deputy head of internal audit, risk and compliance for Asia Pacific, which includes New Zealand, Australia, Singapore, Indonesia, Vietnam, Philippines, Taiwan, Hong Kong, China and Japan. His focus is in risks and controls, with extensive experience in undertaking board and governance reviews in both the private and public sectors for both profit and not-for-profit organisations. The other areas he is involved in include enterprise and risk management implementation, risk identification, Sarbanes-Oxley and internal audit. His client base is geographically spread, from the US, UK, Middle East to Asia Pacific.

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Accountancy Futures | Risk and governance | Research

Considerations for Singapore The Singapore corporate governance framework performs well in assurance, audit committee and financial integrity, disclosures and risk governance.

But like many other markets, it falls short on the behavioural aspects. Here it may be able to draw on the best practices of other markets, including: * a stewardship code, as in the UK * broader definitions of diversity, as in the UK * measurable diversity objectives, as in Australia * regular external reviews for larger companies, as in the UK * greater disclosures to stakeholders, as in Malaysia * mandatory CSR reporting and encouragement of more integrated reporting.

frameworks simply because there is a limit to what a corporate governance framework can do. ‘The real question is, how can we incentivise good behaviour?’

One natural check on bad behaviour, he suggests, may be companies’ own need to survive. To sustain their operations beyond a year, they need a sound business model and corporate governance structure, and will have to adhere to both. ‘Consider what happened to Lehman Brothers. They had good policies and structures, but management decided to override policies such as not taking more risks than they could absorb or accept, and that was when the problem began.’

Unfortunately, he adds, there is not much that regulators and policymakers can do to pre-empt such behaviour within individual companies. ‘Greed, ill intention and motivations cannot be governed at a local or national level. Such things have to be left to the companies themselves to handle,’ he says.

As far as corporate governance frameworks are concerned, Singapore, says Low, is currently at a ‘sweet spot’. The ACCA/KPMG study concludes that Singapore leads the Asia region in the clarity and completeness of its framework, although there are still areas requiring improvement, most notably in behavioural aspects, such as board diversity, performance evaluation and stakeholder engagement and communication.

This good performance does come with considerations, one issue being the burden of compliance. Singapore’s corporate governance code has been reviewed twice so far, in 2003 and 2012, and companies have raised concerns about the latest revision. ‘Some companies feel the Singapore framework is quite onerous,’ Low says. ‘However, I believe that it can be implemented in a straightforward way. Since the framework is principlesbased, companies can simply adopt what is relevant to them. For now, all we need to do is pause, let the market digest the framework, and let it manifest itself in companies’ behaviour.’

In any case, he adds, Singapore is still in a tenable position: ‘Compared to some other markets, we have seen very few cases of class action against companies.

It may be a matter of culture: our society is not as 18 | Edition 10

litigious as, for example, the US. And I don’t think we want that level of litigiousness. What we want is for people to do the right thing because they want to.’

Singapore is also well placed to lead the region in achieving corporate governance parity, which will be significant in light of upcoming regional integration.

Low says: ‘As we embark on the ASEAN Economic Community in 2015, it will be important to have

Singapore’s corporate governance framework is currently at a sweet spot.

‘What makes the world go

round is how we behave, and that’s not very well covered in most governance frameworks’ some consistency in corporate governance between jurisdictions. In this area, the ASEAN countries should be able to achieve parity comparable to the European Union. As long as companies are willing to subscribe to a broad set of corporate governance requirements, there should be a general understanding across borders.’

He adds that changes to the corporate governance framework of any country should be undertaken with an eye to context. Historically, major changes in frameworks, including the OECD principles themselves, have been sparked off by various financial crises and corporate or even industry collapses. But Low favours a combination of proactive thinking and moderation.

‘We certainly shouldn’t wait for disasters to happen before we take action, but we must bear in mind that not all countries are at the same rate of maturity.

Revisions are normally done incrementally and, if policymakers are forward-thinking, they will proactively take lessons from other jurisdictions to up their game in terms of transparency and accountability.’ ■ Mint Kang, journalist You can download the Balancing rules and flexibility report at www.accaglobal.com/ab/158

Funding | Smart finance | Accountancy Futures

At the crossroads

With the allure of alternative financing on one hand, and the familiarity of bank loans on the other, which way should finance professionals turn, asks Manos Schizas

Manos Schizas is former senior economic analyst at ACCA. He led ACCA’s Research and Insights programme on access to finance.

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Accountancy Futures | Smart finance | Funding

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usiness finance is at a crossroads. And which way finance professionals turn could have a significant bearing on how businesses are funded in the future. The situation is best summed up by two key questions. How many times recently have you read an article in the financial press about how alternative financing will be the future saviour of enterprise? Quite a few, I’m sure. At the same time, how often have you read that the banks’ doors are firmly closed to those entrepreneurs looking for investment to grow their businesses? Too often to count, I suspect.

And yet, bank loans and overdrafts remain the types of finance ACCA members are most often involved

Dubai Multi Commodities Centre, Dubai, UAE Created in 2002, the DMCC Free Zone, based at Jumeirah Lakes Towers, is a government authority with a mandate to enhance the flow of commodities trade through Dubai, creating a thriving marketplace for trade and enterprise. It is the largest free zone in the UAE, and is on target to register 10,000 members by 2015.

But according to Jignesh Sanghvi, head of the finance function in the corporate office at DMCC, finance for start-ups can prove very tight. As he says: ‘While the general business outlook in the region is bright, it can be tricky as with any market at times, particularly for a Sharia compliant start-up to expand or develop.’ Sanghvi believes that few local banks are comfortable in financing new businesses, forcing these smaller businesses to turn to private financiers at a significantly higher cost.

To cater for this, the free zone has created DMCC Tradeflow, which offers a Shariacompliant financing route. It is one of many DMCC financing platforms, which also include asset management, commodity and currency derivatives exchanges, but it allows traders to effectively mortgage their goods, with all parties adhering to a specific set of rules that help to speed up the process, reduce legal costs and open up access to finance.

in raising on behalf of clients. Which presents finance professionals with a dilemma. Innovation is rife in the financial services industry and yet the majority of funding applications facilitated by ACCA members still relate to bank loans – anecdotal evidence suggests the advantage of familiarity is still very powerful. Despite attracting an enormous amount of venture capital and capital market funding, alternative finance platforms have yet to make inroads within the profession, at least outside a few early adopter markets in the West.

The backdrop to this is of course the financial crisis that engulfed global markets in 2008. We are still feeling the aftershocks of the crisis more than half a decade later, but as of mid-2014, ACCA has reported that financing conditions at the global level are at their most benign since the recovery began in 2009. In most parts of the world, less than a fifth of large corporates and less than a third of SMEs were reporting problems accessing finance, despite the headlines.

But the key factor behind this shift appears to be an extraordinary level of global monetary stimulus, which is likely to prove short-lived, much like the coordinated monetary easing agreed by the G20 at the London summit in 2009. And as traditional finance providers have demonstrated a remarkably high resistance to risk, the beneficiaries of this stimulus have been larger organisations in the more developed regions of the global economy.

Fundraising challenges So the reality is that even though the macro picture appears to be improving, small businesses still face huge challenges when it comes to fundraising. ACCA’s own research has found that a substantial share of business financing is still only available on a risk-free basis. The recipients must be seen as risk-free or able to provide significant security.

However justified, the need for collateral (and the narrow range of assets eligible as such) is keeping some of the most promising businesses out of reach of much-needed finance.

The silver lining is that, as has been seen in many markets before, where there is a breakdown in how the market works, there is always the opportunity for disruption. If traditional finance providers fail to respond to the needs of those that require finance, then others will step up and provide alternatives. But it will not happen overnight. And this is where ACCA members have a crucial role to play.

ACCA’s research has revealed that between the first quarter of 2013 and the second quarter of 2014, nearly a third (31%) of its members were involved in raising finance, either for their own organisations or for clients. Most active of all were members in Africa, with 40% personally involved in raising finance, and 31% trying to raise finance for their own organisations.

Members in the Middle East and Asia-Pacific follow closely, with 37% and 35% of members

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Funding | Smart finance | Accountancy Futures

SADL Consulting, South Africa After successfully advising its clients in many areas, including fundraising, SADL Consulting found that it needed to raise finance itself in order to achieve its ambitious growth plans. But in the process of securing a commercial mortgage for new premises, SADL’s chief executive Suren Panday was frustrated to discover that the bank required personal sureties, in addition to proof of earnings for the business itself, despite having had the company audited by an independent international auditing firm.

Panday was also frustrated by the interest rates asked for by the bank, which he felt were too high. ‘The banks are just being greedy,’ he says. And to add to the frustration, the process took longer than three months, despite all the necessary paperwork being completed efficiently and on time.

Panday says that he would not approach a bank for this funding again. Instead, he would strongly consider getting a loan from the company’s private shareholders; the bank loan was granted against their finances anyway, and they could draw down the money from the business over the following years. Shareholder loans and funds from family and friends are popular sources of capital in South Africa, particularly among start-ups with no business or personal track record.

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Accountancy Futures | Smart finance | Funding

‘The need for collateral is keeping some of the most promising businesses out of reach of much-needed finance’

Haines Watts, Devon, UK As the 13th largest accountancy firm in the UK, Haines Watts has done well in picking up start-up businesses during the recession. Partners in the firm will go with clients to meet banks and other finance providers to act as an independent third party. As partner Matthew Melksham says: ‘Businesses have always relied on their finance directors and accountants to check things over… all our clients are ownermanaged businesses; their decisions will impact on their families, so it’s important they make the right decisions.’

However, as recently as the summer of 2013, the practice had to go looking for finance offers from alternative providers. ‘At one stage we were in real difficulties using high street lenders for commercial lending because they either could not help or they wanted more security than the business could sensibly offer,’ Melksham says.

But it has since become easier to raise finance because ‘high street lenders are coming back to a sensible place…with reasonable offers, sensible levels of interest and requirement for security’. Melksham believes that the driver for this change was a clear message from the UK government that they need to ‘sort their business out and get the economy moving’.

Peer-to-peer lending and crowdfunding are also proving popular. But the biggest challenges stem from the expectations of both lenders and clients. Unassisted, clients may set unrealistic cashflow projections and try to talk the business up, resulting in loss of confidence and trust from the lender; investment readiness is a major challenge. Conversely, clients are convinced that lenders are trying to rip them off and end up turning good deals down.

respectively trying to source funds for their businesses or clients.

Looking across the size of organisation, it becomes clear that members are most engaged at the SME level – 55% of members working in small and medium sized practices and 41% of those in SMEs were involved in raising finance. And ACCA research has confirmed what many already believe to be true – that, at least among SMEs, businesses around the world see finance professionals as the foremost experts in financial management and business financing.

But of the 31% of members who were involved in raising finance, the majority were helping businesses secure bank loans and overdrafts, although more specialist types of financing were also well represented among the membership’s fundraising efforts – a quarter (25%) of ACCA fundraising members (or 8% of the total membership) sought funds from the capital markets, usually on behalf of clients, and a similar proportion were involved in raising supply chain finance, including invoice discounting, factoring, reverse factoring and trade finance. Government guarantees and export finance also figured in the finance professionals’ armoury.

And of course there is always the bank of family and friends, which was tapped by 14%.

Authoritative advice Interestingly, newly popular methods such as crowdfunding and peer-to-peer lending were only sought out by some 4% of all ACCA’s fundraising members, and almost all of this was recorded in Europe.

But throughout all the fundraising techniques, there is increasingly the need for timely information. This requires finance professionals to act as true business partners. Practitioners are increasingly expected to provide a quasi-assurance service to fundraising businesses. They need to be able to speak directly to the senior directors and explain the long-term implications of financing decisions. And with an increasing array of financing options, there is a risk that business owners are distracted, often with disastrous results, so such businesses will need authoritative advice to help them narrow their options, not merely evaluate them.

So looking forward, professionals need to position themselves so that they can play a decisive role in any organisation looking to raise finance or help others to do so. Businesses need reasonably priced and quick finance, but more importantly they need good planning, trust and finance appropriate to their purposes and circumstances. They need to know which way to turn.

This is the crossroads that faces the complete finance professional of the future. ■ Read the report: The state of business finance at www.accaglobal.com/ab/154

22 | Edition 10

SMPs | Smart finance | Accountancy Futures

Hitting the small time

Small and medium practices are at the sharpest end of the business, and face many of the same challenges as their clients, according to the latest research

T

he future opportunities for small and mediumsized practices (SMPs) are fantastic, says Mark Gold FCCA, partner at UK firm Silver Levene. ‘This is simply because of their clients,’ he explains. ‘SMEs by their very nature require outside help, and it is a role the professional accountant can play completely.’

Gold is one of 17 partners at Silver Levene, an £11m turnover practice based in London. He also chairs the SMP Forum of FEE (the European Federation of Accountants), and is both a former ACCA president and a former chairman of ACCA’s SME committee.

Gold observes that time and again, accountants are seen as the most trusted advisers to businesses, both large and small. But he also makes the point that SMPs are businesses themselves. They face many of the opportunities and threats that their clients face, such as changes in technology and the regulatory environment, and need to adapt their businesses accordingly.

So what have SMPs themselves been telling us about the opportunities and challenges they face today, and will face in the future?

IFAC, the International Federation of Accountants, has just published its latest survey of small and medium-sized accountancy practices around the world. It will make interesting reading for the thousands of practitioners who relish being at the sharpest end of business.

According to the survey, attracting new clients and keeping up with regulations come at the top of the list of SMPs’ challenges, with pressure to lower fees, rising costs and differentiation also seen as key. The survey also suggests that economic uncertainty and rising costs are at the top of their clients’ list of challenges.

However, despite these issues, nearly three-quarters (72%) of SMPs say they are either maintaining or growing the previous year’s practice fee revenue.

Tax and consulting are tipped to be the two biggest sources of revenue growth for the year ahead. However,

Four steps for future success According to Kamlesh Vikamsey, an India-based practitioner in a small firm, speaking at the recent World Congress of Accountants, there are four steps SMPs need to take to ensure they succeed in the future: * To address the changing demographics of business owners, SMPs need to ensure they have the right age mix, including suitably tech-savvy young professionals. * To address a changing SMP workforce, SMPs need to formalise their HR policies and hone their staff retention strategies. * To tackle changing competition, SMPs need to offer high-quality, value-added services tailored to the specific needs of the client. * And finally, to meet the changing needs of SMEs, SMPs need to expand their service offerings to include advisory as well as assurance services, develop their knowledge and skills to offer these services, and participate in a network, association or alliance.

a number of themes have emerged recently that have had a direct impact on SMPs, and will continue to.

Rising audit thresholds around the world are affecting the business models of SMPs, as are technological innovation and the internationalisation of business.

‘Audit thresholds is the one people focus on,’ says

‘The challenge is to put

yourselves in the client’s shoes and demonstrate the value of the audit or its alternative’ Gold. ‘When Silver Levene sat down to talk about rising thresholds in the UK years ago, some people were concerned, while others saw it as an opportunity because they could see the shackles coming off. We wouldn’t be tied down by all the audit restrictions, so we could help clients with the advice they really needed.’

Gold has recently returned from Denmark, where

»

Giancarlo Attolini ‘The world of the SMP is a swiftly changing one, and it is the fastest sector in the profession in adapting to change because it has to – SMPs evolve or die. I expect the number of SMPs to diminish and the number of SMP accountants to increase. This is because there is going to be a huge increase in the number of accountants – if you look at Asia and Africa, there are huge numbers of students – but we will also see the integration of more practices. There will probably be fewer sole practitioners, and SMPs will become bigger. The complexity of regulation will require more expertise in each practice, while competition will force lower fees, so SMPs will look for economies of scale.’

Chair, IFAC SMP Committee See Giancarlo Attolini on video at www.accaglobal.com/ab/176 Edition 10 | 23

Accountancy Futures | Smart finance | SMPs

The Northern Lights at Tromso, Norway, where until recently there was a requirement for all companies to be audited.

of 14 accountancy bodies including ACCA, seven out of 10 SMPs have clients that undertake at least one type of international activity. Around half have clients undertaking import and export activity, but relatively few SMPs have clients participating in a high number of international activities. The study concludes that there is considerable potential for SMEs to expand the scope of their international activities and that those that do not currently buy or sell goods or services internationally could be encouraged to consider how looking beyond home markets could boost business performance.

But it is as likely that SMPs are reacting to their clients’ demands. This is a point highlighted in research carried out by ACCA special adviser Professor Robin Jarvis, Dr Cristina-Maria Stolan and ACCA’s head of small business Rosana Mirkovic. In the report, 2020 vision: Learning

from the past, building the future, Jarvis argues that the motivation for SMPs to provide business advisory services outside their core business activity – namely internationalisation guidance to SMEs – was embedded in their desire to respond as much as possible to their clients’ requirements and business goals.

As the report says: ‘Some SMP practitioners highlighted that their practice not only provides guidance beyond traditional accounting services, but that they primarily

he spoke with accountants in practice facing an increase in audit thresholds. ‘Some are worried, but many are rising to the opportunity,’ he says.

Of course, audit requirements vary from one jurisdiction to another, and this can have an impact on how firms in these different jurisdictions approach the development of no-audit advisory services. As Sue Almond, ACCA’s director of external affairs, explains: ‘You can contrast Canada, where the environment is very much that there isn’t a requirement for an audit, with Norway, where until recently there was the requirement for all companies to be audited. The starting point is very different, and therefore market expectations are different.’

However, she adds that there is still a need for a service that can give assurance to stakeholders such as finance providers, irrespective of whether there is a formal requirement for an audit. ‘The challenge is to put yourselves in the shoes of the client or finance provider, and demonstrate the value of the audit or its alternative,’ she says.

However, issues such as rising audit thresholds focus on the traditional skills of qualified accountants. There are wider forces at play as well that need to be considered.

Top of the list is the internationalisation of business. Even the smallest of SMEs will have the opportunity to do business across borders, and as a result will be looking for advice in areas such as taxation and regulation.

‘Even if you are an SMP servicing SMEs, it is unusual not to have some form of international element,’ says Almond. ‘It might not necessarily be global, but typically there are cross-border issues.’

According to a study by the Edinburgh Group, a coalition 24 | Edition 10

‘You can contrast Canada with

Norway. The starting point for audits is different, and therefore market expectations are different’ Churchill, Canada.

While Canada shares the spectacle of the Northern Lights with Norway, the two countries have very different audit rules.

SMPs | Smart finance | Accountancy Futures

Mark Gold FCCA Five tips for SMPs: 1 Don’t worry – every threat provides an opportunity.

2 Remember you are a business and you supply a service. Look at what your customers need and start helping them.

3 Tell them what you can do – a lot of accountants forget to mention the other services they can offer.

4 Always think outside the box. Think about what other services (legal, HR) you can offer.

5 Remember you are in a privileged position to influence businesses – it’s what makes our work much more enjoyable.

Chair, SMP Forum, Federation of European Accountants (FEE) See Mark Gold on video at www.accaglobal.com/ab/177

act as business advisers; in turn, providing international advisory services represents a different feature for their practice. This sets them apart from their competitors and ultimately provides them with competitive advantage.’

However, the report adds that in giving advice, SMPs are well aware of their knowledge limitations regarding foreign markets and the services they have the capacity to provide. They advise their clients to the limits of their knowledge, and then ask their international network to complement that knowledge. They then transfer the knowledge directly to their SME clients and, ultimately, directly refer their clients to their international network contacts (other SMPs, law firms, bankers, business consultants, and other SME clients) to ensure that their clients receive the appropriate support for enhancing their international activities.

‘This places accountants in a preferred position compared to a number of other professions and advisory services in supporting SMEs’ internationalisation ventures,’ the report says.

And then there is technological innovation, much of which is allowing SMEs, and therefore SMPs, to operate across borders, and in a more efficient and productive way.

Gold believes this is having a huge impact: ‘Technology has to be utilised, and SMPs have to go for it.’

Giancarlo Attolini, chairman of IFAC’s SMP committee, agrees: ‘It is clear that developments in digital technologies are going to affect the world even more radically over the next 25 years than the last 25.

Technology has already made business global.’

