Accountant Middle East - November 2013

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setting standards in financial auditing & accountancy

NOVEMBER 2013

EY:

THE NEW PURPOSE

CAPITAL CONTROL

IFRS FOR SHIPPING INDUSTRY

Abdulaziz Al-Sowailim on EY’s global rebranding and 90 years of doing business in MENA

Citi Commercial Bank roundtable brings finance experts to debate on challenges in working capital cycle

Catch crucial issues arising in connection with financial reporting for shipping companies

MURTAZA CHEVEL

“If you think in the definitive, you are not going to get out of the box,” says Union Properties CFO

PUBLICATION LICENSED BY IMPZ

© 2013 EYGM Limited. All Rights Reserved. ED None

IT’S MORE THAN THE NUMBERS. EY’s Reporting magazine addresses the reporting and governance issues that international businesses face as they explain their performance story.

Companies are striving for growth, assessing new risks and working to maintain the confidence of stakeholders through their reporting.

To read more, visit www.ey.com/ reportingmagazine.

editor's audit

Publisher Dominic De Sousa

Happy Anniversary!

HERE’S THE deal. This November issue of Accountant Middle East magazine marks our 1st Anniversary since the launch of the publication in 2012.

Group COO Nadeem Hood EDITORIAL Editor Joyce Njeri joyce.njeri@cpimediagroup.com +971 4 440 9140

At the same time, ‘Big 4’ giant EY is celebrating a significant milestone this year, having completed 90 years in the Middle East and North Africa.

Contributor Shane Phillips

So where do we begin?

ADVERTISING Commercial Director Chris Stevenson chris.stevenson@cpimediagroup.com +971 4 440 9138

Here at Accountant Middle East, we have come a long way. Editorially, advertising and in terms of events, the publication has grown in ways that we never envisioned a year ago. Most notably are our regular roundtable events where we bring together experts, business leaders and stakeholders from across various industries to share and expand their knowledge through discussions related to finance issues and best practices.

PRODUCTION & CIRCULATION Production Manager James P Tharian james.tharian@cpimediagroup.com +971 4 440 9146 Database and Circulation Manager Rajeesh M rajeesh.nair@cpimediagroup.com +971 4 440 9147 DESIGN Head of Design Fahed Sabbagh fahed.sabbagh@cpimediagroup.com +971 4 440 9148 Designer Froilan A. Cosgafa IV froilan.cosgafa@cpimediagroup.com Photographers Jay Colina Kader Pattambi DIGITAL SERVICES Digital Services Manager Tristan Troy Maagma Web Developer Abey Mascreen online@cpidubai.com +971 4 440 9100 Published by

In the first of a series of roundtable discussions we hosted recently in conjunction with Citi Commercial Bank, CFOs and other top ranking finance managers drawn from the manufacturing sector tackled the all-important debate on effective management of working capital. Read the full report in our ‘Citi Roundtable’ segment.

Also it’s worth mentioning about the launch of our elite networking club aptly dubbed ‘aa+’, which serves as a business and social outlet for all professionals in the accountancy, finance and audit sectors. Every month, members meet at selected exclusive clubs to have fun networking with peers across all associations, nationalities and age groups. So make sure to join us at our next gig.

While I feel the urge to go on beating my own drum here, I will not spoil EY’s party, but rather, in the spirit of togetherness salute the firm’s incredible accomplishment by giving the cover treatment to Abdulaziz Al Sowailim, the Chairman and Chief Executive of EY MENA.

Formerly known as Ernst & Young, the professional services provider opened its first MENA office in 1923, and since then, it has today grown to more than 5,000 employees across the region.

We had an exclusive interview with Saudi-based Abdulaziz, who was recently in Dubai where he joined other EY’s Partners to toast to the firm’s 90 years of service in the region. In the interview, Abdulaziz speaks to us about EY’s recent global rebranding, nine decades of doing business in the region and why MENA is still a great investment destination. Catch all the reports under ‘Focus on EY’.

Here’s to Happy Anniversary to both EY and Accountant Middle East magazine. Cheers!

Office 804 Grosvenor Business Tower, TECOM PO Box 13700 Dubai, UAE Tel: +971 4 440 9100 Fax: +971 4 447 2409

Joyce Njeri Editor, Accountant Middle East

Printed by Printwell Printing Press SETTING STANDARDS IN FINANCIAL AUDITING & ACCOUNTANCY

NOVEMBER 2013

Talk to us: E-mail: joyce.njeri@cpimediagroup.com Twitter: @AccountancyME

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© Copyright 2013 CPI All rights reserved While the publishers have made every effort to ensure the accuracy of all information in this magazine, they will not be held responsible for any errors therein.