Attolini is a founding partner of Attolini Spaggiari & Associati Studio Legale e Tributario, an accounting, tax and law firm in Reggio Emilia, Italy. He believes that SMPs are facing a choice between providing transactional and advisory services.

‘It is critical that SMPs leverage automation and repeatable processes to enable them to add real value to their clients through proactive consulting,’ he says. ‘There will also be opportunities to provide realtime collaboration and professional services to clients utilising technology. For example, SMPs may wish to use the opportunity presented by the cloud to offer enhanced client accounting services.’ ■ Philip Smith, journalist For more information visit www.IFAC.org/SMP

IFAC SMP survey (Jan 2015) Challenges facing SMPs 58% Attracting new clients 57% Keeping up with regulations 51% Pressure to lower fees 50% Rising costs 50% Differentiating from competition

58%

57% 51% 50% 50%

Challenges facing SME clients 67% Rising costs 66% Economic uncertainty

67% 66%

SMP fees 4% Substantial increase 37% Moderate increase 31% Stay the same 28% Decrease

4%

37%

31%

28%

Edition 10 | 25

Accountancy Futures | Smart finance | Shared services

The evolution of the CFO

Can finance professionals with a background in shared services go all the way to the top, or is finance transformation little more than a career graveyard?

A

 s the finance function model evolves, so businesses are having to come up with new ways to develop talent. The trend for global organisations to restructure the function by setting up shared service centres or outsourcing is changing the traditional pathway to top finance roles.

Established wisdom has it that CFOs, to be effective, need a rounded understanding of every aspect of finance. That could include transactional functions, business support and analysis roles, as well as central reporting. But if those transactional functions have

26 | Edition 10

been separated out from the in-house department, then they become less accessible to aspiring future finance leaders. It then becomes a more deliberate choice to move into a shared services role – assuming that it is even possible to do so.

So what is the impact of the shared services route on the finance professional’s career path? Do finance transformation roles attract the best and brightest professionals who want to be CFOs? Or is shared services a graveyard for those whom the organisation believes add value, but who are not expected to

Shared services | Smart finance | Accountancy Futures

achieve the top finance role?

According to a recent ACCA report, Finance transformation roles: pathways to CFO, which examines the views of finance leaders and experts across a wide range of business sectors, careers in financial shared services seem to be underrated.

‘Right now, a so-called urban legend positions finance transformation roles as a dead-end for those who want eventually to occupy the top finance seat at the executive table,’ says Jamie Lyon, head of corporate sector at ACCA and co-author of the report. ‘Perhaps

that is because of the relative immaturity of the shared services finance model, or perhaps finance transformers just have not had enough time to reach the top yet; perhaps it is because organisations need to amend their view of the capabilities now required to balance agility and risk, growth and compliance in increasingly complex market contexts; or perhaps it stems from a lack of imagination.’

But individuals who take this route, according to Julie Spillane, managing director and global director of finance excellence for Accenture Global Services, can

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Edition 10 | 27

Accountancy Futures | Smart finance | Shared services

Chris Gunning ‘What’s interesting now is the movement to global business services or GBS – aggregating all business delivery under one functional group. While traditionally finance shared services sat under the CFO, the GBS head, often the former head of finance shared services, is at the same table. As far as the executive committee is concerned, the CFO and GBS leader are almost equals. It’s a different route; the finance shared services leader now says, “I’m not part of the finance team. I run the business team separately while one of my many stakeholders is now the CFO.”’ Vice president of global shared services, Unisys

Nigel Coffey ‘When it comes to selecting a chief finance officer, I think the choice is a CFO who understands the numbers rather than one who understands the back-office functions. There is a snobbery in finance: the guys in the front of the house – that is, the planning and reporting side – think that they know the business; they think that the guys in the back office don’t really “get” the business. But I think that the guys in the back office often understand the business an awful lot better than the guys in the front do.’

Senior director of finance process transformation, PepsiCo

gain valuable skills and experiences in an era when the CFO role has two distinct sides to it: strategy and investor relations on the one hand, traditional finance operational leadership on the other.

‘Being able to navigate increasing business model complexity internally means responding to changing expectations – knowing how to deal with operations and the implications of culture,’ she says. ‘Shared services experience is extremely helpful for this new generation of leaders.’ She says that working in shared services helps to develop the skills that are needed for operational leadership.

Individuals who move into shared services can gain greater responsibility and greater access to global C-suite executives. Nigel Coffey, senior director of finance process transformation at PepsiCo, says: ‘I spent 10 years as a country CFO and I never met or spoke to the global CFO. On my very first day in shared services I was presenting to the senior leadership team.

As a shared service leader you get access to a much more senior layer in the organisation than you will ever get as an individual country CFO.’

Strategic versus functional Nevertheless, roles in shared services are seen as less strategic, which could put them at a disadvantage as potential springboards to the top finance role. Coffey recalls: ‘When I was asked to go into a shared service and outsourcing [SSO] role my first reaction was, “you must be joking!” I called it the graveyard of ambition; there’s no progression, no career.’

Peter Moller, a partner in Deloitte Consulting, cautions aspiring CFOs against overvaluing shared services experience. ‘Let’s not kid ourselves,’ he says. ‘Finance shared services leaders have limited experience moving up the finance value chain. Shared services operations by their nature are never going to be strategic.’

Finance organisations most likely to see potential CFO talent among shared services pools are those with very mature – and successful – SSO models. Such organisations are consciously plotting career pathways 28 | Edition 10

through SSO operations, realising that skills honed there are key to building a strong finance management bench and top-tier talent.

Sandy Khanna, vice president at IBM global process services, has seen organisations deliberately fasttracking individuals into finance leadership through transformation or shared services roles because they

Skills honed in shared

services are key to building a strong finance management bench and top-tier talent value the business experience gained. ‘You’ll always find that the good finance leaders find great roles because they’re in demand,’ he says.

Could it ultimately be that organisations wanting to appoint their CFOs from shared services backgrounds will have to do the persuading? ‘We don’t want to be the bean-counters of old,’ says Andrew Bacon, head of the EMEA shared services centre for Korean multinational Doosan Infracore. ‘Ask 100 shared services leaders and you’ll find that few aspire to be the traditional CFO.’ Indeed, some may be looking towards another top job altogether. ‘For somebody entrenched in finance, the move into a more operational role might be a good move toward a CEO role,’ Bacon says.

Whether it’s the shared services professional who needs to be persuaded of the CFO job, or the board that need to be persuaded of the shared services candidate, it’s looking like both could benefit from a strong fit of skills and experience. ■ Sarah Perrin, journalist For more information, download the Finance transformation roles: pathways to CFO report from www.accaglobal.com/ab138

Viewpoints | Smart finance | Accountancy Futures

Stepping forward

Whether it is protecting corporate values or anticipating where future growth will be, finance leaders give their views on the key challenges they face

Kevin McCarthy FCCA The former CFO for Xbox says he will continue acting as a path-breaker. ‘New ideas don’t just happen,’ he says, adding that he intends to mentor a team faced with complex open-ended, ever-changing challenges. ‘Ongoing innovation is critical to stay ahead of the competition…

Our products compete effectively based on our strategy of providing powerful, flexible, secure, easy-to-use solutions that work well with technologies our customers already have and are available on a device.’

Full interview at www.accaglobal.com/ab/166 CFO, Microsoft consumer channels

Jonny Backman ‘It’s our long-term goal that my successor can be a Russian. There are a lot of positive things that we can bring as foreign nationals, but we also think there’s lots we don’t have that a local would provide… I would really like to see how we can take this high-performing team from a threesecond pit stop, a world record, and shock the world and bring that down even more. That’s my goal and vision, to take a high-performance team that’s already surprising people and make them even better.’

Full interview at www.accaglobal.com/ab/169 CFO, Microsoft Russia Edition 10 | 29

Accountancy Futures | Smart finance | Viewpoints

Sanjeev Agrawal ‘CFOs have a complete responsibility to make enquiries, as well as explore and assess the landscape. You should be asking all the relevant questions. I also see the role as one of value protection and value addition, in that order. First, keeping the place safe – making sure it’s run on good fundamentals; liquidity is good, capital is good. And that’s where the conscience keeper comes in. There is huge competition and most managers are under pressure, so somebody has to keep that balance of thinking. The CFO has a role to play there.’

Full interview at www.accaglobal.com/ab/167 CFO Standard Chartered Bank, Singapore and ASEAN 30 | Edition 10

Mark Vale FCCA ‘A key part of the job is helping to determine the strategic direction of this part of the company [international operations], including where to focus our financial resources and which metrics to use – I spend a lot of time trying to support our business units out in the field.

We need to understand the latest dynamics in global trade and anticipate where the fastest growth will be. It is really important that we have hired the right people with appropriate skills and experience. I need to find the next generation of UPSers.’

Full interview at www.accaglobal.com/ab/168 CFO, international operations, UPS

Viewpoints | Smart finance | Accountancy Futures

Matt Dolphin ‘If I’m ever recruiting, I have no problem getting qualified people. What I struggle to get is qualified people with interaction skills or the ability to influence or to present – all those other soft skills. The ACCA Qualification gives you a broad understanding of what happens in business, how businesses actually work. And it’s a transferable skill set so it’s absolutely a requirement. But it’s not the end of the road. It just gets you through the door. You need some really good people skills as well as being a functional expert.’

Full interview at www.accaglobal.com/ab/172 Business finance partner, BA

Kathy Liu FCCA A 24-year finance executive veteran, Kathy Liu has first-hand experience of the globalisation of the apparel industry. ‘With such short lead times required in the industry, obtaining your letter of credit is going to delay the whole process.

However, now our suppliers get paid when they put the goods on the ship coming to the US, which helps minimise our financial risk… I am responsible for developing and implementing sustainability strategy across the supply chain and I make sure that I live up to the sustainability expectations of our retailers, regulators and customers.’

Full interview at www.accaglobal.com/ab/171 CFO, Kizan International Edition 10 | 31

Accountancy Futures | Smart finance | Viewpoints

Helmut Hauke FCCA To gain the confidence of investors and bankers alike, Canadian oil company Freemont Resources needed a set of audited financial statements. ‘If you don’t get your audit, then you don’t get a bank loan, and you don’t get new investors to join your company… What a financial executive brings to the table is control, financial structure, and a way to describe the company that will not only be meaningful to auditors and bankers, but to potential shareholders and buyers as well.’

Full interview at www.accaglobal.com/ab/170 CFO, Freemont Resources 32 | Edition 10

Ahmad Fuaad Kenali ‘The key to the success of any CFO is that they must be effective in discharging their duties and in adding value to the company. In order to do this, they will have to be the trusted business adviser to the CEO. Without support from the CEO, it would be extremely difficult to develop and implement changes or improvement… Developing future leaders is key. It is incumbent upon us to develop our talents to build a strong team to support our growth strategy.’

Full interview at www.accaglobal.com/ab/165 Group CFO, DRB-HICOM

Integrated reporting | Sustainability | Accountancy Futures

Integrated thinking

However it is encouraged and led, widespread adoption of integrated reporting will come from leadership at board level, says the IIRC’s Neil Stevenson Edition 10 | 33

Accountancy Futures | Sustainability | Integrated reporting

D Neil Stevenson is managing director, global implementation, at the International Integrated Reporting Council.

ecember 2014 marked the first anniversary of the International Integrated Reporting Council’s International Integrated Reporting Framework. One year on from its launch, numerous developments are now taking place worldwide to encourage the framework’s widespread adoption.

This was an important theme during the World Congress of Accountants in Rome in November 2014, attended by 4,000 people from 150 countries.

Speakers at the conference described a shift in outlook in business towards a wider concept of value creation.

Business needs to respond by planning to achieve long-term outcomes while managing the short term.

The conference made a powerful statement about the

opportunities for enhancing reporting. Professional accountants are in an excellent position to innovate reporting to meet the needs of investors and other shareholders, so it is a prime opportunity for the profession to show how it can continue to add value.

The strategy for integrated reporting (IR) is to achieve the breakthrough: a meaningful shift to global adoption over the next three years. The focus is moving from testing and early innovations to an era when IR becomes mainstream and adopted by a far greater number and range of entities. Our strategy to 2017 includes a number of key themes, such as: * leading practice through IR networks around the world and promoting dialogue between key players

Nick Holland ‘At Gold Fields, integrated thinking and integrated management has been a prerequisite, given the many divergent risks faced by our operations around the world. As such, an integrated report is far more appropriate than the traditional annual report, as equal and appropriate weighting is given to all issues facing a company, not just operational and financial issues.

Integrated reporting offers our shareholders a more comprehensive overview of these divergent risks and provides a more accurate reflection of the impact our company is having on society – communities, suppliers, governments and employees.’

CEO, Gold Fields

Euan Munro ‘State-of-the-art integrated reporting provides us with information on corporate performance across the full spectrum of financial, social, intellectual and natural capital that is necessary for value creation. This gives it a much more complete picture of the long-term prospects of the business, and helps us make better investment decisions.’

CEO, Aviva Investors

Bertrand Badré ‘Integrated reporting does more for an organisation than just facilitate the creation of a holistic report of overall performance. It fosters and embeds integrated thinking; everyone has a common understanding and speaks the same language.’

Managing director and CFO, World Bank Group

Dimitris Lois ‘Integrated reporting reflects how our company thinks and does business. This approach allows us to discuss material issues facing our business and communities and show how we create value, for shareholders and for society as a whole.’

CEO, Coca-Cola HBC

Jean-Marc Huët ‘The call for integrated reporting is beginning to rise in volume. With public trust in business undermined by scandal after scandal, we would do well to listen and act quickly.’

CFO, Unilever 34 | Edition 10

Integrated reporting | Sustainability | Accountancy Futures

Global momentum of integrated reporting Securities and Exchange Board of India: not ‘if’ but ‘when’ for IR

IR crucial part of Japan’s revitalisation strategy

in corporate reporting building a bridge to investors to encourage investment decisions based on integrated reporting and thinking * engaging with the policy and regulatory community to ensure that IR can flourish.

It is clear that to achieve our objective, we will succeed through the influence and advocacy of many institutions and forward-thinking organisations which are well placed to drive adoption in markets around the world.

However it is encouraged and led, widespread adoption will come from leadership at board level. This insight has been well understood for a long time in relation to best practice corporate reporting.

*

Harvard Business School study hails IR as enabler of financial stability

IR promoted by G100 and major superannuation funds in Australia

Malaysian prime minister declares business take-up of IR

Brazilian stock exchange calls for ‘report or explain’ on IR

UK guidance on strategic report consistent with IR

IR set for takeoff in Singapore

South Africa endorses the International IR Framework

European Commission labels IR as ‘step ahead’

Boards drive reporting Among the influencers, company boards are hugely important. As the IIRC highlights in its recent report, Creating value: value to the board, decisions about the nature of company reporting begin in the boardroom, and so the extent to which senior executives drive adoption of IR will be vital in the coming months and years. Corporate reporting, and the thinking that has to accompany it, are boardroom issues. This is where strategy, performance and the development and communication of long-term value are best understood, aligned and led. The International Corporate Governance Network has endorsed this view, revising its Global Governance Principles to include the recommendation that boards should produce an integrated report. Reporting is firmly placed among the responsibilities of top management.

Adopting IR can substantially help boards in meeting their governance responsibilities, and in building and maintaining trust in their organisation. Businesses increasingly need to be seen to be making a positive

»

Globally: Recommendation to G20 on IR World Bank implements IR

What is an integrated report?

The primary purpose of an integrated report is to explain to providers of financial capital how an organisation creates value over time. However, an integrated report benefits all stakeholders interested in an organisation’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policymakers.

An integrated report aims to provide insight about the resources and relationships used and affected by an organisation – collectively referred to as ‘the capitals’. It seeks to explain how the organisation interacts with the external environment and the capitals to create value over the short, medium and long term. The capitals are categorised in the international framework as financial, manufactured, intellectual, human, social and relationship, and natural capital.

Edition 10 | 35

Accountancy Futures | Sustainability | Integrated reporting

CEOs can build trust by

communicating clearly and transparently, telling the truth regardless of how unpopular it is contribution to the societies in which they operate. This has been a repeated theme in debates following the financial crisis. How boards report their performance and their organisation’s impact on wider society is therefore critical. The ACCA study, Understanding investors: directions for corporate reporting, found that two-thirds of investors surveyed had lost trust in company reports since the onset of the global financial crisis.

Separately, research by public relations consultancy Edelman, which conducts a substantial annual global survey to develop a Trust Barometer, shows that the factors seen as building trust in business have changed since 2008. People now place greater importance on engagement and integrity-based attributes such as treating employees well, listening to customers and exhibiting ethical and transparent practices. These factors now carry more importance than operationalbased attributes, including financial performance.

Edelman’s research suggests that CEOs can build trust in themselves and their companies by communicating clearly and transparently, telling the truth regardless of how unpopular it is, and engaging regularly with employees. Clear and transparent communications can be enabled by IR, and trust in the organisation therefore supported.

Read: Creating value: value to the board at http://tinyurl.com/ iirc-value Read ACCA’s Understanding investors: directions for corporate reporting at www.accaglobal.com/ ab/160

Meeting investor needs Even if individual boards are not yet receiving routine requests for integrated reports from investors, this should not be a reason to delay starting the IR journey.

Investors say that they have more confidence in management when they gain a clear picture of the business from its reporting.

Research by PwC has shown that investors want the benefits associated with the broader reporting focus of IR. Its report, Corporate performance: What do investors want to know?, found that 87% of investment professionals surveyed felt that clear linkage between a company’s strategic goals, risks, key performance indicators and financial statements was helpful for their analysis. In addition, 63% believed that the quality of a company’s reporting – including information about strategy, risks and other drivers of value – could have a direct impact on its cost of capital.

However, substantial gaps were perceived between the importance of these topics and the effectiveness with which companies typically report on them. ‘Developing more integrated reports could potentially better meet the needs of investment professionals while also encouraging more cohesive decision-making within companies to support longer-term value creation,’ says PwC assurance partner Zubair Wadee.

36 | Edition 10

Mounting evidence shows the benefits that boards can gain from adopting integrated reporting. IIRC research conducted by corporate communications consultancy Black Sun among organisations piloting the framework identified both external and internal benefits (see box). From an external perspective, many companies found they had better engagement with external stakeholders, including investors. Internally, many companies felt they had better understanding of how they created value, and that there was more collaboration and integrated thinking taking place between different parts of the business. Many organisations found their decision-making improved as a result.

A natural path Boards are increasingly pursuing long-term strategies that integrate wider sources of value creation. This should incline them towards an IR approach; it will become a natural part of boardroom thinking to report organisational performance in relation to long-term value creation – a need and intent that is aligned with the international framework.

Integrated reporting is a sound board response to the challenges of modern business life. Big data, the internet and social media mean that we are now living in an age of transparency. Integrated reporting is a strategic response to the challenges of operating successfully within modern society. It is also about doing the right thing. Increasingly, boards are being expected to recognise that they have a wider purpose beyond delivering financial success for shareholders.

Many leading companies understand this and are embracing IR as a practical means of telling a compelling story about how they are creating longterm value and so contributing to the greater good – not only in pure business terms, but also for society at large. Others will surely follow. ■

What benefits can boards expect from adopting IR? IIRC research conducted by Black Sun among 66 organisations that have already started to implement IR found that:

*

91% have seen a positive impact on external engagement with stakeholders, including investors * 92% believe that they have increased understanding of value creation * 79% report improvements in decision-making * 78% see a current benefit of more collaborative thinking about goals and targets by the board, executives and strategy departments.

Among organisations that have already issued an integrated report, Black Sun found that: * 84% believe that the process has had benefits for their board * 84% have experienced benefits in collaboration between the board and executives * 87% believe that investors better understand their strategy * 79% believe that financial capital providers have greater confidence in the long-term viability of their business model.

Source: Realizing the benefits: the impact of integrated reporting, Black Sun, September 2014

Assurance | Sustainability | Accountancy Futures

Gathering evidence

With integrated reporting gaining traction worldwide, traditional assurance methods face a challenge in adapting to this brave new world

F

ollowing the launch of the International Integrated Reporting Council (IIRC) framework in December 2013, around 100 companies worldwide have engaged in pilot projects, with some already embarking on their first report. While this is a positive step, there are some concerns – recognised by the IIRC – that traditional assurance methods may fall short of what is required for this groundbreaking approach.

Integrated reports are characterised by their concise nature, focus on narrative storytelling alongside hard figures, and projections of value creation over the short, medium and long term. Information is reported in line with the ‘six capitals’, the fundamental elements that allow an organisation to create value. Companies typically report on financial and manufactured capitals, but IR seeks to expand this by including intellectual, social and relationship, human and natural capitals.

Independent assurance should offer an independent conclusion that an integrated report represents an organisation’s strategy, governance, performance and prospects in accordance with the IIRC’s framework.

However, this widens the scope of traditional assurance, and concern is growing over whether existing processes can cope in this brave new world.

‘Integrated reports are the future of reporting. They provide a great opportunity for companies to be much clearer about how they’re creating value and planning for longevity,’ says Dr Helena Barton, partner, Deloitte Sustainability. ‘Auditors can bring credibility by examining the robustness of underlying management processes. We must seek to understand how and to what extent integrated thinking is being applied throughout the business.’

The IIRC recently published two papers outlining the current state of play and inviting feedback. In addition, last October in Brussels it co-hosted roundtables on the subject with the Federation of European Accountants.

In its introductory paper, the IIRC acknowledges that, ‘just as IR is a new approach to reporting, a new approach to assurance is needed, involving a rethink of basic tenets such as independence, evidence-gathering procedures, the subject matter of assurance

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Accountancy Futures | Sustainability | Assurance

and the content of the assurance report’. The IIRC has highlighted the fact that integrated reports may contain information not previously subject to assurance.

As a result, internal systems may not be sufficiently robust to enable the assurance practitioner to gather information effectively. Added to this is the complexity of technical challenges, from ensuring connectivity and completeness to interpreting narrative and futureoriented information. The IIRC also acknowledges that implementing assurance will have an attached cost. However, the benefits of the process in ensuring that integrated reports are ‘investment grade’ should outweigh any additional costs.

Carol Adams, research professor at Monash Sustainability Institute in Australia and a member of ACCA’s Global Forum on Sustainability, believes that IR could represent a real shift in reporting, helping to build a clearer picture of how businesses create value

‘In many ways auditors will

be doing what we’ve always done – being professional sceptics, challenging the client’ in society over time. She adds: ‘In establishing how to assure for IR, it’s important to understand where users want to see credibility added. Assurance must evolve to meet users’ needs.’

David York, ACCA’s head of auditing practice, agrees.

‘In the early years, credibility for integrated reports will be provided by a wide range of assurers, perhaps including stakeholder panels,’ he says. ‘Businesses should consult with their stakeholders on whether the assurance is meeting their needs. As IR takes off and investors in multinational companies demand assurance, a common approach will develop that needs the resources of the largest accountancy firms to provide it.’

In establishing an IR-ready assurance process, participants at the Brussels roundtable suggested that those responsible for a company’s governance could also make statements to explain why they believe the report to be credible and trustworthy.

Other suggestions include a combined assurance model, through which management, internal auditors and external auditors would act together to establish credibility, as advocated by the 2009 King Report on

Governance for South Africa (King III).

‘Assurers will need to build an in-depth, robust knowledge of the reporting organisation, from the top down,’ says York. ‘In this way, they will be better equipped to identify any cracks in the paintwork and offer insightful commentary on the maturity of a reporter’s journey.’

Thinking outside the box Since assurance for IR is uncharted territory, a whole new approach is called for, says Adams: ‘Thinking outside the box will be integral to developing an assurance process that delivers value to both users and reporters. It’s no good just looking at what seems technically desirable.

Assurers need to explore the whole context in which companies are operating, and clarify to what extent an organisation is working to maximise value creation in line with its own definition.’

In terms of balancing numerical data with less tangible narrative elements, auditors are already tackling similar challenges in relation to the auditing of sustainability reports, Barton confirms. It will be a matter of drawing on their experience to assess whether processes are robust and have been drawn up competently.

‘The technical assurance challenges are not insurmountable, and the auditing profession must conquer its fears and develop the capabilities to assure these reports,’ she says. ‘In many ways, we’ll be doing what we’ve always done – being professional sceptics, guiding and challenging the client, looking in murky corners and making tough judgment calls.’

In order to move forward, a regulatory and legal environment conducive to assurance quality is integral to ensure the ongoing quality of IR. From there, the question of how to create consistency and develop an assurance standard for IR is one that, some believe, falls naturally within the remit of the International Auditing and Assurance Standards Board (IAASB), following its work on developing ISAE 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, the recognised international standard used by auditors to ensure the quality of assurance work on non-financial audits.

‘The IIRC’s work to capture a diverse range of views on assuring integrated reports is very valuable and will be a good starting point for our work in this area,’ says Nancy Kamp-Roelands, IAASB’s deputy director.

‘Through our dedicated working group, we will further explore the developments and continue the discussion. Our focus will include the market demand for assurance, the scope of the subject matter on which

Professor Carol Adams ‘Significantly, users will want to have a good level of confidence in less quantifiable elements such as management and governance processes, and whether the extent of social and environmental risks has been captured accurately.

Assurance providers must therefore start with a clean sheet and consider whether the reporter’s actions are really changing the nature of the business, even providing advice on how their reports could be improved. Stakeholder panels could also help establish the credibility of IR and determining whether the report responds to their needs.’

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Assurance | Sustainability | Accountancy Futures

assurance is obtained, the reporting criteria used by preparers and the relevant assurance issues that need to be addressed at the international level.’

Meanwhile, Kamp-Roelands believes that ISAE 3000, which was updated in 2013 and addresses both reasonable and limited assurance, provides guidance for practitioners. In particular, greenhouse gas information ISAE 3410, Assurance Engagements on Greenhouse Gas Statements, offers more detailed guidance.

‘Standards play an important role in uniting auditors under a common set of guidelines,’ Barton says. ‘If existing assurance standards such as ISAE 3000 cannot be adapted to suit IR, a new standard will eventually need to be developed. However, with companies already working on their first integrated reports, this shouldn’t stop us from getting on with the job of assuring them in the meantime.’ For example, companies listed on the Johannesburg Stock Exchange have been required to use IR since 2010 on a ‘comply or explain’ basis, in line with the King III report.

No shortcut ‘South African companies have had a good few years to practice IR, and have also been searching for a suitable assurance model and process for longer than most other countries,’ she explains. ‘This is not easy, and few have yet managed to present full assurance on the integrated report as a whole. Until there is further clarity on how integrated assurance should be conducted, some companies are opting for a combined assurance approach. This takes time, and requires greater involvement from boards of directors in both the monitoring of strategic non-financial information and report production. There is no shortcut, but work is underway and we simply have to keep experimenting until we find the most robust and suitable criteria against which to provide assurance.’

‘Overall, as reporting frameworks evolve towards drawing up more forward-looking, strategic analysis, it’s important to consider to what extent future-oriented information can be verified by a third party,’ she adds.

‘By joining the conversation at an earlier stage, auditors will be in a better position to determine whether a company is making progress on its reporting.’

However, it will be important to keep a balance, confirms York. ‘If standard-setters begin to develop specific standards for IR assurance too early, there’s a risk that reporters will try to produce reports that are assurable rather than continuing to innovate,’ he says. ‘This is where credible, non-authoritative guidance could help.’

With the advent of increasing regulation, such as the European Union’s non-financial reporting directive, there can be no doubt that reporting robust social and environmental data will become ever more important.

The EU’s new directive requires an initial 6,000 companies with over 500 employees to report annually on their social and environmental policies, risks and impacts.

Member states have two years to transpose the directive into law, with the first reports set to appear in 2018.

Despite some of the inherent complexities of assuring IR, there’s also a sense of optimism surrounding the potential for IR to transform reporting and give reporters and stakeholders, including investors, greater clarity on the value companies bring to society.

Tackling the assurance challenge will require ongoing dialogue between reporters, assurers, investors and standard-setters, and may need to vary to cater for different markets. Ultimately, assurance for IR should be determined by market demand, ACCA and the IIRC agree. ACCA sees a role for itself in helping to improve user understanding and prevent ‘expectation gaps’ by building capacity within the accountancy profession and developing tailored education programmes.

‘We have some lofty aims for IR assurance, not least the shift of focus to value creation, streamlining the corporate reporting model, enhancing stewardship and accountability for a broad range of capitals and the more efficient allocation of financial capital,’ says Michael Nugent, the IIRC’s technical director.

‘We recognise that engendering trust in integrated reports will be integral to achieving these aims, and therefore it’s encouraging to see so much innovation and discussion taking place around the issue of assurance.’ ■ Katharine Earley, journalist

Assurance on IR: an introduction to the discussion and Assurance on IR: an exploration of issues are available at http://www.theiirc.org/ resources-2/assurance Edition 10 | 39

Accountancy Futures | Sustainability | A4S project

From acorn to mighty oak Sustainability reporting has evolved from a need to report on companies’ environmental impacts to a transformation in corporate reporting, says Robert Bruce

S

ustainability and accounting always used to be firmly on different sides of a definite divide.

Sustainability folk busied themselves in one silo; accountants hammered out the figures in another.

There was no real connection. And neither side ever deigned much to talk to each other. Then, as the stories of our childhood might have it, along came a prince and transformed the world.

This was the founding of what is now the Prince of Wales Accounting for Sustainability Project (A4S), back in 2004.

And to confirm the transformation, the annual forum of the project in December 2014 heard, for example, the finance director of the UK’s National Grid, Andrew Bonfield, telling the audience that 15 years ago he, as a CFO, had been part of ‘a world chasing the bottom line’, but that world had now gone.

‘We cannot remain immune,’ he said. The skills and motivations of the accounting community were changing and had to change more. Corporate reporting now had to tell the full story and not just that of the figures.

This new world, said Bonfield, ‘impacts our customers, the public attitude towards us, and consumer attitudes’. Even investors now wanted to be in there for the long term.

It was a far cry from the early days of the project. The prince has long argued that accountants needed to do something about what he described at the forum as

Prince of Wales exhorts ‘Work to achieve the cultural shift required in your own organisations to convince your board and senior leadership of the importance of a truly sustainable model. Reach out to your suppliers and customers, and work with them to transform their approaches alongside your own. Seek to convince your peers. I understand that if every one of you here manages to convince just five others to start accounting for sustainability, and then each one of them engages another five each year, in five years’ time we could reach all of the three million accountants in the world. For obvious reasons five years is too long. So each of you needs to rush out and convince 10. And then accountants really will be helping to save the world!’

Prince of Wales’ advice for CFOs delivered to his Accounting for Sustainability Forum in December 2014.

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Robert Bruce has been involved as a journalist and board and committee member of what is now the Prince’s Accounting For Sustainability Project for most of the past 10 years

‘the constraints of an increasingly crowded planet’. He gave an interview on the subject for BBC’s Panorama back in 1989.

ACCA set up an annual environmental reporting award in 1991. Roger Adams, then ACCA technical director, recalls sitting under the Natural History Museum’s blue whale at the award ceremony. But the real change came when the prince took aside his then principal private secretary, Sir Michael Peat – of the family that represent the ‘P’ in Big Four accounting firm KPMG – and berated him about the ineffective nature of his profession (see box, page 42).

The prince subsequently spoke at the annual dinner of the ICAEW; shortly afterwards the then ICAEW president, Paul Druckman, started to chair the small group charged with putting the prince’s vision into words and action.

In a small attic room (which had once been

History was made in

creating a model that brought together financial, narrative and sustainability reporting under one roof Prince William’s bedroom) in Clarence House, the committee got to work. ‘Sir Michael,’ recalls Druckman, ‘brought it down to very simple language.

To him, company reporting had gone wrong and that enabled us to go down the route of value creation rather than just sustainability.’

That was the key to early deliberations and, in 2007, the first report was published. This was where history was made in creating a reporting model that brought together financial, narrative and sustainability reporting under one roof so that the combined effects of these information streams could influence strategy and decision-making directly.

By 2011 what became the International Integrated Reporting Council (IIRC), with Druckman in command, spun out of the project and rapidly went international.

‘Without A4S and the intervention of the prince, we would not be having this conversation now,’ he said. ‘It made things happen.’

The prince told Druckman that it felt like being a father whose children were leaving but would always come back for money. In the words of the project’s executive chairman, Jessica Fries: ‘In an incredibly short time,

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A4S project | Sustainability | Accountancy Futures

CFO network: commitment to act Launched at the 2013 A4S Forum, the Chief Financial Officer Leadership Network is the first grouping of its kind to focus on the role that CFOs play in integrating environmental and social issues into financial decision-making. It was brought together to demonstrate leadership on how companies should respond to challenges including climate change, a rising and ageing global population, rapid urbanisation, and increased consumption – all of which are putting unprecedented pressure on natural resources and the fabric of society.

The network aims to focus on developing and sharing successful strategies so that these become the ‘norm’ across all businesses. This will include improved modelling of future risk and uncertainty, as well as engagement with investors and other stakeholders to increase their understanding of the commercial benefits of sustainable business models.

Members are committed to act as leaders in this area and to engage the wider CFO community; to work to achieve tangible outcomes towards more sustainable business models; to share experiences of ‘successful’ and ‘unsuccessful’ projects in embedding sustainability within decision-making and accounting; to develop guidance to improve transparency in decision-making, including ways to embed sustainability into capital expenditure appraisal and to better model risk and uncertainty; to contribute to the development of improved methodologies for the measurement and valuation of natural and social capital in order that they can be taken into account in decision-making processes; and to improve investor engagement on the commercial benefits of sustainable business models.

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How the Prince of Wales’ project came about Sir Michael Peat, then principal private secretary to the Prince of Wales, was not in his bath when he had his ‘eureka’ moment. He was, he says, reclining in his office when the phone rang. It was the prince, asking for an urgent meeting. He gave me a look, he recalls, of ‘middling to heightened aggression’. ‘All you accountants are useless,’ the prince apparently told him, and went on to point out that ‘climate change was the biggest market failure ever’. That was in 2004. Ten years on, it has all changed. As the prince recalled in his speech to the 2014 Accounting for Sustainability Forum, which celebrated a decade of progress and transformation: ‘As a profession with such strong ethics, and with the link between sustainability and financial success clear even at that time, it was evident that the way accounts were prepared and decisions taken was a barrier to achieving the right results – right for the bottom line, right for society and right for the environment which provides our life support. As I said at the time, we need 21st-century tools to address 21st-century challenges. With that challenge, my Accounting for Sustainability Project was born.’

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A4S project | Sustainability | Accountancy Futures

integrated reporting has gone from a few ideas in that first report from the project that were tested by a few companies, and been turned into global momentum, transforming reporting now and in the future.’

Since then, the work and culture of the A4S project have also been transformed.

‘If you look at the attendee list for the project’s annual forum back in 2007, you see it had a lot of people from the sustainability world,’ says Fries. ‘[With 2014’s] list, the culture has changed. The finance community now takes a direct interest.

It is people from the finance teams, or heads of investor relations – not sustainability experts – who are there.’

The fostering of networks in the CFO community, and building both understanding and enthusiasm there has become the driving force for the A4S project.

‘One of A4S’ most powerful roles,’ says Neil Stevenson, now managing director, global implementation, with the IIRC, ‘is galvanising business leaders with the idea that this is an important part of their role. They need to understand that sustainability is part of their role because it makes business success.’

That idea was at the heart of the 2014 forum, which celebrated a decade of progress but focused on building momentum within the CFO community.

‘Leadership, energising networks and ensuring that the next generation of accountants are trained with all of this at the heart of their role’ is the key for Stevenson.

And that was reflected at the forum.

Richard Mayfield, CFO for retail giant Walmart EMEA, warned businesses that ‘in 10 years your supply chains may have dried up’. And that sort of attitude deals with the basics of power and other fundamental resources, like water, as well as, for example, ensuring that suppliers remain resilient and reliable.

As one CFO responding to the discussions pointed out: ‘We ask all our suppliers to impose the living wage.’ John Rogers, CFO of Sainsbury’s, said: ‘If we don’t embrace sustainability, we won’t have a business in 15 years’ time.’

Expansion Decisions were taken. The CFO leadership network, which has been nurtured and built by A4S, will be expanded worldwide. ‘A4S needs to be a catalyst and a contributor to CFOs and their world,’ says Druckman.

And the momentum is growing. As one seasoned observer suggested, success would be measured by having the majority of FTSE 100 companies’ CFOs on board and contributing. ‘We are a good way down to that mark,’ says Fries, ‘and it gives us a strong basis on which to work.’

The world of the CFO and the finance leader is where the culture is changing.

It makes the link to the board and it ensures reporting is relevant to investors. The acorns planted in the discussions back in that regal bedroom are growing into mighty oaks. ■ Edition 10 | 43

Accountancy Futures | Sustainability | Children’s rights

Consider the child

Companies need to prove that no child exploitation is taking place within their supply chains. It’s not just a corporate governance issue – it’s a reputational one too

J

Rachel Jackson is ACCA’s head of sustainability. She is the staff expert on ACCA’s Global Forum for Sustainability, and represents ACCA on external committees and working groups.

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ust over one in 10 children around the world – some 168 million – are currently working as child labourers. This has now become a business issue – one that has the potential to damage corporate brands where companies are found to have turned a blind eye to the exploitation of children in their supply chains. For businesses, therefore, taking action to protect the rights of children isn’t just about philanthropy; it is increasingly part of essential and expected corporate governance.

As highlighted in the recent ACCA report, Accounting

for children: implementing child rights for better business, companies can have an impact on children’s rights in numerous ways. Products and advertising can have positive or negative effects, while exploitation of children via the internet is a major concern.

The workplace is of particular importance when considering business impacts on children’s rights,

not least as a result of child labour. UNICEF defines child labour as ‘work that deprives children of their childhood, their potential and their dignity, and that is harmful to physical and mental development’.

Employing children under the legal minimum working age – or requiring anyone under the age of 18 to perform hazardous work – is child labour.

The problem is particularly widespread in sub-Saharan Africa, where 21.4% of the region’s children (59 million) are estimated to be involved. In Asia and the Pacific, 9.3% of the region’s children (78 million) are child labourers. Given the increasingly long supply chains involved in global business today, many Westernbased groups could be unknowingly exposed to the risk of child labour. Many industries can be affected, including agriculture and food production, retail, mining, travel and tourism.

The workplace can have an impact in other ways, too.

Children’s rights | Sustainability | Accountancy Futures

Adrian Henriques ‘Children’s rights are an issue for business – because children are important. And this is an issue for a wider range of companies than you might think. Any company should ask itself how it might affect children’s rights, and what those impacts on children are.

‘The workplace can have an impact in a range of ways – particularly in terms of levels of pay. One of the causes of child labour is the low rate of wages paid to their parents. When parents are paid a poverty rate, they have no choice but to get their children to work. So the default position for all companies should be that they probably do have a significant impact on children. It is an issue they need to address.

‘This might not be an issue that comes across the desks of accountants every day. But what is the remit of the accountancy profession? It’s not only to look after the money, but also to look after the public interest. Accountants have a mandate to look at their business more broadly and consider children’s rights.

‘When children’s rights are not respected, that could create a risk for the business. Considering the business impact on children’s rights ought to be part of any due diligence review of risk – which is a familiar activity to accountants.

‘Finally, we are seeing an increasing number of regulatory requirements around non-financial reporting, and these include the reporting of issues related to human rights. So this is an issue that is only going to figure more strongly in the lives of accountants in future.’

ACCA Global Sustainability Forum member

Samah Abbasi ‘Children matter to business – as consumers, family members of employees, young workers, future employees and business leaders. When businesses think of children’s rights they almost always refer to the risk of child labour in the supply chain. But almost every business activity leaves a footprint of some kind on children’s lives.

‘More companies are beginning to recognise that protecting children’s rights is good for business as it leads to better risk management, enhanced reputation and the social licence to operate, a motivated workforce and a stable and sustainable business environment while also delivering long-term shareholder value.