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NEW PURPOSE EY:THE Abdulaziz Al-Sowailim on EY’s global rebranding and 90 years of doing business in MENA

CAPITAL CONTROL

Citi Commercial Bank roundtable brings finance experts to debate on challenges in working capital cycle

IFRS FOR SHIPPING INDUSTRY Catch crucial issues arising in connection with financial reporting for shipping companies

MURTAZA CHEVEL

“If you think in the definitive, you are not going to get out of the box,” says Union Properties CFO

PUBLICATION LICENSED BY IMPZ

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www.accountancyme.com 3

Contents NOVEMBER 2013

Main Features

14

4

14

Cover Story:

EY: The new purpose - Abdulaziz Al-Sowailim, Chairman of EY MENA, speaks on the firm’s global rebranding, nine decades of doing business in the region and why MENA is still a great investment destination.

30

CITI roundtable:

46

Personality & Practice:

Capital control – CFOs and senior finance experts from the manufacturing sector debate on the challenges in the working capital cycle.

There’s always a solution – Union Properties CFO - Murtaza Chevel – explains a paradox that ambitious accountants face when attempting to advance into an executive role.

November 2013

24

Current Affairs 6 News & Views:

9

News & Views:

Profession Watch

Assessing accountancy landscape – As part of the continuing effort to strengthen the accountancy professional globally, the Professional Accountancy Organisation Global Development Report was released recently.

56

IFRS Special:

61

Technology Talk:

68

Private Equity:

IFRS for shipping industry – Moore Stephens Partners hold key seminar in Dubai to enlighten on crucial issues arising in connection with financial reporting for shipping companies.

DFM unveils cool apps - Stock exchange showcases its latest technology innovations, including electronic services and smart phone applications at Gitex 2013.

PE cycle ups gear - More than half of respondents in Deloitte MENA survey expect an increase in investment activity.

74

30 Special Reports

CIMA releases 2014 prices - In an effort to make its qualification even more accessible to ambitious students and professionals in the UAE and across GCC, CIMA has announced a special pricing campaign.

Industry Appointments:

Revolving door - Find out the latest movement of professionals between roles, companies as well as new industry hires.

46

24

Focus on EY:

Takaful growth soars - Key countries continue to offer high prospects with low market penetration rates, but wider opportunities beckon in emerging markets, new EY study shows.

38

Combating fraud:

52

Student accountant:

62

Career development:

Corruption in construction - Fraud in building industry is causing significant threats to both the finances and reputations of companies, new Grant Thornton report shows.

MSA programme now in UAE - As American University of Sharjah launches first-of-a-kind Master of Science in Accounting, the Head of Accounting at the school tells us what makes the qualification tick.

CFO mentorship course on – Middle East CFO Alliance, the largest CFO networking group in the region has announced the final details of its CFO Mentorship Programme for 2014.

From the Experts 42 Competency Check:

Psychometric testing - Rita Rizk assesses the benefits of a controversial tool that measures individuals’ work skills, attitude and personality traits.

72

CORPORATE TREASURY:

Rewarding relationships – It is essential for treasurers to communicate honestly and openly if they want to get the best from their banks, argues Sarah Boyce

Interactions 3 Editor's audit

5

News & Views

CIMA RELEASES 2014 PRICES THE CHARTERED Institute of Management Accountants (CIMA), in an effort to make its qualification even more accessible to ambitious students and professionals in the UAE and across GCC, has announced a special pricing campaign.

Students who wish to up-skill and build a successful professional career in business and finance, can now register for a CIMA degree and avail savings worth AED 600 with annual subscription fee waived off until Jan 2015.

The courses include CIMA Certificate in Business Accounting, which is an entry level business and accounting qualification for students with little or no business and accounting background, and the CIMA Professional Qualification which is recognised worldwide as the most relevant global finance qualification for business. The qualification is backed by two of the world’s leading accounting bodies (AICPA and CIMA), which works to make management accounting the most valued profession in business worldwide.

Geetu Ahuja (pictured) Head of GCC, CIMA said: “There is a strong emphasis on recruiting qualified professionals to fill a growing number of key financial & management positions in the UAE. As the largest professional body in the world focused exclusively on management accounting, the CIMA qualification is the most relevant international accountancy qualification for business performance and finance management.”