‘The UN Guiding Principles on Business and Human Rights have changed the expectation of business. The growing demand for corporate reporting on human rights from consumers, shareholders, investors and governments increases the pressure on businesses to undertake due diligence. This process regularly identifies, prevents, mitigates and accounts for how impacts on human rights, including those of children, are being addressed. It firmly moves businesses away from a reactive approach to human rights and towards one whereby it is their responsibility to seek out and address any actual or potential negative impact their activities may have on individuals and communities.

‘For businesses new to this concept, the process may seem daunting. That’s why UNICEF developed the Children’s Rights and Business Principles, which guide companies on the actions they can take to respect and support children’s rights. It has also created tools that help businesses integrate children’s rights into due diligence processes.

There’s much more to this approach than businesses just avoiding harm. The private sector can be an incredible force for good in children’s lives and companies should consider how they can leverage their resources, skills and innovative approaches to ensure that core business achieves transformational change for children.’

Policy and research officer on child rights and business, UNICEF

If parents are paid wages below the level that they need to support their families, then their children may be forced to earn an income. Every company board should therefore be asking and addressing a number of questions around children’s rights and the workplace, encompassing child labour, working conditions, migrant workers and discrimination.

Benefits and risks When boards ask such questions and take steps to protect children’s rights, the benefits can extend beyond enhanced risk management. Corporate reputations can be strengthened when businesses are perceived to behave responsibly, and the social licence to operate is secured.

Businesses that take their responsibility towards children seriously may also become more attractive to prospective employees, and benefit from greater

staff retention and motivation. Many employees are parents, for example, and appreciate employers who pay a fair wage and offer good working conditions.

In general, businesses that play their part in supporting the communities in which they operate – including protecting the interests of children by minimising pollution or supporting educational opportunities – help to create a stable and sustainable business environment.

If these are potential business benefits of protecting children’s rights, so there are risks that arise from ignoring them. These include increased risk exposure, potential legal action, reputational and brand damage, human resource challenges and an unstable social and business environment. In effect, if business and finance leaders fail to take account of children’s rights, they run ethical, reputational and legal risks that will affect the bottom line.

In Bangladesh, more than 650,000 children live on the streets.

They are found working in almost all the sectors of the economy. Many work 48 hours a week and earn less than US$6 per month.

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Accountancy Futures | Sustainability | Children’s rights

If businesses need any more persuasion to act, then shareholders and governments may provide it. There are signs that shareholder groups are becoming more interested in the issue of children’s rights – for example, by questioning whether companies’ advertising and privacy policies adequately safeguard children. Some investors are beginning to develop procedures for integrating children’s rights into their investment decision-making processes. Governments, too, have been paying attention to the way that companies impact on human rights, including children’s rights. Greater transparency is also being expected, with UK quoted companies now required to disclose information on human rights that could affect the business.

Time to act Once businesses acknowledge their responsibilities in relation to children and their rights, the next challenge is to act on those responsibilities across all their operations. The Children’s Rights and Business Principles, developed by Save the Children, UNICEF and the UN Global Compact, provide an invaluable launch pad. The principles build on previous international conventions, and set out actions that businesses can take to fulfil their corporate responsibility to respect and support children’s rights in the widest sense: in the workplace, marketplace and community.

Organisations such as UNICEF have also developed a number of business toolkits. These are designed to help businesses develop policies and codes of conduct in relation to children’s rights, assess their risks associated with children’s rights, take action to address and mitigate those risks, and report on their actions.

Dr Faiza Shaheen, head of inequality and sustainable 46 | Edition 10

Boardroom watch list Questions the board should ask: * How do we know that we are not employing children under the legal minimum working age? * How do we know that our business partners, via the supply chain, are not employing children illegitimately? * How do we know we are not providing poor working conditions and pay, making it impossible for parents to provide supportive environments for their children? * How do we know we are not employing migrant workers who leave their children when they move to new cities or countries in search of employment? * How do we know we are not discriminating against certain groups of children, such as those with disabilities, girls or ethnic minorities?

development at Save the Children, has no doubt that such efforts by business are essential. ‘It is becoming increasingly clear that respecting children’s rights is not desirable but necessary if businesses are to have a strong foundation,’ she says. ‘To fully recognise children’s rights, companies must embark on thorough investigations of their supply chains, core business and sales activities.’

Childhood is a time of physical, mental and emotional development – which can all be affected by the actions of business. Yet children often lack a public voice: they cannot vote or form trade unions; they cannot influence companies through buying stocks and shares, and attending shareholder meetings. Businesses thus have an inescapable responsibility to consider their impacts on children’s rights carefully. ■

You can download ACCA’s Accounting for children: implementing child rights for better business report at www.accaglobal.com/ab137

Syrian child refugees attend a school funded by the European Union at Al Zaatri refugee camp, in Mafraq, Jordan, near the Syrian border.

Sustainable development | Corporate reporting | Accountancy Futures

Looking beyond profit

Businesses are becoming increasingly aware of corporate social responsibility, leading to a change in thinking about accounting, says Song Xianzhong

S

ince the Industrial Revolution, environmental problems and other social issues have become increasingly prominent. The public is becoming aware of the side-effects of the traditional concept of pure economic growth and the idea of sustainable development is now commonly accepted all over the world. Sustainable development includes three areas: ecological, economic and social. It requires any individual or group within the system to shoulder its responsibility. Enterprises should show great concern not only about the realisation of their economic interests, but also about social and public benefits of what they do.

An enterprise’s sustainable development is linked

to global sustainable development. There is no conflict between an enterprise’s value targets and its environmental objectives. One of the important ways for an enterprise to develop its sustainable development capacity is to pay overall attention to the environment, the society and the interests of its different stakeholders. By fulfilling its social responsibility, the enterprise will meet the needs of stakeholders, and establish and carry out its sustainable development strategies. When the enterprise spends resources on engaging in social responsibility activities, this will have an impact on its stakeholders, changing the contract benefits, and thus affecting their overall evaluation of the enterprise.

Âť

Song Xianzhong is vice-president, professor and doctoral tutor of accounting at Jinan University. He is also vice-chairman of the Chinese Institute of Business Administration, and a member of the Chinese Accounting Association Advisory Expert Group of the Ministry of Finance on accounting standards and the National Master Professional Accounting Education Steering Committee.

A woman wearing a mask to protect her from smog in Beijing, where air pollution is a huge problem.

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Accountancy Futures | Corporate reporting | Sustainable development

Since the public is paying more and more attention to corporate social responsibility, CSR reports have become a new way for enterprises to release information. They also enable the public to measure and supervise an enterprise’s CSR performance. The emergence of social responsibility accounting and social responsibility reports has had a huge impact.

First, it has changed the thinking patterns of traditional accounting, which tends to adopt a closed and onedimensional thinking pattern. That is, it regards a company as an independent system and is only concerned with the enterprise’s financial situations and its operating results. The enterprise is simply a subordinate unit of the economic system. However, social responsibility accounting adopts an open thinking pattern, placing the enterprise into the whole society, taking it as not only a subordinate unit of the economic system, but also a subordinate unit of the political, environmental and social system. This transformation has triggered a revolution in the field of accounting academic ideology.

Social enterprise Second, CSR has helped to coordinate the relationship between the enterprise and social environment. The theoretical basis of traditional accounting is to treat the enterprise as a pure economic organisation, or a profit organisation, rather than a social one. Thus the aim and mission of an enterprise is to make the biggest profits. Profit is considered to be an enterprise’s only contribution to the society. Under this view, when making strategies, managers tend to focus on ways to maximise profits and ignore social responsibility.

From the CSR point of view, however, the enterprise is not only an economic organisation, but more importantly, a social one. It is a basic cell of society.

Thus the aim and mission of the enterprise should also place emphasis on social responsibility and legal requirements, committing itself to improving society.

An accountant should properly recognise, measure

‘If accountants only provide

information on an enterprise’s profits, they exclude the interests of most people’ Papier mache pandas in Hong Kong as part of a world tour to highlight the fact that there are only 1,600 living pandas left in the wild.

Demonstrators wearing masks of world leaders at the recent UN Climate Change Conference in Lima, Peru.

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and report information on how the enterprise achieves this aim and mission. If they only provide information on the enterprise’s profit objective, accountants exclude the interests of most people in society, which may induce the enterprise to ignore social benefits and go against the direction of social development. Social responsibility accounting can use its own mechanism to report social responsibility performance, reflect social benefits and operating costs, and hence coordinate the relationship between the accounting unit and society.

In the 21st century, China’s State-owned Assets Supervision and Administration Commission (SASAC) and the Stock Exchange have respectively required enterprises to disclose their social responsibility information. External environmental pressure and greater public awareness of social impacts have urged enterprises to consciously choose the road of sustainable development. In 2013, nearly 800 enterprises in China published CSR reports. Such reports will develop in a more comprehensive way in the future through an organic combination of financial and non-financial indicators as well as an organic unity of economic, environmental and social performance. ■

Confidence accounting | Audit | Accountancy Futures

How much?

Michael Mainelli and Ian Harris explain why they believe that accountancy should be seen as a measurement science

P

rofessor Michael Mainelli FCCA, along with his colleague, Ian Harris, wrote an award-winning book based on his 2005 to 2009 Gresham College lectures. The Price of Fish: A New Approach to Wicked Economics and Better Decisions explored economics, systems theory, decision-making and evolution as four intertwined streams people needed to understand in order to make big decisions about commerce. In the book, they put forward an intriguing idea, that accountants should recognise that accountancy is a measurement science. Such recognition would mean that accountants should move from discrete numbers

to ranges and confidence intervals. They encouraged all business people to use ranges where appropriate, suggesting the mnemonic BET% – Bottom, Expected, Top, % likelihood in range. This suggestion grew into a structured proposal: Confidence accounting: a proposal by Ian Harris, Michael Mainelli and Jan-Peter Onstwedder of Z/Yen Group published by ACCA, Long Finance and the Chartered Institute for Securities & Investment (CISI) in July 2012.

Luminaries such as Sir David Tweedie, former head of the International Accounting Standards Board, and Andy Haldane, chief economist at the Bank of England,

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Accountancy Futures | Audit | Confidence accounting

Professor Michael Mainelli FCCA is co-founder of City of London think-tank Z/Yen and a member of ACCA’s Global Forum for Governance, Risk and Performance.

Ian Harris is co-founder of Z/Yen, which has created award-winning statistical systems.

have come out in support. Confidence accounting suggests the use of distributions, rather than discrete values, where appropriate in auditing and accounting.

The authors claim that in a world of confidence accounting, the end results of audits would be presentations of distributions for major entries in the profit & loss, balance sheet and cashflow statements.

The proposed benefits of confidence accounting include a fairer representation of financial results, reduced footnotes, more measurable audit quality and a mitigation of mark-to-market perturbations. So how did this begin? The following is an extract from The Price of Fish:

Numbers, numbers ...take one fundamental and universal area of commercial measurement, financial accounts. Accounting measures are presented as specific numbers, not ranges, despite their inherent uncertainties.

When Global Megacorp states its turnover as $71,393,224,326.73, you know this number is a fiction.

This is typically an estimate of the mean of turnover, but you don’t actually have the distribution of values to know more. Accountants grapple with significant uncertainties when computing turnover. Auditors have materiality issues with the consequences of that uncertainty. Realising the obvious absurdity and statistical improbability of purporting to know a huge corporation’s turnover to the penny, accountants laugh and happily round things off, but still neglect to give us any idea of the range of the distribution. One number alone is sought to describe complex distributions, typically the mean.

The three frequency charts (shown below) show the same mean turnover, $71,393,224,326.73 under today’s

deterministic ‘one number’ paradigm. However, that mean turnover has a very different meaning in each case. Scenario A is the least of anyone’s problems. The differences in values across the range $71,393,224,325.75 to $71,393,224,328.50 are infinitesimal, each of the potential individual differences making up that range amounting to pennies. Scenario B has an alarmingly wide range ($50bn to $90bn), normally distributed around the same mean turnover figure. In fact, there is a 90% chance that the turnover will fall between $61bn and $84bn, which doesn’t exactly increase confidence in the mean value. In Scenario C, the distribution is heavily skewed, with the most likely outcomes being significantly lower turnover than the mean outcome (median turnover is $50bn).

There are possible outcomes at significantly higher turnover than the mean. All that we can say with 90% likelihood is that turnover falls within the range $0bn to $172bn. Much like Scenario B, Scenario C is a dream for the accountant who is being asked ‘just give me the figure’, but a nightmare for the auditor trying to work out whether that figure is justifiable.

As in all accounting statements, too many measurable items that end up in a profit figure are ranges, from the estimate of gains in freehold land value to the likely profit on individual contracts to the value of insurances. To ensure total clarity, we litter accounts with explanatory footnotes to the point that only highly sophisticated financial analysts can understand them.

When the accounts are presented, these financial analysts tear them apart in order to try to rebuild estimates based on ranges.

Audit is all about measurement, yet in practice financial audit is virtually bereft of all the usual scientific terminology one finds around measurement:

‘The overreliance on

single numbers ensures that auditors get off very, very lightly, practically skipping away’

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Confidence accounting | Audit | Accountancy Futures

Frequency

Scenario A: the sure thing

71,393,224,325.75

71,393,224,328.50

»

The three frequency charts on the right show the same mean turnover under today’s ‘one number’ approach, but the mean turnover has a very different meaning in each case.

50,000,000,000

90,000,000,000

Scenario C: skew you, auditor

Frequency

confidence intervals, range estimates, sampling techniques, probability distributions. In short, we believe that financial audits need to be more scientific.

If auditors do practice risk-based auditing, then why can’t we see the odds they face? This simple question raises a number of concerns about the approach to financial statements in auditing by today’s accountants.

Balancing the odds might well give a truer and fairer picture of accounting than traditional ways of balancing the books. We call this probabilistic or confidence accounting.

Much like the Soviet era, there is a surfeit of old jokes in which an accountant delivers the punch line: ‘What do you want the number to be?’ The uncomfortable truth is that accountants have quite a bit of influence over the final number. Indeed, accountants and auditors throw away tremendous amounts of information, as they principally use fixed numbers in almost all their calculations. The financial community knows that the annual report is subject to tremendous uncertainty, but will find little evidence therein. The key community for the annual report, investors, spend more of their time on reconstruction of the underlying ranges or guessing other investors’ sentiments than worrying about the

Frequency

Scenario B: the wide range

0

275,000,000,000

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Accountancy Futures | Audit | Confidence accounting

This extract in this article is from The Price of Fish: A New Approach to Wicked Economics and Better Decisions (Nicholas Brealey Publishing).

annual report’s singular guess at what reality might be.

Surely no theory of measurement has wasted so much effort ignoring the real world.

Intriguingly, the overreliance on single numbers ensures that auditors get off very, very lightly, practically skipping away. How do you hold an auditor to account?

If you can prove that the profit figure is incorrect by $1, is that enough to claim that the accounts are invalid?

Certainly not. $100? Well, when? In fact, auditors have cleverly avoided giving us anything substantive to go on, such as ‘The auditors are 95% certain that profits were between $X and $Y.’ We believe that the auditing profession would benefit from such disciplines and that audit failures (of which there are far too many) would then become that much rarer. We advocate forcing auditors to lay these ranges out clearly and to provide indemnities to support their ranged opinions.

The term we use to describe this approach, confidence accounting, has an intriguing double meaning. It uses confidence intervals rather than absolute numbers, plus we believe that the approach should cause people to have more confidence in accounts. For example, once profits are expressed as ranges after allowing for doubt, users of those accounts should 52 | Edition 10

have more confidence in the profits thus recognised.

We also believe that the approach introduces useful feedback and control loops into the regulatory system. Regulators could, in changing circumstances, change the confidence limits to be applied to certain accounting factors. For example, following a banking crisis, confidence intervals used by banking regulators to determine reserve levels could be tightened or loosened in order to restore market confidence and/ or vary liquidity.

We use the acronym BET% to describe this approach: Bottom, Expected, Top, and % likelihood. We have talked about overreliance on single numbers in the context of financial accounting measures, but the principle of using ranges instead of discrete numbers applies to all manner of measures. In fact, we advocate pinning down all commercial measurers to their estimates using BET%. ■ See also the paper by Michael Mainelli and co-published by ACCA, the Chartered Institute for Securities & Investment and Long Finance, Confidence accounting: a proposal, at www.accaglobal.com/ab96.

Extended reporting | Audit | Accountancy Futures

Binning the boilerplate

With new-style audit reporting due to begin next year, auditors are bracing themselves for the accompanying challenges. Audit will never be the same again

A

udit reporting is changing forever. The brief, binary, clean or qualified boilerplate auditor report known to generations of auditors and readers of accounts is being consigned to history.

Extended auditor reporting, which is about to be introduced across the globe, can trace its roots back to the financial crisis.

The International Auditing and Assurance Standards Board (IAASB) has published its finished work on extended auditor reporting, with implementation slated for year-ends December 2016. The US is working on its own standard but the two are closely aligned, with similar concepts and much discussion between the standard-setters.

Sue Almond, ACCA’s external affairs director, says that extended reporting is ‘one of the most exciting developments in audit reporting in my whole professional career. There have been no significant changes in auditor reporting – certainly on a global basis – in 30 or 40 years. This is the standard-setter trying to be responsive and make a major step forward.’

In the UK, the Financial Reporting Council decided to move ahead and take a lead before the IAASB had completed its work.

The result is a glimpse into the future of audit reports. Notable examples include KPMG’s report on Rolls-Royce (above) – which runs to five pages – which detailed the risks that had the greatest effect on the audit, the procedures it undertook and its findings.

Providing colour An extended audit report is all about responding to the demands for more information. The idea is to enhance the information value of the binary nature of the pass/ fail audit report and to provide users of accounts with colour around what happened in the audit and where some of the key audit judgments were made.

Brendan Murtagh FCCA, former ACCA president and founding partner at LHM Casey McGrath in Dublin, joined the IAASB in 2012. He is one of 18 board members responsible for developing and revising the auditor reporting standards over the past three years.

‘Following the financial crisis, it became clear the level of information in the audit report needed to be improved and there needed to be greater transparency,’ he says.

‘As we worked through the project, what became clearer was that it was not an expectation gap but an information gap that we needed to bridge.’

The principal change facing auditors is reporting on key audit matters: those issues that have taken up the time and effort during the audit. ‘It is a judgment piece

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Accountancy Futures | Audit | Extended reporting

for the auditor who is required to discuss the issues with those charged with governance and then disclose in the audit report why it is of significance, how the auditor has responded and how sufficient comfort has been achieved to be able to give the audit opinion,’ Murtagh says. So while the audit opinion (clean or qualified) will be at the top of the report, the detailed context for that opinion will be presented – and that represents a fundamental change. The result, Murtagh says, ‘is intended to put information in the hands of the users so they can make a more informed decision’.

‘Game changer’ Diana Hillier, PwC partner for international standards, says: ‘These new standards give us an opportunity to deliver innovation and insight in a way not previously permitted. We can demonstrate publicly the relevance of the audit, rebuild trust in auditors and, crucially, underpin confidence in reported financial information.

This a game changer for all stakeholders.‘ And game changers are never universally welcome.

There is bound to be nervousness, with questions raised over issues such as liability. But once an audit is subject to a legal challenge, anything becomes discoverable.

Almond points out: ‘There is nothing in the extended audit report which shouldn’t be in the audit file anyway.’

Such a major step forward will not be without its problems in practice. The IAASB has tried to limit the degree of specificity in the standard to allow practice to develop and evolve. Almond says: ‘Only when you come to write some of these things do you uncover some of the practical challenges from both the company perspective and the auditor perspective.’

Too bright a light?

But is there a danger that the light shining could be too bright in some circumstances? When the economy is benign an extended audit report may not worry management but when times get tough then Stenhouse warns that ‘these audit reports will become trickier’. If the entity does not value external audit, then they won’t value an extended audit report. ‘However, the best boards will know that there is comfort from, and value in, the fact that stakeholders and investors get an audit report which shows that auditors have looked at the right thing, know their business, and are engaging and challenging the entity appropriately,’ Stenhouse adds.