The campaign extends across Saudi Arabia, Qatar, Bahrain, Oman and Kuwait. Upon successful completion of the course, students will receive a globally recognised CIMA certification allowing them to build a career across various departments in an organisation, not just in finance. To register, visit www.cimaglobal.com/ register 6

November 2013

IPOs IN GCC TO RISE WHILE THE regional and international equity markets have generally been depressed post global financial crisis, early signs of recovery are appearing with higher volumes being traded on some of the regional exchanges, and more interest from foreign investors.

On the other side, the GCC economies are showing positive signs of recovery across a multitude of sectors, including retail, tourism, real estate and infrastructure.

According to Deloitte Middle East’s first Equity Capital Markets Confidence Survey, “From a trot to a canter?”, the Tadawul (Saudi Stock Exchange), the Dubai Financial Market (DFM) and the Qatar Exchange (QE) are expected to be the most active GCC exchanges over the next 12 months, and there is a strong pipeline of issuers looking to

launch IPOs regionally as well as on international stock exchanges.

The survey, which was conducted through meetings with 30 equity capital market practitioners within regional and international banks operating in the GCC, covering the MENA region, covers topics such as the macro-economic environment, valuations, the IPO process and regulations amongst other themes.

It shows that over 70% of the respondents expect the volume of IPOs in the GCC region to increase in the next 12 months.

Increases in trading volumes are driven in large part by foreign investors seeking a safe haven from socio-political turmoil in the wider Middle East region, which is positively affecting real estate and stock values in GCC countries, especially the UAE.

STATS FACT:

70%

proportion of MENA equity market leaders who expect high volume of IPOs in the region

PROTIVITI GETS POSITIVE RATING PROTIVITI, a global consulting firm, has received a “Positive” rating from Gartner Inc, in the MarketScope for Global Risk Management Consulting Services. The report assesses risk management consulting capabilities in order to help organisations identify and evaluate the right consultants to support the development

of their risk management and compliance programmes. The evaluation also helps businesses select associated implementation services and technologies.

Protiviti is one of only seven global consulting firms that Gartner evaluated in the report.

“The increasingly dynamic and complex nature of today’s highly regulated business environment requires organisations to take an enterprise-wide view of risk,” said James Pajakowski (pictured), executive vice president, global services, Protiviti.

News & Views

KPMG ISSUES M&A RAILWAY STUDY

KPMG RECENTLY launched a brief report on Merger and Acquisitions trends in transport infrastructure, as well as looking at the opportunities and challenges facing the GCC railway projects.

Andrew Robinson, Head of Transport and Leisure for KPMG Lower Gulf said “this report focuses on two current issues that are facing the transport sector. It firstly analyses the trends in transport infrastructure and how the transactions in the sector are gaining importance. Secondly, it looks at the vast opportunities that the rail development in the Middle East is presenting to potential investors.”

The report also explores the main drivers behind the trend of increasing M&A activity in the transport infrastructure segment by looking at factors such as how public budget restraints across debt ridden countries have forced national governments to privatise national infrastructure and look for private operators and investors in order to secure the sustainable operation of strategic transport infrastructure and hub networks.

Talking about the opportunities and challenges for the GCC railway, Daniel Lawrence, Manager Transport Advisory at KPMG said; “Following the recent hiatus in UK rail franchising activities, many European rail operators have been turning their attention increasingly to developments overseas. One area eliciting particular interest is the Middle East. The region holds huge potential for rail operators, due to an extensive transport investment plan driven by the ambition and wealth of the Governments.”

GT RANKS AS ‘TOP EMPLOYER’ A SURVEY of more than 200,000 business and engineering students from 12 of the world’s largest economies named Grant Thornton one of the top 50 most attractive global business employers, placing 35th. The survey was conducted as part of the Universum Annual Student Survey.

“We are honored by this award, and it is a testament to the 35,000 Grant Thornton people working in 120 countries who make Grant Thornton the firm that it is,” said Grant Thornton CEO Ed Nusbaum (pictured).

The rankings are based on the opinions of business and engineering students from top

universities in the world’s 12 largest economies: Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Russia, UK and USA. Hisham Farouk, Managing Partner of Grant Thornton UAE said, “This is a great accomplishment which supports our ambition to retain and attract the best people who can continue to add value to our dynamic clients.”

Earlier this year, Grant Thornton was named International Accounting Bulletin’s 2013 “Accounting Network of the Year,” largely based on leading the major global accounting organisations with growth of 10.4%, as well as strong thought leadership in the profession on critical global accounting issues.

CARRYING ON THE LEGACY FAMILY BUSINESSES are one of the largest business segments in the Middle East. Operating across diverse industries and with varied scales of operations, these businesses have made a significant contribution to transforming the markets within the region, creating employment and fuelling the growth of the economies within which they operate.

While family businesses owners benefit from the personal challenge of building their businesses, family independence and respect within the community, they are also confronted with numerous challenges which generally aggravate over time and with business expansion.

It is against this background that KPMG held the regions’ first Middle East & South Asia Regional Family Business Conference recently in Dubai. Over one hundred owners

and top executives from family business establishments across the Middle East and South Asian region attended the event.

Fawzi AbuRass Head of Family Groups KPMG Lower Gulf said that the “Family Businesses are one of the key drivers for the Middle East economy and a major player in various industries in the region.

Majority of the businesses are in the first or second generation and are facing the big challenge, in addition to other operational challenges, of transition to the next generation.”

KPMG also held an exclusive session for the members of the Young Presidents’ Organisation (YPO) coinciding with the Family Business Conference.

7

News & Views

IS BANK KENNEDY GIVES DELOITTE SPECIALISATION TOP MARKS WORTH THE RISK? DRIVEN BY difficult market conditions, concerns about complexity, and new regulation, many banks are making tough strategic choices, and changes that may result in a sharper focus on a select set of “core” businesses.

In other words, they are specialising.

While the potential benefits of specialisation are likely to be many and are widely anticipated, less attention has been paid to potential difficulties and downsides. A new report from Deloitte, the largest professional and consultancy firm in the world, entitled “Bank specialisation: new strategies, new risks?” highlights the likely risks created from specialisation and the actions banks might take to mitigate these risks.

The Deloitte report indicates that specialisation is a major strategic trend in the banking industry, with risks and benefits both requiring careful assessment. This is because execution of the specialisation strategy can be challenging and presents a number of risks that may not be new, but will likely be more prominent.

“Alongside market challenges and pressure on results, regulation plays a large role in banks’ strategic direction,” said Joe El Fadl, financial services industry leader at Deloitte Middle East.

“Basel III-inspired capital provisions and framework for new liquidity requirement, while yet to be fully implemented, are perhaps the most significant drivers of specialization. Higher capital and tougher liquidity requirements and more stringent risk-weighting rules have forced banks to set their priorities and make hard choices about where they compete. In the Middle East region there has been a trend, even though still modest, to shift slightly towards Islamic banking driven by market demand,” he added.

8

November 2013

DELOITTE TOUCHE Tohmatsu Limited (DTTL) has announced that Kennedy has named it global leader in Leadership Development Consulting services in their Leadership Development Consulting Market Report 2013.

Kennedy’s Leadership Development Consulting Market report examines the strengths and weaknesses of the major providers including those from the strategy and operations, multi-services, and HR consulting segments. Additionally, the report examines the business, geographic, and industry drivers of client spending on leadership development consulting.

The interplay of these drivers is illustrated in case studies that underscore the challenges of scale and scope for these providers.

The report notes “Deloitte differentiates on researchdriven leadership consulting, a position strengthened by its recent acquisition of Bersin and Associates.”

Julian Hawkins, consulting leader at Deloitte Middle East, said: “Deloitte’s thought leadership and research, most notably that of Bersin by Deloitte, outpaces its peers in quantity and quality. Bersin’s leadership development practice generates market-leading benchmarks, methodologies, and frameworks, including the leadership maturity model, that provide a compelling fact basis for designing effective solutions.”

RED FLAGS FOR CFOs CONDUCTING DUE diligence on international business partners has become a necessary and critical practice for companies—and for CFOs—operating in global jurisdictions, Deloitte says.

There are multiple factors driving the need for better compliance in this area. The US Foreign Corrupt Practices Act (FCPA), UK Bribery Act, and multinational agreements, to name a few, oblige companies to “know” their foreign counterparts.

A recent report released by the Deloitte Forensic Center entitled “The Case for Getting Global Business Partners” explores options for information-gathering and examines factors in the due diligence process for senior business leaders to consider in investigating international business partners.

What seems clear is that companies will be expected to conduct a deeper, more systematic investigation of potential international business partners, and CFOs and others overseeing risk management can lead that effort by establishing a due diligence process that involves collecting information from the business partner, verifying the data, and following up on identified red flags.

“Common due diligence pitfalls include failing to conduct timely and sufficient due diligence, failing to adequately verify information provided by business partners, and failing to act on identified red flags” explains James Babb, CFO programme leader at Deloitte Middle East.

News & Views

ASSESSING ACCOUNTANCY’S LANDSCAPE AS PART of the continuing effort to strengthen the accountancy professional globally, the Professional Accountancy Organisation Global Development Report was released recently.

The report is an initiative of the Memorandum of Understanding to Strengthen Accountancy and Improve Collaboration (MOSAIC).