There may well be some questions raised over specific, heavily regulated sectors. ‘For systemically important sectors such as banking, the regulators are already alive to the impact on the market if auditors were to say something that could cause a run on a bank or

‘The regulators are already alive to the impact on the

market if auditors were to say something that could cause a run on a bank or provoke some sort of economic contagion’

Indeed, the extended auditor report is an opportunity for auditors to show off their stuff. ‘Audit partners will be wary of significant change but the other side is it opens up opportunities,’ Almond says. ‘The debate about competition and concentration underlines there is very little that allows firms to differentiate themselves.

There is an opportunity for firms to look at the way they report in the audit report – the final product – and the quality insights they give. There is an opportunity for more to be in the public domain which reflects on the quality of what they do.’

Robert Stenhouse FCCA, chair of the ACCA Global Forum for Audit and Assurance and director of UK national accounting and audit at Deloitte, agrees, describing himself as a huge fan of extended auditor reporting. ‘I encourage ACCA auditors around the world to grasp this opportunity and use their audit reports to showcase what fantastic work they do,’ he says. Through the reports, auditors will be seen to respond to challenges in a way that should resonate with stakeholders, Stenhouse adds. ‘We need more transparency about what auditors do and how they do it. We should no longer live with the pretence that everyone knows what a bland audit report means.’

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provoke some sort of economic contagion,’ Stenhouse says. ‘As extended reporting spreads around the world, there needs to be appropriate recognition that this is a powerful communication mechanism.’

So far, feedback from a pilot suggested that auditors were confident that they would be able to identify the right key matters. ‘We see implementation bringing both opportunities and challenges,’ Hillier says. ‘The new reports will be as new to management, audit committees and users as they are to auditors; we will all be on a learning curve. The aim is audit reports that are insightful and tailored to the company. It would be a setback if this just becomes a boilerplate exercise. That said, there will be a certain degree of similarity when auditors address similar facts, circumstances and outcomes, both for the same company over time and across industries. But that, in and of itself, provides insight.’

The point of extended auditor reporting is that it is set to allow auditors to enhance audit quality, improve transparency and alter their engagement with stakeholders. Audit, never mind the audit report, will never be the same again. ■ Peter Williams, accountant and journalist

IFAC | Public value | Accountancy Futures

Core truths

IFAC president Olivia Kirtley reveals her take on the accountancy profession and its challenges globally, and how her organisation is leading the way Edition 10 | 55

Accountancy Futures | Public value | IFAC

O

livia Kirtley, the president of the International Federation of Accountants (IFAC), believes that, to develop and prosper, every country needs the core skills of professional accountants.

Take the war-torn central African state of Rwanda.

According to a World Bank estimate, in 2008 the country possessed just 45 qualified accountants and no professional organisation to support them. Such scarcity makes it nigh-on impossible to access funding from donors and others to finance national reconstruction.

‘Those core accountancy skills are needed to build transparency and accountability for strong, sustainable government, companies and societies in general,’ says Kirtley. ‘Accountants have ethical standards and competencies, they ask the right questions and they know how to put the information together.’

Thanks to IFAC’s work, Rwanda now has 285 qualified accountants, supported by a growing national accountancy body. Kirtley describes it as a great capacity-building success story. She hopes the work will continue, with IFAC’s Memorandum of Understanding to Strengthen Accountancy and Improve Collaboration (Mosaic) website helping improve cooperation and collaboration between IFAC, international donors and the development community.

Building relationships Cooperation and collaboration are the touchstones of Kirtley’s own career success. Sharing and building professional networks outside the formal workplace has helped take her to the presidency of IFAC – a twoyear position. And she acknowledges ACCA as ‘one of the largest and most important partners in IFAC and a huge supporter’. In her speech to the International Assembly in November 2014 she noted ACCA’s large student membership and said ACCA often identified talent in locations around the world where IFAC itself has trouble finding representation. Looking ahead, she is seeking to build stronger understanding and relationships between the accountancy profession and interest groups such as legislators, regulators, investors and the business community.

Describing how she entered the profession 40 years ago, ‘a simple girl from a farming community’ in the US, she was looking for a job to fund her husband through medical school. She got her break in what was then overwhelmingly a man’s profession when a senior partner hired her on the spot – without consulting his partners – after she drove 100 miles for an interview two days before her wedding. ‘It only takes one person to make a difference,’ she says, and believes that we all have to show ourselves worthy of the trust that others place in us.

Global representation One of IFAC’s key tasks is to represent the profession globally. Kirtley says: ‘We do advocate on behalf of the profession where we see it is serving the public interest; we have to tell the public what we do and how 56 | Edition 10

Olivia Kirtley Olivia Kirtley brings a breadth of experience to the role of IFAC president. The only gap in the CV is that she hasn’t been a regulator, although she has met plenty in her time. A business consultant, she is also a non-executive director of three public companies: US Bancorp, Papa John’s International and Rescare.

She was previously vice president of finance and CFO of a global manufacturer and a joint venture of Emerson Electric and Robert Bosch. She spent the first decade of her career with Ernst & Ernst/Ernst & Whinney (now EY) in both audit and tax.

What’s on the mind of global accountants?

Integrated thinking and fighting fraud were top of the agenda at the ‘Olympics of the accountancy profession’ in Rome in November 2014. Watch our World Congress video to hear the views of leading accountants from around the world on the big issues and challenges facing the profession.

Visit www.accaglobal.com/ab139

we make a difference, and why we are important to society in general.’ She says the profession does not always appreciate the views of regulators because it is too busy defending its position and that of its clients, but even-handedly points out: ‘Regulators don’t listen because they think they already have the solution or at least a political soundbite. Through building relationships you build trust and, when it comes to the next inflection point or crisis, there is a greater chance both sides will reach out and talk.’

While acknowledging the importance of improving standards, she is clear that the process should be evidence-based. One of the problems that she perceives is regulatory fragmentation at a regional and global level. She points to the European Union setting

‘We have to tell the public what we do and how we make a difference, and why we are important to society in general’ out a broad framework of mandatory audit firm rotation but then leaving individual countries to implement it, with the result that each EU country ends up having its own rules. Kirtley adds that she has heard of whole audit teams moving from one firm to another to comply with the rules on rotation of firms. ‘It sounds good in theory until you start working through the detail,’ she says.

She reiterates that IFAC is a member body whose purpose is to serve its members. Power comes, she says, from leveraging what each member body does well and the work they have already done. ‘There is a tendency to be insular. We are all doing great work but we’re not aware of what others are doing. IFAC is there to spearhead initiatives where the member bodies think that we can be uniquely effective in terms of reach or relationship.’

IFAC | Public value | Accountancy Futures

Ndung’u Gathinji receives IFAC’s Sempier Award at the World Congress of Accountants in Rome.

African accountants in the spotlight IFAC president Olivia Kirtley championed the capacity-building work of the global accountancy profession, particularly for the benefit of emerging economies and their populations, when speaking at the World Congress of Accountants in Rome in November 2014.

She told delegates of the Memorandum of Understanding to Strengthen Accountancy and Improve Collaboration (Mosaic) that IFAC has signed with key groups in the international donor community.

‘Out of this agreement we have launched the Mosaic website, which will provide a “marketplace” to match the developmental needs identified by national professional accountancy organisations with the funding interests of potential donors,’ she said.

IFAC also underlined the importance of building capacity in accountancy skills by awarding this Congress’s Sempier Award – recognising outstanding contributions to the accountancy profession – to ACCA member Ndung’u Gathinji FCCA of Kenya.

‘Gathinji’s pioneering efforts to launch the Pan African Federation of Accountants, Institute of Certified Public Accountants of Kenya, and the former Eastern, Central and Southern African Federation of Accountants have ensured that the value of the profession has been understood and embraced in Africa in a way that would have been otherwise impossible,’ she said.

In a compelling acceptance speech, Gathinji charted his career from boyhood in colonial Kenya, his training in the UK and rapid return to Africa, and the subsequent decades spent developing both his own career and the accountancy profession, including the IFAC committees he served on that worked to increase focus on the need to support the profession in emerging economies. He thanked many, including ACCA, naming chief executive Helen Brand for the support he had received.

‘Africa is on the rise. If you need convincing, just look around the hall,’ he said.

The three Ps As a former CFO Kirtley identifies three challenges for today’s finance heads: people, process and pace of change. In terms of people, she cites internal audit – does it have the right people with the right skills for areas such as cybersecurity?

Likewise with processes, companies must get to grips with issues such as big data. ‘As the finance function you can’t keep producing the same reports and be effective; you have got to go out and ask people what they need to do the job better.’

And then there is the pace of change. Kirtley asks whether accountants are moving fast enough to provide the reporting information that investors really want.

She says the key lessons of the past crisis are not to allow controls imposed for a good reason to be overridden;

to be sceptical and not too trusting; to keep digging until you get satisfactory answers; to avoid group-think and not be afraid to ask questions even if no one else seems to think they are worth asking. ‘Our duty as management and auditors is not to take things at face value,’ she says.

With that sort of outlook – and her confession that she loves finding solutions to challenging problems – IFAC looks set to take an ever greater role in the global leadership of the profession. ■ Peter Williams, accountant and journalist See our interview with Olivia Kirtley at the World Congress of Accountants at www.accaglobal.com/ab140 Edition 10 | 57

Accountancy Futures | Global economy | Africa

Cracking the skills mine One of the key challenges facing the finance sector in Botswana is the lack of qualified accountancy professionals, says ODC’s CFO Susanne Swaniker-Tettey

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Africa | Global economy | Accountancy Futures

Susanne Swaniker-Tettey FCCA Susanne Swaniker-Tettey began her career as an audit trainee with Deloitte & Touche in Ghana. From there she moved to Deloitte & Touche Gaborone in Botswana, where she gained her ACCA Qualification and became a senior audit manager. In 1999, she spent five months in the US on secondment as an audit trainee at Deloitte & Touche. In 2004 she joined mining and smelting company BCL (Selebi Phikwe) as finance manager, after which she moved to the Tati Nickel Mining Company (Botswana) as commercial manager. In 2008 she gained an MBA at Oxford Brookes University in the UK, after which she joined Boteti Mining (Botswana) as CFO, before moving to Okavango Diamond Company in January 2013.

W

hile Africa can be a tough place to work, it offers key opportunities for skilled financial professionals who can develop an understanding of how African business operates.

Susanne Swaniker-Tettey FCCA, chief financial officer at Okavango Diamond Company (ODC), is one such specialist. ODC is a Botswana-based rough diamond distribution company established in 2012 and wholly owned by the government – the diamond sector is critical for the national economy.

Swaniker-Tettey, who has more than a decade of experience working in Africa, says: ‘Working in the finance sector in Southern Africa, especially Botswana, can be very challenging.’ Her daily routine is based on the corporate reporting, audit and business planning regime typical in sub-Saharan Africa, where finance personnel often take an active management role and may act as thinktanks for other departments.

Skills drive One of the key challenges facing the sector in Botswana is the lack of qualified accountancy professionals.

‘Getting the right skills with depth and experience is still relatively difficult, because Botswana historically has not had its own accounting qualification.’

Part of the problem, she says, is that while many local colleges are training accountants, they are doing so with full-time accounting programmes. ‘So most of the trainees, when they finish, have qualified on paper, but they do not have the depth of experience of someone who has gone through a formal [work-based] training,’ she says. Reforms are in the pipeline, notably those authorised by the Botswana Accountants Act of 2010, which requires qualified accountants to have a minimum of three years’ hands-on training.

Swaniker-Tettey also fears that financial professionals in Botswana are inadequately trained to handle money laundering, and ignorant of the risks. ‘Most accountants believe that money laundering is for the banks and banks should deal with it,’ she says. ‘Not enough is being done to educate the people who are supposed to be the custodians of companies’ finances. Money is moving under their nose and some of them are not cognisant of things happening in their companies that could be deemed money laundering.’

She urges companies and industry associations to partner with the country’s recently formed Financial

Intelligence Agency (FIA) to raise awareness about anti-money laundering policies and controls. This is a particular concern in the diamond industry, where Swaniker-Tettey fears diamond cash purchases could offer a way to move dirty money in and out of the country. ODC, for instance, insists on knowing the identity of all buyers of diamonds in any deal. ‘If we allow the industry to be tainted, the negative consequences not only affect ODC but the country as well.’

Diverse continent This is especially important internationally, given Africa’s poor reputation for business probity – one that Swaniker-Tettey believes is not necessarily deserved.

‘Doing business in Africa is no more difficult than in any other part of the world,’ she says. ‘Yet people think Africa is risky. Africa is an incredibly diverse continent.

If you understand Africa, I do not think working here is an impediment to doing business.’

Indeed, regional economic integration within Africa, increasing regional tourism and a booming mobile money industry are all helping open up the continent to business, notably in East Africa. However, she is quick to point out that the Southern African Development Community (SADC) region is lagging behind West and East Africa. ‘SADC has made progress around customs, but in trade there is a lot that needs to be done.’ She adds that the region needs a common currency and an end to the cumbersome, multiple visa applications that are required for those travelling within the region.

‘Doing business in

Africa is no more difficult than in any other part of the world. Yet people think Africa is risky’ At home, she believes the Botswana government should promote IT, data integration and online services. She acknowledges there has been progress on the latter – for instance the country’s laws are now available online – but says: ‘There is too much paperwork in Botswana. We need to have the processes streamlined.’

Meanwhile, Swaniker-Tettey believes more women can and should rise professionally in Africa, as she has, through the financial industry. ‘We need more females at senior finance positions, especially at the board level, but I do not think there needs to be any discrimination in favour of women. Women must be treated fairly and given the same opportunities as men. We need to do more as women to ensure that we get into positions, put up our hands, and when opportunities come to make ourselves available and also to be more aggressive.’ ■ Andrew Maramwidze, journalist based in Gaborone Edition 10 | 59

Accountancy Futures | Global economy | Europe

Expansion and ethics

Targeting market share is the best way to drive corporate growth, and is best underpinned by ethical values, finance chiefs heard at the recent CFO European Summit

G

iven today’s uncertain global economic environment, it is up to CFOs to manage expectations and push for their companies’ long-term growth through clear planning and a responsible corporate culture. Business leaders from across the globe discussed how to navigate these issues at the seventh CFO European Summit, organised by ACCA Poland and staged in Warsaw at the end of last year.

Whatever the economic conditions, companies are always looking for growth. But today, although the global economy is looking up in general, the European economy is still sluggish. And with instability in the Middle East rearing its head again, a simmering war in eastern Ukraine adding to geopolitical worries, and continuing fears over a potential Ebola crisis, investment risk remains high globally.

How then should CFOs focus and manage their growth strategies to maximise returns, while staying ahead of potential risks?

Marcin Sojda, central Europe group finance manager at Procter & Gamble (P&G), told the summit: ‘Growth doesn’t always mean more. Sometimes it can mean less.’ He explained to the audience that P&G was in the process of spinning off more than 100 brands, many peripheral to its core business of personal care products; for instance, it is selling its Duracell battery

division. This strategy has enabled the company to 60 | Edition 10

Left to right: Daniel Thorniley, president of DT-Global Business Consulting; John Rendall, CEO of HSBC Bank Polska; Jarosław Gugała, journalist and broadcaster; and Allan Dowie, CFO of Clyde Blowers Capital IM.

focus on its core businesses, he said, enabling it to build valuable market share in its key segments.

Market share was a major theme at the conference, with speakers time and again declaring that while achieving good top and bottom-line figures is important, increasing market share is the real key to sustainable growth.

For example Scotland-based Clyde Blowers Capital, an investor in industrial businesses, significantly grew its market share even while the global economic crisis was

‘My experience is that whenever we focused on defining values, we generated value’

continuing. The company’s CFO Allan Dowie said this had been achieved by investing in sales and entering new markets just as others were scaling back in 2008. Sales have subsequently increased from the wider client base.

But when looking to enter new markets, businesses need to have a clear strategy. John Rendall, CEO of HSBC Bank Polska, said that companies need to set out explicit financial parameters. ‘When you understand your business and those parameters, then

Europe | Global economy | Accountancy Futures

it enables you to act decisively when an opportunity arises. The better prepared you are, the more able you are to make a decision,’ he said.

Tomasz Suchanski, deputy CFO at Jeronimo Martins Group, said that expansion strategies need to take into account the differences in the markets a business might be considering entering. Outside its home country of Portugal, Jeronimo Martins has retail businesses in Poland and Colombia, and adopted very different strategies to enter them. It took the acquisition route into the Polish market, and the greenfield investment route into the Colombian market.

Expanding into new markets is never a quick fix.

Daniel Thorniley, president of Austria-based DT-Global Business Consulting, said that businesses too often see emerging markets, especially Africa, as places where they can come in, make huge sums of money quickly, and fix their financial problems. In practice, it rarely happens like that. Effective investment in emerging markets requires planning for the long haul.

Mark Vale, CFO for international operations at UPS, echoed Thorniley’s view: ‘We expanded a long time ago in Europe. It took many years to pay off, but it has now paid off significantly.’

Corporate culture As companies pursue growth, they should not forget about corporate culture, said speakers at the conference. In fact, following the right corporate values can supplement growth: ‘My experience is that whenever we focused on defining values, we generated value,’ said Ramin Khabirpour, a management consultant and a member of the supervisory board at Agros-Nova, a Polish fruit-and-vegetable processor.

But how should companies go about defining their values? Ewan Willars, ACCA director of policy, presented a report, Culture and channelling corporate behaviour (see page 6), that sets out a methodology for doing just that. The report says that values can differ even within an organisation, and provides a simple, logical assessment tool to help company leaders determine what their values are, what they should be, and what they can do to get from the actual to the desirable.

Panellists discussing the issue welcomed this approach, and said the initiative is necessary, especially since issues of corporate culture and values seem to come up only in times of economic downturn. But mature organisations are always measuring and reassessing their corporate values, said Izabela Jagosz-Kuchta, CFO for IBM Poland and the Baltic countries. However, she added, a company’s values can evolve as it develops and changes.

Leaders must act as role models for a company’s values, but it is often impossible for a single person to be a role model for every aspect within a company.

‘The diversity of our organisation is so great that it is difficult to point to a single role model,’ said Gavin Flook, executive committee member for talent at Deloitte Central Europe. ‘In various contexts you can point to

The Polish exception In his keynote address, former Polish finance minister Jan Vincent-Rostowski set out several key reasons why Poland is an ideal investment location within Europe: * over 20% growth between 2008 and 2013, and further outperformance expected * debt-to-GDP ratio rose 13% between 2008 and 2013 – fourth-slowest in the EU * government expenditure-to-GDP ratio seventh-lowest in the EU * current government expenditure about 36.6% of GDP, its lowest ever figure * 32% corporate tax rate – the seventh-lowest in the EU * expected to grow around 3% annually, compared with 0% for the EU as a whole.

Six barriers to European growth Daniel Thorniley, president of DT-Global Business Consulting, set out six major reasons why Europe’s economy may continue to underperform over the next three to five years. His comments reflected general concern that the global economy is currently exposed to some significant risks.

* SMEs

still have problems accessing finance – Thorniley described the situation as ‘a financing cancer that goes up to the corporates and down to the consumer’, and with no cure in sight. * Consumer confidence has been weak for the past five years, especially in Europe. * Austerity programmes have crippled the eurozone economy, with countries that have implemented them now drifting away from such policies. * Aside from a few recent M&A deals in the US, companies are holding back on investment because of the difficult global risk environment. * The rise in trade worldwide that happened early in 2014 has proven unsustainable, and exports are not rising as expected, hurting the EU’s big exporters. * Exchange rates have remained volatile, which hurts the bottom line for companies that may be seeing significant growth in particular countries but still have to translate their profits into dollars for head office.

Jan Vincent-Rostowski championed Poland’s counter-trend economic success.

one person as a role model for certain attributes, but in other situations someone else is a model. Some things are non-negotiable – ethical behaviour, results to our clients – but one-size-fits-all does not work.’

Professor Bolesław Rok, director of the Business Ethics Centre at Kozminski University in Poland, said that corporate values are not just a code of conduct for individuals, but for the actions of the company itself. If a business behaves responsibly, its employees become more engaged, and this leads to better performance.

No contradiction For that reason, there is not necessarily any opposition between following the right values and generating profit, although Khabirpour said there does need to be a change in how businesses prioritise the chase for profit and the maintenance of ethical standards: ‘The question is, do we need more profit every year or is a stable profit good enough? Do we need to increase our profit margin at the expense of the environment, at the expense of the ecosystem, at the expense of paying taxes? The world will dissolve if we don’t realise we are in a paradigm shift.’ ■ Andrew Kureth, journalist based in Warsaw

Culture and channelling corporate behaviour is available at www.accaglobal.com/ab/156 Edition 10 | 61

Accountancy Futures | Global economy | Innovation

Power of innovation

As Malaysia aspires to become a high-income economy, it is banking on the transformative power of innovation to boost competitiveness and spur growth

A

ccording to Prime Minister Datuk Seri Najib Razak, speaking at the Innovating Malaysia Conference 2014 organised by Agensi Inovasi Malaysia (AIM), innovation is the fuel that powers developed economies; indeed, two-thirds of the UK’s growth is derived from innovation.

Since Malaysia’s national strategy is to create a more knowledge-intensive economy, ‘there is a clear need for traditional and non-traditional businesses to innovate to create significant impact on GNI and GDP’, he said.

Malaysia currently ranks 33rd out of 143 countries in the Global Innovation Index 2014 and in the top two among 40 upper-middle income countries.

The new National Corporate Innovation Index (NCII) is one key initiative to drive innovation in Malaysia.

AIM is collaborating with Nesta, the UK’s innovation foundation, and other expert partners on the NCII, which has been three years in the making.

in intangible asset identification, rating and valuation – and Alpha Catalyst Consulting to gain insights into small and medium-sized enterprises’ (SMEs) attitudes to innovation and its return on investment.

The NCII has been developed with the support and involvement of a wide range of leading Malaysian public listed companies. While Phase I focused on companies’ innovation strategies, culture and processes, Phase 2 brings in a range of financial measures to help companies more accurately track their return on innovation.

The NCII aims to help companies embed and systematise innovation by identifying tools and mechanisms for corporations to measure, value and benchmark their innovation investments. The eventual goal is to enhance innovation management and to commercialise innovations to generate revenue.

today are: design, R&D, process improvement, training, software and innovation-related elements of branding and marketing.

These investments translate into certain core outputs and gains such as new products and services, efficiency savings, intellectual property licensing – which offer huge potential for new revenue streams – and grants and incentives to spur future investments, thus sustaining the virtuous cycle of innovation.

In today’s business environment, intangible assets are clearly gaining dominance in the value-creation process. Chiew noted that, based on research carried out by Ocean Tomo, an intellectual property specialist, on the S&P 500 companies in 1975, 83% of market value could be traced to recorded and physical assets.

By 2010, however, more than 80% of market value was based on intangibles.

During the event, delegates discussed the need for businesses to broaden their definition of innovation to encompass intangibles and ‘hidden assets’, and take innovation beyond conventional perceptions of R&D.

What is innovation?

The prime minister warned businesses not to associate innovation strictly with R&D, high technology or patents.

This would be ‘sorely misguided and counterintuitive’ because the bulk of Malaysian businesses are in the services sector. Rather, innovation is ‘about turning a new idea into something profitable or that creates new value’, he added.

‘For Malaysian businesses to fully benefit from the government’s initiatives to boost innovation in their sector, they must be able to identify and measure the investments made towards both tangible and intangible assets, which contribute to innovation outcomes,’ said Chiew Chun Wee, ACCA’s head of policy, Asia Pacific.

ACCA played a central role in supporting the NCII by undertaking research with Nesta, Inngot – a specialist 62 | Edition 10

The significance of intangibles Investments in intangibles are increasingly driving innovation and business. According to Dr Benjamin Reid, principal researcher in international innovation at Nesta, the key intangible investments in innovation

Chiew Chun Wee, ACCA’s head of policy, Asia Pacific, told delegates that bright ideas are just the beginning – it is also vital to enlist top management support in nurturing and sustaining innovation.

‘Business needs to

broaden its definition of innovation to include intangibles and hidden assets’

Impact of the NCII The NCII will help boost innovation in four ways, said Reid. One, companies will better understand, and therefore be able to improve, their innovation processes. Two, they can uncover their hidden innovations and identify innovation strengths and weaknesses. Three, they will have better data to convince internal and external stakeholders of the importance of innovation. Four, they can use NCII

Innovation | Global economy | Accountancy Futures

tools to calculate the return on innovation investments – something many Malaysian firms struggle to do.

‘The NCII framework will allow management to have a much clearer picture of their internal investment practices, especially those which result in longer-term returns, as is often the case with innovation activities,’ said Chiew. ‘The data-collection process itself will also enable companies to take a hard look at the information system and address any gaps, so that the necessary useful data can be collected on a going-forward basis to better guide investment decisions.

‘In addition, NCII enables organisations to benchmark themselves against FTSE companies, as well as against each other – giving them a better understanding of where they stand, enabling management to conduct more strategic, intelligent investment planning based on market realities.’

NCII tools can be used to help drive acquisition and growth strategies based on intangibles.

‘It’s tough for accounting and management systems to measure investments in innovation, but the NCII will help companies tell the narrative of innovation-led growth,’ said Reid.

Currently, accounting treatments may hinder innovation investments. ‘Under accounting standards, intangible investments in innovation are expensed and cannot be capitalised, so strong board buy-in will be necessary to get companies to change how they account for innovation,’ Reid added.

Enlisting top management support will be critical to nurturing and sustaining innovation. ‘All too often, management want to see results fast, and if they are not convinced that the project will be profitable, they cut off the funds and in the process kill off the innovation,’ said Chiew.

‘Innovation is not just about bright ideas. It is clearly about execution as well. It’s about having an internal decision-making structure that supports innovation. It’s about having the right information.’

Boosting IR Tracking and consolidation of information through NCII will also facilitate an organisation’s adoption of integrated reporting (IR), which is encouraged by the Malaysian government and the Securities Commission. ‘As the first professional accountancy body to introduce IR into its qualification, ACCA is interested in any tools that will better equip companies to adopt IR, which requires organisations to provide information material to the business beyond the traditional financial numbers under accounting standards – giving a much more comprehensive and strategic picture to current and potential providers of financial capital and other key stakeholders,’ said Chiew. ■ Nazatul Izma Abdullah, journalist Edition 10 | 63

Accountancy Futures | Global economy | Cambodia

Work in progress

While Cambodia’s accountancy sector is moving towards greater clarity and standardisation, more training is required to boost numbers of professionals

W

hile Cambodia’s GDP growth over the past two decades has been tremendous, averaging 7.6% per year since 1995, the country remains a developing market and its accounting industry is still very much a work in progress.

One person who is at the forefront of Cambodia’s drive to develop the accountancy sector is 40-yearold Kimleng Khoy FCCA. Recently named country director of Deloitte Cambodia, Khoy is responsible for setting up operations for the latest Big Four firm to enter the country. Having worked in the profession since 1997, first at EY and then at PwC, he is also helping to advance industry-wide accounting practices and implement standards as president of the Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA) and as a member of the board of the National Accounting Council of Cambodia (NAC).

While there is much room for improvement in Cambodia, Khoy points out that the country is actually ahead of many of its South-east Asian neighbours in terms of its use of accounting frameworks. In 2010, the country adopted in their entirety International Financial Reporting Standards (IFRS) and the related IFRS for SMEs (known as Cambodian IFRS and Cambodian IFRS for SMEs locally.)

‘If I compare Cambodia to other countries – for example, Thailand and Vietnam – many around ASEAN haven’t adopted fully,’ he says. ‘In terms of adopting frameworks, I think we are quite advanced.’

The problem, however, comes in the implementation of these accounting systems, particularly some of the more complex standards found in IFRS such as IAS 32 or IAS 39, which deal with financial instruments. This, says Khoy, is caused primarily by lack of exposure.

‘In terms of commercial transactions, even banks or microfinance don’t have all these derivatives, so you don’t have these contracts used by those standards.

Therefore, you don’t have exposure and you don’t have a lot of knowledge.’

On a more fundamental level, most businesses in Cambodia are simply not experienced in utilising basic accounting practices. The informal sector is still a major part of the Cambodian economy, employing nearly 60% of the country’s workers, according to the National Institute of Statistics’ Cambodia SocioEconomic Survey 2013. And most formal businesses remain extremely small – well below the country’s current legal threshold for an audit. Companies are

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required to audit only when they meet two out of three of the following criteria: * 100 staff * turnover of approximately US$750,000 * assets of US$500,000.

How many companies meet those requirements remains a grey area. The NAC is working to gather accurate statistics; Khoy puts forth a rough estimate at 5,000 companies. And, of these, an estimate culled from the major accountancy firms in Cambodia finds that only around 450 companies were actually audited in 2013.

Khoy has worked with the NAC on a draft law that will give the agency more power to work with companies that do not prepare their accounts and submit them for audit. He is also working with the council on an accounting template that will simplify the process for the many companies that do not meet the auditing criteria.

Modernise and diversify These efforts to boost financial clarity and standardised practices are becoming increasingly important as Cambodia attempts to modernise and diversify its economy. As with many developing countries, much of Cambodia’s growth has come on the back of inexpensive labour, with 80% of its exports from the garment industry alone.

As a November 2014 report from the Asian Development Bank (ADB) puts it: ‘Moving into highervalue-added production and climbing the global value chain will require sustained improvements in infrastructure, human capital, governance and other economic factors.’ The ADB report cites the need for increased fiscal spending to attain a number of these goals; however, revenues from taxes remain extremely limited. In 2013, national tax revenues were a small US$881m, out of a GDP of US$15.24bn. The figure actually represents an increase of 16.1% on the previous year as the Cambodia government has bolstered its efforts to enforce tax laws.

Lack of qualified accountants Khoy says the overwhelming majority of taxpayers file under an estimated regime. ‘They pay a lump sum per year,’ he says, ‘which is very small compared to the real regime where they pay taxes on salary, withholding tax, VAT, profit tax and so forth.’ Here, he notes, the simplified accounting template being developed by the NAC will help in terms of tax collection.

One of the other major issues facing the accountancy sector is a lack of qualified accountants. Khoy was

Cambodia | Global economy | Accountancy Futures

While Cambodia’s accounting sector is still developing, the country is ahead of some of its neighbours in terms of adoption of international standards, says Khoy.

Kimleng Khoy FCCA Since September 2014, Kimleng Khoy has been the country director for Deloitte Cambodia. Prior to joining Deloitte, he was a director at PwC in Phnom Penh, where he worked first as an auditor and then headed up advisory services in Cambodia, and was seconded to PwC’s office in Birmingham, UK, from 2006 to 2008. Prior to working at PwC, Khoy was a senior auditor at EY in Phnom Penh. In 2004, Khoy became one of the first Cambodians to attain the ACCA Qualification. He is president of the Kampuchea Institute of Certified Public Accountants and Auditors and a member of the board of the National Accounting Council of Cambodia.

one of the first Cambodians to qualify for ACCA membership, back in 2004. The government has increased spending on education, but it remains the lowest share of government expenditure in South-east Asia, at less than 2% of GDP between 1995 and 2013, according to the ADB. However, Khoy is optimistic about the potential of young Cambodians to enter the accounting field.

He points out that when he began studying for his ACCA Qualification, he was required to travel to Vietnam to complete much of the course work. Now, ACCA courses are widely available, with thousands of students enrolled. In addition, many young Cambodians also begin learning English much earlier than those of Khoy’s generation, removing another barrier to qualification.

Another difference Khoy sees are the opportunities available to women in the workforce. ‘More and more women are going to study at university or starting their

own businesses,’ he says. ‘I’ve been happy to see that many are enrolling in ACCA qualifications.’

Khoy notes that he faced some of these challenges setting up Deloitte’s operations in Cambodia: ‘There are a very limited number of qualified candidates who match the needs of the firm, so to get the pool of talent was a challenge. I managed to bring in good people with me, but we still have to continue to develop people. In terms of dealing with other agencies, like the government, tax [agencies] and banks, I guess we are on the same playing field as the other firms.‘ Nonetheless, Cambodia has come a long way in just two decades, with professional accountants like Khoy playing an increasingly important role in how far and how fast the country continues to develop. ■ Thomas Maresca, journalist based in Phnom Penh Edition 10 | 65

Accountancy Futures | Global economy | Latin America and Caribbean

Turning the tide

Skilled accountants are having a positive impact on the financial management standards of Latin American and Caribbean public bodies

I

n the 1970s and 1980s, the governments of Latin America and the Caribbean were not noted for their sound financial management. Many Caribbean island states had newly emerged from colonialism and were finding their way as independent countries, while many Latin American countries were riven by social discord, even civil war, and military rule was common.

Fast-forward to 2014 and not only is democracy the norm, but many governments have taken the tough decisions required to make their states efficient and financially watertight. This progress was welcomed in a recent report from the Organisation for Economic Cooperation and Development (OECD) and the InterAmerican Development Bank (IDB), which notes that half the countries examined have recently introduced new budget tools.

The OECD and IDB were particularly keen on countries that had introduced fiscal rules, mediumterm budgeting, stabilisation funds and performance budgeting systems. The report highlights Chile, Colombia, Mexico and Peru as having adapted ‘best practices in fiscal and budgeting reforms of [wealthier] OECD countries to the political and institutional reality of Latin American and Caribbean (LAC) countries’.

The result has been the creation of fiscal and budget institutions with a structural view targeting long-term fiscal stability.

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The report says that the integrated application of these reforms should serve as a guide for the more vulnerable LAC countries in how to find a relevant local formula to ensure stable fiscal income that meets government demands. It adds, however, that many still have to ‘improve their budget management, tax collection and public sector pay equality to bring their governments to the level of more advanced economies’. An OECDIDB communiqué adds that successful initiatives on these issues ‘could help raise living standards and mitigate risks in future economic shocks’.

Mozammal Hoque, senior financial management specialist at the World Bank, agrees that this holds true for the Caribbean. But, he adds: ‘Most countries are embracing integrated financial management, which means things are more transparent; people can read budget reports and see how public money is being spent.’

Hoque says that while much progress has been made by nations that have implemented integrated financial management systems in recent years, others are hampered by tardy, and often non-existent, formal public accounts, uncoordinated government spending and inadequate foreign exchange reserves.

Limited oversight of procurement means corruption remains a serious problem, he adds: ‘Politicians need money to get elected and one way of doing that is from local businesses. More laws governing campaign financing

Latin America and Caribbean | Global economy | Accountancy Futures

are needed or it’s impossible to control anything.’

According to Hoque, risk-based audit training in 2014, organised through the World Bank and the UN, has improved capacity in Jamaica and is being extended to other countries. ‘Jamaica has done a lot to strengthen the capacity of the auditor general and make her more independent,’ he adds, pointing out that the government has begun to overhaul the way it prepares budgets, levies taxes and procures goods and services.

A US$35m scheduled World Bank loan will also help strengthen public investment management systems and property tax compliance administration in Jamaica. Work under way includes putting in place an effective fiscal rule to entrench financial discipline, with authorities working to amalgamate fiscal consolidation gains in the medium term. The aim is to eliminate annual budget deficits and slash debt to 60% of GDP by 2025 from its current 140%. Bank strategies include staging performance audits of public bodies to make them more accountable.

Hoque adds that some countries have recently taken steps to alleviate foreign currency shortages to ease tightness in the market. The Trinidad and Tobago central bank sold more than US$600m to authorised dealers between January and May 2014 in a bid to ‘restore normalcy’ to national foreign currency liquidity.

Antigua-based accountant Laura Lyn says that better skilled accountants are having a positive impact on the financial management standards of Caribbean public bodies and government departments. In Antigua and Barbuda, for example, ‘the Commissioner of Inland Revenue has become much stricter at enforcing audited financial statements and up-to-date tax returns prior to the importation of goods and licensing,’ she says.

She adds that more banks are demanding up-to-date financial statements and, in some situations, up-to-date tax returns in the issuance of loans, bank overdrafts and other business activities, while the Financial Services Regulatory Commission and its Office of National Drug and Money Laundering Control Policy are also providing more training to financial regulators and officials.

Mixed assessment A similarly mixed assessment is heard about Latin America. Mario Pessoa, deputy division chief of the International Monetary Fund’s (IMF) fiscal affairs department, says: ‘Countries in [Latin America] have good coverage of the budget and good information on budget execution but have room for improving the capacity to identify and measure fiscal risks.’

He picks out Brazil, Chile, Peru and Mexico as countries that over the past decade have implemented or are now implementing reforms to exert more control over public expenditure through improved fiscal rules or fiscal responsibility laws. He welcomes the stabilisation funds that have been created in Chile and Mexico, and notes that Argentina, Bolivia, Brazil, Colombia, Costa Rica, Mexico and Peru have all created single treasury

accounts to centralise cash resources and manage cash better. Brazil, Chile, Costa Rica and Uruguay have also expanded the coverage of their fiscal reports and financial accounts, while Argentina, Brazil, Mexico and Peru have implemented programme budgeting or medium-term budget frameworks.

While nearly all Latin American countries are implementing reforms to strengthen their public financial management systems, Pessoa points to the successes of Brazil and Chile in particular. ‘As a result, Latin America countries have been more resilient to the 2008-2010 financial crisis than in that of the 1990s,’ he says.

‘The early birds of the reforms are now aiming for further steps, achieving global standards’

Andreas Bergmann, chair of the International Public Sector Accounting Standards Board, adds: ‘I think the overarching topic in the region is the strengthening of the institutions and the implementation of international standards in accounting, auditing and government financial statistics.’

Bergmann points out that in Latin America the focus has shifted from year-to-year budget management to medium-term planning, balance sheet management and risk orientation. ‘For this, strong institutions and rigorous statutory frameworks are needed,’ he says. ‘Additionally, high-quality financial information provided by accrual accounting is a critical ingredient.’

He notes that countries such as Chile, Colombia and Peru have benefited from the global trade boom in natural resources and introduced fiscal rules and stabilisation funds to capitalise on this. Progress is also being made in Costa Rica and Panama, while Chile has introduced sophisticated risk management.

‘I can observe that the early birds of the reforms are now aiming for further steps, achieving global standards,’ Bergmann says. ‘Recently achieved or future membership in the OECD is often a driver of these reforms, but most urgently needed are reforms in those countries which have not undertaken any, like Venezuela, or have been stagnant for prolonged periods of time, like Argentina and many central American countries.’ ■ Pacifica Goddard, Gemma Handy and Keith Nuthall, journalists The OECD-IDB report, Government at a glance: Latin America and the Caribbean 2014 – towards innovative public financial management, is available at tinyurl. com/LAC14-PFM Edition 10 | 67

Accountancy Futures | Global economy | Epidemics

The Ebola effect

The fear spread by the Ebola epidemic stretches far beyond the actual geographic reach of the disease, which has devastated the economies of the three countries hardest hit

A

frica’s economic future is looking bright, as illustrated by a Deloitte survey released last November that concludes this is the optimum time to invest in the continent. In 2013 the gross domestic product of sub-Saharan Africa grew at a blistering 4.9%, outpacing all of the BRIC nations (Brazil, Russia, India and China) with the exception of China. And this was no one-year wonder. The average 5.5% growth rate over the past decade has been more than double the 1990s rate.

But, as global headlines make only too clear, two ominous clouds currently hang over the continent. The first is a slide in commodity prices, which account for the lion’s share of African countries’ export revenues.

And the second is a widespread outbreak of Ebola, a gruesome haemorrhagic fever.

Aside from the obvious human impact of the disease, any epidemic can have an extremely damaging effect on an economy. At the height of the panic over severe acute respiratory syndrome (SARS), for example, retail sales plunged around 15% in Hong Kong, even though the disease resulted in no more than around 300 deaths in a province with a population of 7.2 million.

Africa may be even more vulnerable to the panic caused by the spread of a contagious disease, worries Edouard Messou, PwC’s senior partner for francophone Africa. ‘Many outsiders see Africa as a single country rather than a continent,’ he says. ‘So even though Ebola has so far been contained in a tiny part of West Africa it risks scaring off the foreign visitors and foreign investors who have become a key driver of economic growth for many nations.’

question for economists is whether this could be sufficient to slow Africa’s promising growth spurt.

There can be no doubt as to the devastating toll on the three nations hardest hit by Ebola – Guinea, Sierra Leone and Liberia. Worst off of all is Liberia, one of Africa’s poorest countries, with a per-capita income of just US$410. As of November 2014, the tiny nation accounted for about 3,000 of the 5,700 deaths from the disease. The resulting panic has been a hammer blow to a nation that had been struggling to recover from a long and bloody civil war. However, Liberia seems to have reached a turning-point, with only eight new cases a week in January compared with 550 a week in December.

A World Bank report, The economic impact of the 2014 Ebola epidemic, concluded that the biggest economic consequences were not the direct effects of death, surging health spending or loss of workers, but rather ‘changes in behaviour – driven by fear – which have resulted in generally lower levels of employment, income and demand for goods and services’.

Investments in vital sectors such as mining, which

‘Ebola risks scaring off the

foreign visitors and investors who have become a key driver of growth for many nations’

Economic toll The fear that Ebola engenders extends far beyond the disease’s actual geographical reach and may linger long after Ebola fades from the headlines. The main

In numbers * * * * * *

The World Bank has estimated that if the Ebola virus is left unchecked, it could cost West Africa as much as US$32.6bn.

The US spends US$8,895 per person on healthcare, Guinea US$32 per person, Liberia US$66 and Sierra Leone US$96.

As of January 2015 Ebola had killed 8,641 people.

The number of deaths as a result of road accidents worldwide is 1.24 million, according to the World Health Organisation.

The Ebola epidemic could slash up to 12% off the GDP of Liberia – more than twice what the US economy lost during the global financial crisis.

The International Monetary Fund expects sub-Saharan Africa to grow by 5.8% in 2015 compared with 5% for all emerging markets and 2.3% for rich nations.

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accounts for 17% of GDP, have also been put on hold.

As recently as June 2014, the World Bank had expected Liberia’s economy to expand by 5.9% in 2014. By October it was forecasting just 2.5%. Few Africa experts would be surprised if the outcome turns out to be even worse.

Extra healthcare spending and lower tax revenues for Liberia alone have been estimated to amount to more than US$100m – 5.1% of the country’s GDP. Add in Sierra Leone and Guinea, and the short-term hit measured in lost GDP for 2014 alone is likely to add up to US$359m, the World Bank has estimated.

Part of the damage comes through lower productivity and higher costs for businesses. PwC, which has operations in the most affected countries, offers one example of this. ‘To keep our staff as safe as possible we have been restricting their travel to the worsthit areas for assignments,’ says Messou. ‘Since using public transport can increase the risks of infection, we have arranged a minibus to take some staff to work.

The extra travel time means that instead of working

Epidemics | Global economy | Accountancy Futures

eight hours a day, some employees are now able to be in the office just five or six.’

Of course, Guinea, Sierra Leone and Liberia are three of Africa’s smallest economies, with a combined GDP of just US$14bn in 2014. That is a mere 0.8% of subSaharan Africa’s US$1.7 trillion economy, according to data from the International Monetary Fund. Whether Ebola harms the entire African economy will depend on several factors: how far afield the disease spreads, how quickly it can be contained, and how far it is possible to convince wealthy outsiders not to punish Africa as a whole for a regional outbreak.

The World Bank has warned that the Liberian economy will contract this year unless the Ebola outbreak is quickly contained.

In terms of the spread of the disease there are some grounds for cautious optimism. True, the outbreak is already the deadliest by far since the disease was first identified in Zaire almost 40 years ago. Fatalities from previous Ebola epidemics have never risen much above 300. The US Center for Disease Control estimated in September last year that up to 1.4 million people could be infected by Ebola by early 2015 if the response did not improve. Since the disease has been killing about 70% of those who get infected, that is a terrifying prospect. Meanwhile, the World Bank has projected that if the epidemic spreads into

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Accountancy Futures | Global economy | Epidemics

neighbouring countries the total cost by the end of 2015 could reach US$32.5bn – more than twice the GDP of the three nations at the heart of the epidemic.

But most experts agree that the response has already improved. The nations that border Guinea, Liberia and Sierra Leone have been strikingly successful at containing the outbreak. Officials in Nigeria and Senegal meticulously tracked down anyone who could have been exposed to the disease and monitored them for signs of the illness.

As a result, the disease has so far been contained in these countries. ‘This is extremely encouraging,’ says Amadou Sy, a senior fellow at Brookings Institution’s Africa Growth Initiative. ‘The first step is to prevent this from becoming a continent-wide problem.’

For nations with functioning healthcare systems, Ebola should be relatively easy to stop. The virus is not airborne and sufferers are contagious only once they start to exhibit the conspicuous symptoms of the disease. As a result, the average sick person will infect no more than two others. That compares with four for HIV and SARS, 10 for mumps and 18 for measles.

‘I believe that within a year the issue with the disease itself will be largely fixed,’ says Messou.

Back in business If the disease does die down, the affected economies can start to get back to some semblance of normality, says Mead Over, a former World Bank health economist and now a researcher at the Center for Global Development in Washington. ‘The main worry over the disease is that it stops people going about their normal economic business,’ he says. ‘A lot of people have been less willing to go into work, 70 | Edition 10

It is as far from Liberia as London is, but Kenya reports that holiday bookings are down due to the Ebola epidemic in West Africa.

potentially hollowing out companies and government bureaucracies. Gradually that fear will subside as the epidemic is brought under control.’

Unfortunately, outside perceptions may be harder to shift. The tourism industry accounts for about 10% of sub-Saharan Africa GDP, including indirect wealth creation. Until the Ebola outbreak, visitor numbers had been growing fast, hitting 36 million in 2013. There are already signs that this burgeoning sector is being hit – even thousands of kilometres from the affected areas.

Bookings are down for safari trips to Kenya, which is about as far from Liberia as London is. ‘I was talking to somebody recently who said they planned to cancel a trip to Papua New Guinea,’ laments Sy. ‘The mere fact that Guinea was in the country’s name seems to have been enough, despite the fact that it is located on a remote island north of Australia and obviously has no reported cases of Ebola.’

‘The trouble with Ebola,’ says Over, ‘is that it plays into the idea that Africa is a dangerous place, associated with famine, war and exotic diseases.’

Such aversion will almost certainly create strong headwinds for Africa during this year. In addition, many African nations will have to cope with some selfinflicted woes during 2015, predicts William Jackson, an analyst for Capital Economics: ‘Many countries in Africa squandered the windfalls they received from a decade of high commodity prices,’ he says. ‘We see a lot of countries with high budget deficits that will be hard to sustain if raw material prices remain weak.’ Some African nations, Ghana and Zambia in particular, boosted government payrolls and subsidies instead of investing in productivity-boosting infrastructure projects.

Despite such additional impediments, Messou of PwC believes that Africa will overcome the Ebola epidemic.

‘This is not going to dramatically slow the continent’s economic momentum,’ he argues. He points to several grounds for optimism. ‘The main drivers for growth still exist,’ he says, adding that the latest commodity price slump is unlikely to last. ‘A growing global population will need to be fed and Africa has a disproportionate share of the world’s arable land.’

Large-scale investors interested in Africa’s mineral wealth may respond more rationally to the outbreak than international tourists – especially if the disease is kept under control. ‘Africa also boasts a burgeoning middle class and a youthful population, standard ingredients for fast economic growth,’ says Messou. ‘Democracy and the rule of law are also spreading and the level of corruption is starting to decline in many places.’

Ebola may be dominating the continent’s headlines, but it could be a speed bump that Africa will soon get over. ■ Christopher Fitzgerald and Fernando Florez, journalists Deloitte’s Africa on the cusp of a consumer boom report is at http://tinyurl.com/Africa-boom

Healthcare | Public sector | Accountancy Futures

Taking the temperature

With austerity measures looming large over hospitals around the world, can we still somehow build a sustainable future for healthcare, asks ACCA’s Gillian Fawcett Healthcare is rarely out of the headlines. It could be the temporary closure of accident and emergency departments in the UK, political fights over Medicare and Medicaid in the US, or health systems in a developing country stretched to breaking point

Indian tobacco factory workers wait to get their medicines at a hospital in Madhya Pradesh.

following the outbreak of a devastating disease such as Ebola. There will always be passionate debate on whether the right resources are being committed to the right areas at the right time in health systems around the world.

Âť

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Accountancy Futures | Public sector | Healthcare

The healthcare systems themselves can vary greatly between countries. There can be differences between the size and role of both the public and private sectors, the balance between preventative services, acute care and longer-term care, as well as administrative structures and mechanisms – the glue behind the scenes that holds the systems together.

However, these systems, no matter in which country they are, face very similar challenges: changing populations and demographics, the rise of preventable illnesses, financial constraints and political scrutiny.

Yet it is clear that possible solutions to these challenges will vary from one country to the next: there is no ‘onesize-fits-all’ answer.

Funding need But answers need to be found, as it is becoming increasingly clear that the existing healthcare systems are unlikely to remain sustainable in the longer term in the absence of either additional funding or innovative approaches to delivering health services.

This is one of the key conclusions of Sustainable healthcare systems: an international study, a detailed report by Nottingham Trent University and ACCA. Its authors, Professor Malcolm Prowle and Dr Don Harradine, have examined the current healthcare systems in 11 countries across several continents, looking at how they are coping with their various challenges, and drawing out examples of best practice.

Gillian Fawcett is head of public sector at ACCA.

And as with so many other public policy matters, much of the challenge comes down to money and politics. The study elicits some revealing attitudes and observations. Nearly two-thirds of the healthcare professionals interviewed for the study say that they feel it is unlikely or even impossible that their country’s system is financially sustainable in the long run. Less than one in 10 think that it definitely is sustainable.

But when asked whether it is likely that more money from their governments would be forthcoming, a similar two-thirds say such a likelihood is low. Instead, eight out of 10 believe that there will be a drive for

Below: A radiotherapy department in Accra, Ghana. Sub-Saharan Africa is predicted to see two million new cancer cases a year in the next decade.

Right: Emergency department at St Mary´s Hospital, London. The NHS is under pressure as waiting time figures have hit their worst level in a decade.

efficiency improvements to secure the long-term future of their healthcare system. More than half believe there is a medium prospect of the introduction or extension of charges to users, while a slightly smaller proportion accept there will be the introduction of an insurance system.

Unfortunately, austerity looms large over many of the healthcare systems around the world. We see it here in the UK, and it is evident elsewhere. As the study observes, the impact of the economic recession led many governments to borrow money to fund budget deficits. But this was untenable and so they were faced with the need to cut public spending.

Attempts may have been made to ring-fence crucial services, such as health, but there have been subtler impacts of austerity as well. Rising unemployment, reduced incomes and increasing taxation have an indirect impact on the demand for healthcare and the ability to pay for it. Developing countries, which rely on overseas financial aid to supplement their own healthcare finances, have suffered as donating countries cut back on their aid budgets.

For these reasons perhaps it is not then surprising that governments around the world are looking to reorganise how healthcare is provided, whether that is at the hospital level or at a primary care level through doctors’ surgeries. And this is where Prowle and Harradine hit the nail on the head.

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They highlight the comments made by Nigel Lawson, a former UK chancellor of the Exchequer, who described the UK’s National Health Service as the nearest thing the British have to a national religion. And as one interviewee for the study says: ‘I think health is a very politically sensitive issue for any country… health is something that everyone is concerned about and so this is the nature of the sector. So I think we can’t get away from all these bad headlines. What we hopefully will get away from is politicians making changes to the health sector without helping the sector.’

But as all those that work in the public sector will be only too aware, public opinion matters and can unfortunately act as a brake on any attempts to reorganise or refinance our public institutions. This is amply demonstrated by the study’s finding that, apart from the lack of financial resources, public opinion is seen as one of the most significant factors posing resistance to change, supported by resistance from health professionals and the media. How many times have we seen our health services used as a political football?

Change in behaviour But perhaps it is just as difficult to change the politicians’ behaviour as it is to change the lifestyle choices that people make that can have considerable consequences for healthcare priorities further down the road. Both are equally challenging, but both need to be resolved to ensure any form of sustainability in healthcare systems.

The study also uncovered other resistors to change: a lack of consensus among politicians about the nature of change required, the influence of private economic interests, and bureaucratic interests in maintaining the status quo.

The second of these, the influence of the private sector, is worth investigating further. As the study rightly notes, in virtually every country there is some form of private healthcare services to private individuals in return for payment, either directly or through a

Nantes hospital CHU Hotel Dieu in France.

The French healthcare system is often cited as one of the best healthcare services in the world.

It has become increasingly

clear that existing healthcare systems are unlikely to remain sustainable in the longer term private health insurance scheme. Inevitably, there will always be political discussion on the appropriate size of the private healthcare sector, but of more interest to policymakers is the role the sector can play in the provision of healthcare to non-private patients.

In theory, there are advantages in using the private healthcare sector for this purpose, including the use of spare capacity in the private sector at lower cost and the exposure of public healthcare providers to market competition. There can also be

disadvantages, however, not least problems that arise when profit motives conflict with public service equity considerations. In some countries, such as the UK, there is a significant involvement of the private healthcare sector in publicly financed healthcare, and other countries are experimenting with this idea. In some countries such an approach is strongly resisted, possibly on political grounds. It is important that the approach to be adopted is considered on its merits and not on the basis of an ideological position.

So what are the implications for finance professionals working in the healthcare sector and so often closely involved in the negotiations over resource allocation and change management? As the authors say, the problem is that in non-authoritarian democratic countries there is likely to be much resistance to change. So the key message for politicians and healthcare managers and professionals, including those in finance, is they need to devise ways of communicating the essential need for changes and the means by which they should be implemented.

Only then will we be able to ensure that healthcare is in the headlines for the right reasons, not the wrong, in the future. ■ Read the report Sustainable healthcare systems: an international study at www.accaglobal.com/ ab/public-sector Edition 10 | 73

Accountancy Futures | Public sector | Accounts

The whole story

ACCA is partway through a study that will shed light on an important aspect of public sector finances: whole of government accounts

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here has been a quiet revolution in the way governments account for themselves. Amid intense scrutiny of public finances, and a drive for more transparency, the need to produce a single bottom-line figure for consolidated debt and public assets has never been greater. In short, governments are trying to work out what they owe and what they own.

This process is known as whole of government accounts (WGA), and has been under development in a number of countries, including the UK, Australia, New Zealand, Canada and Sweden, for two decades. Cash-based or budget-centric accounts have been reformed, with accruals accounting extended to cover consolidation.

Significant public resources have been invested in this process, but until now, there has been no real investigation into the use and usefulness of WGA. To gain greater understanding of how governments

‘Nobody can be sure whether the

end-users of government accounts are able to understand and interpret them’ are handling the shift in accounts, and to match the claims against reality, ACCA is partway through a study on this important aspect of public sector finances.

Gillian Fawcett, ACCA’s head of the public sector, says: ‘Governments are focusing on producing consolidated reports for users they assume will be interested. But to date, there has not been any research into who really uses the reports and what information they actually need. Equally, nobody can be sure whether the endusers of government accounts are able to understand and interpret them and are therefore able to demand change where it is needed.’

Fawcett’s comments go to the very heart of the investigation. A great deal of time has already been spent on looking at how WGA can be used, rather than whether they are actually of any use. So while governments believe that consolidated accounts will be of benefit, they have yet to convince potential users, including many within government.

For instance, the ACCA study found that in Australia the financial markets, credit ratings agencies and analysts make little use of WGA. But in New Zealand, which has a long history of consolidated accrualbased WGA, interest is high in the current shift from International Financial Reporting Standards (IFRS)

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Anthony Harbinson, ACCA president and director of Safer Communities for the Northern Ireland Department of Justice: ‘The UK Treasury finds WGA helpful for strategic decision-making.’

to International Public Sector Accounting Standards (IPSAS) for WGA. In the UK the available literature focuses on how WGA can be used, rather than on their usefulness. In Canada, ACCA found that WGA are mainly used for accountability reporting to parliament and are not used, or perceived as useful, for managerial planning, decision-making and control.

It is a subject close to the heart of ACCA president Anthony Harbinson. As director of Safer Communities for the Northern Ireland Department of Justice, he is responsible for the resourcing, policy and legislative framework for reducing offending, as well as policing and community safety within Northern Ireland.

He says: ‘My view of WGA is that they are pretty labourintensive for around six weeks following the completion of the year-end accounts and while the systems are fairly well structured to deliver the WGA they don’t actually produce any meaningful information or benefit for individual government departments.’

However, Harbinson believes that the UK Treasury finds WGA helpful for strategic decision-making and it is at that macro-economic level that they come into their own. But he adds: ‘I have no idea who uses them outside of government other than a few academics who specialise in some very specific areas of research.‘ Following the second stage of the study a final report on who is using WGA will be published as we go to press. ■ Philip Smith, journalist Read Whole of government accounts: who is using them? at www.accaglobal.com/ab/159

Australia | Tax | Accountancy Futures

A paler shade of green In 2014 Australia became the first country to repeal its carbon tax. So where does this leave a country which was once seen as a climate change leader?

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n July 2014, Australia became the first country in the world to repeal a carbon tax.

Two years after it was introduced, a change in government saw the scheme scrapped, to be replaced by the (now mandated) Emissions Reduction Fund, whereby businesses would compete to win tenders, and be paid to undertake emission reduction projects.

While maintaining that Australia was still on track to meet its carbon reduction targets (5% by 2020), new prime minister Tony Abbott cheered the demise of the ‘useless, destructive tax’, which he also called an ‘international aberration’. The world media didn’t quite see it that way. Australia had gone from being a climate change leader ‘to no plan at all’, said The Guardian. Reuters described

it as a ‘major setback for CO2 trading’. The BBC included a link to the Climate Institute thinktank’s statement that Australia was now ‘bereft

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Accountancy Futures | Tax | Australia

of credible climate policy’, just as the international community focuses on deeper reduction targets.

So, where to from here for the country which trumpets its clean, green environment, but is in fact the world’s worst polluter per head of population, according to the latest data from the Organisation of Economic Cooperation and Development (OECD)?

New research by Melbourne’s Deakin University attempts to find out. The Carbon Risk Management: In an Era of Changing Regulations survey asked Australia’s biggest polluting companies including energy, manufacturing, mining and construction, what they were doing to reduce risks associated with managing pollution, and the associated costs. The survey was part of a larger research project between Deakin University’s Centre for Sustainable and Responsible Organisations (CSaRO) and Macquarie University, cofunded by ACCA and the Australian Research Council.

Overall, it found a business community ‘in limbo’. Most didn’t believe that their energy bills would fall as a result of the carbon tax repeal, but they have ‘lingering concerns’ about the new carbon pricing regulations.

CSaRO director Professor Nava Subramaniam said the survey found half the respondents felt they had little or no choice but to continue to invest in management systems that would lead to better risk controls and measures to reduce pollution levels. ‘However, the majority did not agree that the new Emissions Reduction Fund would benefit their company,’ she said. An overwhelming 80% believed the carbon tax would be replaced in some form in the future anyway.

‘To stop the good work that many of them have started on setting carbon management systems would be unwise,’ Subramaniam said. ‘Such investments need to be viewed from a mid to long-term stance. A bundle of complementary policies are needed including energy efficiency initiatives, low carbon electricity generation and regulatory sanctions.’

Nevertheless, Mathew Nelson, EY’s managing partner, Asia Pacific Climate Change and Sustainability Services, says businesses have been holding back on emission reduction activity given the policy uncertainty. Nelson’s team provides advisory and assurance services to large corporates and government around climate change and carbon policy, so was heavily involved in the implementation of both versions of carbon pricing.

Lately, the focus has been on how businesses can benefit from the Emissions Reduction Fund, passed by parliament on 31 October 2014.

‘We’re starting to see a bit of momentum coming back into the debate,’ Nelson said, adding that what’s happening internationally in relation to climate change and carbon policy – the historic deal between the US and China, and new targets set for Europe – emphasises the need for Australian businesses to take a long-term view. ‘They realise that some form of carbon pricing is inevitable; it’s something they are definitely focused on.’

Australia does need meaningful carbon policy, Nelson added, but the current uncertainty is hampering 76 | Edition 10

progress. A lot of the investments that are required by businesses to make significant emissions reductions are costly, he pointed out. ‘A changing policy environment makes it very difficult for them to make change, look to the future, and make sure they are undertaking projects that will be rewarded.’

There is ‘no question’ the international market will continue to put pressure on Australia to ramp up its emissions targets, and the sooner the nation gets to that point, the better, Nelson says.

‘The critical next step is the development of the safeguard mechanism for the Emissions Reduction Fund. The first auction under the fund (expected in

Australia | Tax | Accountancy Futures

choice but to continue investing in carbon emissions management, the majority seeing this as integral to their corporate social responsibility.

Yet Paul Dobson, national lead partner for sustainability services at Deloitte, says it’s ‘too early to tell’ how effective the new carbon pricing mechanism will be. ‘It all depends on the uptake by the business community on abatement projects. You (also) need a crystal ball to predict the policy position post the 2020 target.’

Regardless, says Dobson, there will be some implicit price on carbon, and companies should be factoring that into their planning. ‘This issue is not going away: we still need to reduce carbon over time, and energy prices are going up even without a carbon price, because of other factors.’

Dobson’s advice to his clients is to focus on efficiency: ‘This will reduce your carbon emissions going forward, and your potential liabilities down the track.’

The bottom line from the Deakin University research is that most companies do not see the repeal of the carbon tax as the last word on Australia’s carbon policy, but a prelude to an unknown future where some form

Loy Yang Power Station in the Latrobe Valley is Victoria’s newest and most efficient brown coal-fired power station.

‘If Australia wants to compete on a global scale it had better lower its carbon emissions – carbon tax or no carbon tax’

early 2015) will give us some pricing info about what the government might be willing to pay for emission reductions – an important step in the journey.

Hopefully this will push the needle for businesses to take advantage of the fund through government funding for projects to help them transition to and future-proof their businesses for pricing on carbon that will inevitably come in the not too distant future.’

This view is supported by the Deakin University survey, which found that 67% of respondents consider themselves to be proactive in carbon emissions reduction, while 35% see their firm as an industry leader in the field. Almost half (48%) believe they have little

of carbon impost is reintroduced.

‘Businesses are waiting to find out what they need to do, how much they need to spend, when and on what, in order to be eligible for the incentives to flow from the Emissions Reduction Fund,’ Subramaniam said. But they risk lagging behind.

‘The world’s powerhouse economies of China, Korea and the US are certainly not waiting; they are all preparing to lower their countries’ own carbon emissions and if Australia wants to compete on a global scale they’d better be doing the same – carbon tax or no carbon tax,’ she said.

‘Australia has moved into an era where it considers environmental taxes as a bogey figure. Such taxes need to be a part of a basket of tools but they certainly have a part to play in effective carbon reduction,’ says Chas Roy-Chowdhury, head of tax at ACCA. ‘Revenue from them can be recycled (hypothecated) to help provide incentives or subsidies for emissions reduction. ‘ ACCA has long sought to highlight the importance of climate change and sustainability to business through its research. Sam Bell, policy and communications manager at ACCA Australia and New Zealand, said: ‘This research is a call to action on both governments and corporations to be accountable and transparent for their impacts on the environment and society.’ ■ Peta Tomlinson, journalist Edition 10 | 77

Accountancy Futures | Tax | BEPS

Time for action

As international tax avoidance hits the headlines, the OECD has made swift progress in its programme to tackle the issue, says ACCA’s Chas Roy-Chowdhury

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n a flurry of activity just as 2014 was drawing to a close, the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting team released a number of draft discussion papers as the organisation’s programme on international tax avoidance notched up a gear. And it couldn’t come sooner, given the current spotlight on tax evasion and avoidance. On the face of it, there has been remarkably swift progress in the BEPS project, but 2015 will prove pivotal in the fight for greater international tax transparency and cooperation.

The publication of the drafts followed on from an update webcast by the BEPS team at the OECD. This update in turn came after the G20 meeting in Brisbane, which had welcomed the ‘significant progress’ that has been made so far. The G20 communique added that the group remained ‘committed to finalising this work in 2015’.

So by the end of 2015 we will have a large number of suggestions and policies from the OECD group, but how much action will there be? And in the meantime, will 2015 see unilateral action as jurisdictions seek to stake their own claims over revenue protection?

However, first it would be helpful to look at where we are now. The BEPS team produced a 15-point action plan back in 2013. This covered, among other things, the tax challenges of the digital economy (Action 1), hybrid mismatch arrangements (Action 2), treaty abuse (Action 6), permanent establishments (Action 7) and the

Chas Roy-Chowdhury FCCA is head of taxation at ACCA. He is the staff expert on ACCA’s Global Forum for Taxation and worked in public practice before joining ACCA.

‘Even though the project is

moving quickly, it is important that moves to protect revenue are made in a coordinated way’

development of a multilateral instrument (Action 15).

The OECD believes these 15 actions (see box opposite) will result in fundamental changes to international tax standards, based on three core principles: coherence, substance and transparency. It adds that addressing BEPS is critical for most countries and must be done in a timely manner so that actions can be delivered before the existing consensus-based framework unravels.

At the same time, the OECD says that governments need time to complete the necessary technical work and achieve widespread consensus. Against this background, it is expected that the action plan will largely be completed within two years of its adoption. Indeed, 78 | Edition 10

the first set of measures and reports was released in September 2014, just 12 months after the BEPS project’s launch. Work on the reports to be delivered in 2015 has already started, and will continue quickly to ensure the rapid development of concrete measures to allow countries to end double non-taxation and artificial profit-shifting. Since the launch of the Action Points, we have seen the publication of a number of draft discussion papers, followed by public consultations. The latest batch, cover Action Points 4, 8, 9, 10 and 14, will be subject to public consultations in early 2015, and the OECD team admitted that the discussion documents would have provided plenty of holiday reading.

Indeed, throughout this process, the OECD team has recognised that it is dealing with an incredibly complex subject and said at the last webcast update that the highly technical nature of the actions requires careful implementation. That could easily be taken to read that the process will take a long time to come to fruition, though Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, said during the webcast that the team recognised the importance of getting guidance out as quickly as possible. He also recognised that the European Union was moving quickly in the wake of the G20 summits.

Balancing act And he noted the moves made in the UK following the Autumn Statement announcement of a diverted profits tax. Saint-Amans said that the UK initiative was ‘extremely interesting’ as it showed both the relevance of the BEPS plan, and a highly political concern about tax avoidance. It also showed that governments are taking action unilaterally, but he hoped that the UK view would be compatible with Action 1 on the digital economy, enabling a coordinated approach that was not detrimental to investment and government revenues.

And this perhaps drives at the heart of the debate – even though the project is moving quickly, it is important that moves to protect revenue are made in a coordinated fashion. The UK has shown that it can go its own way and one only needs to look at the example of International Financial Reporting Standards to understand the ineed to have everyone on side. Governments face a tricky balancing act – while facing political pressure at home to protect or raise revenue, they need to be mindful of the impact their moves will have on other countries.

This is particularly important for developing countries, which arguably stand to benefit the most from a number of the action points, especially when it comes to country-

BEPS | Tax | Accountancy Futures

by-country reporting. The OECD has vowed to increase the involvement of these countries during 2015, so we wait to see whether this commitment is translated into action in the future, but again the signs are encouraging.

A strategy of deepening the engagement of developing countries was launched last November, followed by a workshop that brought together officials from 14 such countries the following month. Participants agreed on the pressing need to reform the international tax rules ‘as soon as possible’ and considered how to most effectively participate in the debate, as well as the support required to ensure effective implementation of the BEPS measures.

The officials requested that outputs would be practical and easy to implement, with support required to ensure increased awareness at all levels. Capacity building should focus on practical guidance and participants welcomed the preparation of toolkits in a number of areas of the BEPS project, as well as related issues that developing countries have identified as significant, such as wasteful tax incentives and availability of quality comparability data for transfer pricing purposes.

So there is a lot to get through in 2015. Further webcasts will update us on progress over the year, together with the launch of more discussion documents and public consultations on areas such as disclosure rules, controlled foreign companies and cost contribution arrangements.

But above all we must see the standards translated into practical tools in 2015. The future of the BEPS project depends on the ability of tax authorities to deliver, otherwise we will be left with more heat than light. ■

The 15-point BEPS Action Plan Action 1 Action 2 Action 3 Action 4 Action 5 Action 6 Action 7 Actions 8-10

Action 11 Action 12 Action 13 Action 14 Action 15

Address the tax challenges of the digital economy.

Neutralise the effects of hybrid mismatch arrangements.

Strengthen CFC (controlled foreign companies) rules.

Limit base erosion via interest deductions and other financial payments.

Counter harmful tax practices more effectively, taking into account transparency and substance.

Prevent treaty abuse.

Prevent the artificial avoidance of PE (permanent establishment) status.

Assure that transfer pricing outcomes are in line with value creation (8: Intangibles, 9: Risks and capital, 10: Other high-risk transactions.

Establish methodologies to collect and analyse data on BEPS and the actions to address it.

Require taxpayers to disclose their aggressive tax planning arrangements.

Re-examine transfer pricing documentation.

Make dispute resolution mechanisms more effective.

Develop a multilateral instrument.

EC president JeanClaude Juncker at the G20 summit in Brisbane, November 2014. In the summit’s wake, the EU is moving fast on tax avoidance.

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Accountancy Futures | Diversity | Business benefits

A diverse role for finance Diversity is a finance issue – one that requires all the analytical, governance and management skills the finance function has to offer

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egulators around the world are increasingly taking action to encourage greater diversity within corporate entities. The European Commission, for example, has proposed a directive that will require companies to have a minimum of 40% of either gender among their non-executive directors by 2020.

As well as setting targets, governments are requiring companies to report diversity data. In Australia, for example, all non-public organisations with 100 or more employees must now provide standardised data relating to a set of gender equality indicators. And in the UK, the corporate governance code now requires listed companies to set out their diversity policy in their annual report and disclose progress against any measurable objectives they have set themselves.

Businesses need to take action in response, but not just to avoid breaching regulatory requirements. A number of research studies have shown the business benefits of diversity – not only intangibles such as greater innovation, but also bottom-line benefits. For example, a September 2014 study by the Credit Suisse Research Institute (based on 3,000 international companies) found that companies where women accounted for over 15% of senior management achieved an average return on equity of 14.7% in 2013, compared with 9.7% by companies where women accounted for under 10% of senior managers.

In response to regulatory pressure and the mounting evidence for diversity benefits, companies are starting to set their own targets. Lloyds Banking Group, for example, has set itself the goal of 40% female representation at all levels of management by 2020.

Many organisations like Lloyds see benefits from having a workforce – including senior personnel – that reflects their customer base.

But diversity isn’t only about gender. A recent report

by ACCA and the Economic and Social Research Council, Towards better diversity management, shows that diversity relates to many different attributes – gender, age, ethnicity, disability, sexual orientation, and educational and socio-economic background. Even where organisations appear to have a mix of nationalities or genders in senior roles, those individuals often share a similar background, so true diversity can still be lacking.

Role of finance Within individual businesses, making the case for diversity action remains a challenge. Line managers have other priorities and are often under pressure to deliver short-term results – diversity initiatives generally require a medium to long-term timeframe to have an effect.

Part of the challenge is to demonstrate the bottomline impact. This is where finance functions need to be proactive. ‘The expertise of the finance team

How finance can help manage diversity * * * * * * * *

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Approach HR and diversity colleagues to propose working together in order to assess diversity within the organisation and its interaction with management strategy.

With HR, identify the best measures for analysing diversity impacts – financial measures and softer metrics such as employee or customer satisfaction.

Assess the quality and extent of current diversity data and whether this needs to be improved.

Consider including shareholder value, wider stakeholder value, regulatory costs and the global value chain in the scope of the business case.

Consider the financial impact of lost business, as well as the potential for increased turnover and profit from improved customer understanding.

Tailor the business case and its presentation for specific audiences, whether HR, line managers or C-level executives.

Establish governance around diversity actions. For example, include diversity KPIs in management reporting.

Examine the standard methodologies and reporting practices used by finance to ensure these are not acting as a blocker to diversity initiatives.

Business benefits | Diversity | Accountancy Futures

can demonstrate linkages between good diversity management and business performance,’ says Claudia Chapman, head of policy and campaigns at ACCA. ‘The finance function could help diversity managers overcome some of the hurdles to success such as the pressure for short-term business results and lack of support within the business.’

Finance teams can bring their analytical skills to bear on performance data – for example, looking at sales data to determine whether particular attributes are linked to increased revenue. Nikki Walker, a diversity and inclusion (D&I) expert from consultancy More2Gain, uses her own finance and operations experience to help companies build a business case for change. She recalls one client finding that slightly older, female employees were getting the best customer satisfaction scores and taking the highest spend. ‘This analysis caused the company to step back and think about the need to recruit slightly different people – perhaps older, perhaps different genders and perhaps different ethnicities – in order to be able to connect with their customers and drive more value to the bottom line,’ she says. ‘That’s the kind of analysis that makes business leaders understand why they need to invest in D&I.’ But making the business case isn’t only about valuing the upside of action – it should also consider the potential negative impacts of inaction. Walker has seen the first signs of major companies demanding D&I progress from their suppliers – or threatening to remove their business. ‘Finance can show the impact of losing a customer on the bottom line,’ she says. ‘That’s what drives change.’ Similarly, failure to meet regulatory targets could generate bad press, damage corporate reputation and ultimately reduce shareholder value.

Governance and methodology As well as helping to make the business case, finance can ensure there is appropriate accountability and governance attached to D&I initiatives. For example, two or three key performance indicators could be included in the monthly management pack sent to the board to report on business performance. This helps integrate D&I management with mainstream business management. ‘It

needs to be part of the way the business is run,’ Walker says. ‘Finance can help with mainstreaming it.’

Finance functions also need to examine their own practices, including the standard reporting methodologies they require business units to use, to make sure that these aren’t impeding policies that could support greater diversity. For example, requiring business units to report performance data based on basic physical headcounts rather than full-time equivalent employees could deter the spread of part-time working.

What’s next?

Looking ahead, the case for diversity is beginning to encompass the concept of the ‘global value chain’. As the ACCA and ESRC report highlights, this approach involves ‘seeking to redress disparities of power across a company’s operations in different parts of the world’.

It also reflects the shift in business and economic power towards emerging markets and away from the mature economies of the West.

Alison Maitland, a writer on leadership and diversity topics, says leading organisations are already moving their diversity initiatives to the next level with a greater focus on ‘inclusion’. ‘Among more experienced companies, there is a clear shift of emphasis in the search for what works,’ she says. ‘Instead of, or alongside, programmes focusing on categories of employee – women, ethnic minorities, people with disabilities, etc – these organisations are investing in developing leaders and creating inclusive cultures in which everyone feels valued and able to achieve their potential.’

Some companies have renamed their strategy ‘inclusion and diversity’ or dropped the word diversity altogether. ‘Others have renamed such programmes to reflect their emphasis on culture change,’ Maitland says. ‘As many of these companies operate globally, they attribute increasing importance to managers’ and leaders’ possession of cross-cultural skills.’ ■ Sarah Perrin, journalist

Towards better diversity management is at www.accaglobal.com/ab134 Edition 10 | 81

Accountancy Futures | News | In brief

ACCA chief executive Helen Brand: ‘There has never been a greater or more urgent need to develop sustainable economies.’

(Right) Stephen Heathcote, ACCA’s executive director, markets, with Naim Sadat, treasury program coordinator at the Afghanistan Ministry of Finance.

Celebrating 110 years ACCA celebrated its 110th birthday on 30 November 2014. Founded in 1904 with core values of opportunity, diversity, innovation, integrity and accountability, the body has been developing professional accountants ever since. Significant expansion in the past four decades has seen membership grow from 12,500 in 1970 to 170,000 in 180 countries in 2014.

‘There has never been a greater or more urgent need to develop sustainable economies,’ says Helen Brand, ACCA chief executive. ‘A well-coordinated international accountancy profession, which demands the highest ethical and technical standards of the world’s professional accountants, is key to positive economic development.’

ACCA has continued to support new markets and launched its 91st office last year, in Myanmar. In many parts of the world, ACCA is the only international body working hand-in-hand with national bodies, governments, employers and education providers to help build the financial capacity needed to underpin economic development.

ACCA and IMA focus on future ACCA and IMA (Institute of Management Accountants) have renewed their long-term commitment to their global strategic partnership with the announcement of a multi-year ‘signature’ research programme, which will focus on futures-related topics.

As well as research projects, this new signature programme includes the development of a broader suite of outputs, learning resources, joint events and enhanced digital engagement.

‘ACCA is pleased to announce the next step of its successful strategic partnership with IMA, which has already reaped huge dividends for CFOs, aspiring finance and accounting professionals, and the profession at large,’ said Helen Brand, ACCA chief executive.

Jeff Thomson, IMA president and CEO, said: ‘IMA and ACCA have a shared commitment to serving the public interest and enhancing organisational capability, given 82 | Edition 10

the evolving and challenging role of the CFO team.’

Further details of the futures research programme were announced by both bodies at the World Congress of Accountants in Rome last November.

For more on ACCA and IMA, go to www.accaglobal. com/ab/173

Afghanistan move ACCA and the Afghanistan Ministry of Finance have signed an agreement to develop the accountancy profession in Afghanistan.

The memorandum of understanding will see the Afghan government and the global accountancy body establish the infrastructure for long-term development of the finance profession.

The memorandum sets out the objectives for the partners to work together to build capacity within the profession in Afghanistan, with ACCA providing expert advice and guidance on a broad range of areas, such as the establishment of a national professional accounting organisation, including qualification development, professional regulation and membership issues.

For more on ACCA and the MoU, go to www. accaglobal.com/ab/174

New breed of adviser Recommendations on how entrepreneurs, enterprises and finance professionals can achieve success together have been set out by ACCA’s Global Forum for SMEs. The paper, A new breed of adviser for the modern-day enterprise, emphasises the importance of communicative ‘soft’ skills to the role of business adviser.

It also considers the potential of Massive Online Open Courses (MOOCs) in enterprise education, in the light of ACCA’s 2014-launched course with the University of Exeter, Discovering Business in Society. ■ The report is available at www.accaglobal.com/ab/175

Accountancy Futures

Accountancy Futures

Editor Lesley Bolton lesley.bolton@accaglobal.com +44 (0)20 7059 5965 Contributing editors Jo Malvern, Chris Quick, Colette Steckel Sub-editors Dean Gurden, Peter Kernan, Jenny Mill, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar Designers Bob Cree, Robert Mills Production manager Anthony Kay Head of ACCA Media Chris Quick 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 Ecolabel. The mill operates under the ISO 14001 certified environmental management system.

ACCA President Anthony Harbinson FCCA Deputy president Alexandra Chin FCCA Vice president Brian McEnery FCCA Chief executive Helen Brand OBE

The London Tube system is a good example of corporate culture (see page 6).

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.

ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, firstchoice 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 180 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.

Accountancy Futures Edition 10 was published in March 2015.

Accountancy FuturesÂŽ 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 2015 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.

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Think Ahead 2 | Edition 10

Editorial board Sue Almond External affairs director sue.almond@accaglobal.com Chiew Chun Wee Head of policy, Asia Pacific chunwee.chiew@accaglobal.com Arif Mirza Regional head of policy, MENASA arif.mirza@accaglobal.com Ewan Willars Director of policy, ACCA ewan.willars@accaglobal.com Edition 10 | 83

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ACCOUNTANCY FUTURES CRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 09 I 2014

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Critical issues for tomorrow’s profession Edition 10 | 2015

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markets stephen.heathcote@accaglobal.com

Lucia Real-Martin Market director – emerging markets lucia.realmartin@accaglobal.com

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Western Europe mark.cornell@accaglobal.com

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May Law Market director – Asia Pacific may.law@accaglobal.com

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POLITICS, PROTEST AND PILLAGE A NEW WORLD OF RISK FOR MULTINATIONAL BUSINESS

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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

08/01/2014 14:41

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Jamil Ampomah Market director – Sub-Saharan Africa jamil.ampomah@accaglobal.com

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Edition 10

Stephen Heathcote Executive director –

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Corporate culture Getting your organisation on the right track

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