The report was created to provide an assessment of professional accountancy organisation (PAO) development at the global, regional, and national levels.

Through its 10 key findings, the report establishes the success factors and challenges associated with building a strong, sustainable accountancy profession supported by an effective PAO. “As an integral part of national financial infrastructures, PAOs can provide significant contributions to the financial, economic, and social development of nations,” said Deborah Williams (pictured), MOSAIC Steering Committee co-chair and chair of the IFAC PAO Development Committee.

“Capacity-building efforts benefit the global economy since properly functioning PAOs support the production of high-quality financial information and contribute to public and private sector development, economic growth, and the aid-effectiveness agenda,” she added.

UHY STRENGTHENS PRESENCE IN AFRICA GLOBAL ACCOUNTANCY network UHY has extended its coverage within the EMEA region by appointing two new member firms in Ghana, Voscon Chartered Accountants and Douglas Godwinson World.

Both firms will rebrand to UHY Voscon and UHY Godwinson respectively and are both based in Accra, the Ghanaian capital.

Voscon Chartered Accountants was founded in 1991 and now has a team of 21 staff including four partners.

The firm provides audit, tax and bookkeeping services to a portfolio of clients in the information technology, building and civil engineering, non-banking financial services, trade and commerce, and non-governmental organisation sectors. Their main focus is on supporting their clients’ interests in Gambia, Ghana, Liberia, Nigeria, Ivory Coast,

Sierra Leone and Burkina Faso.

The team speaks English as well as local languages.

Douglas Godwinson World was founded in 2006 and has two partners and 10 staff. The firm’s focus is on providing tax, audit and bookkeeping services for clients in the oil marketing, construction, commerce and manufacturing sectors.

Ladislav Hornan (pictured), chairman of UHY commented: “We are delighted both firms in Ghana have joined the UHY network extending our coverage and capabilities in Africa.”

MAJID AL FUTTAIM CELEBRATES SUKUK LISTING

IYAD MALAS, Chief Executive of Majid Al Futtaim Holding, was all smiles recently as he rang the opening bell at Dubai Financial Market (DFM) to celebrate the listing of a Sukuk by the company on NASDAQ Dubai, the Middle East’s international financial exchange.

The ceremony took place in the presence of His Excellency Mohammed Abdulla Al Gergawi, Chairman of The Executive Office of His Highness Sheikh Mohammed Bin Rashid Al Maktoum, as well as Essa Kazim, the Managing Director and Chief Executive of Dubai Financial Market (DFM).

The listing of Majid Al Futtaim’s 400 million dollar Sukuk, which took place in July, brought the nominal value of Sukuk listed on Dubai’s exchanges to 11.08 billion dollars, the third largest total in the world. It was the sixth listing of 2013 and brought the total value of new Sukuk listings in Dubai this year to 4.4 billion dollars.

His Excellency Mohammed Abdulla Al Gergawi said: “Majid Al Futtaim’s Sukuk listing represents a new addition to the successes of the ‘Dubai, The Capital of the Islamic Economy’ initiative. The Committee will strengthen its activities aimed at expanding the Islamic initiative further, to increase the prosperity and wellbeing of the people of the UAE.” 9

BUSINESS PICTORIAL

inside

ROUNDTABLE

A

ccountant Middle East Magazine in conjunction with Citi Commercial Bank recently hosted a roundtable forum to explore the ‘Challenges in the Working Capital Cycle within the Manufacturing Industry’. The objective of the roundtable - which brought together an influential group of Chief Financial Officers and other Senior Financial professionals from the manufacturing industry - was to look into ways of how companies could effectively manage their working capital cycle, by highlighting how the financing decisions determine a company’s overall working capital position and why the management of working capital is critical for the survival of companies in the manufacturing industry.

(Turn to page 30-36 for full report)

10 November 2013

BUSINESS PICTORIAL

THE BIG DEBATE CFOs and Senior Financial professionals drawn from the manufacturing industry engage in an invigorating roundtable discussion on the ‘Challenges in the Working Capital Cycle in the Manufacturing Industry’. The event was hosted by Accountant Middle East Magazine in conjunction with Citi Commercial Bank, at the iconic JW Marriott Marquis Hotel in Dubai.

11

Tech Talk

BIG DATA DRAWBACKS

New survey by CIMA and AICPA shows that third of finance professionals admit incorrect analysis of big data has significant impact on revenue.

Geetu Ahuja – Head of GCC, CIMA: “Big data is increasingly becoming a core business asset”

T

HE INTERNATIONAL sur vey of 2,000 CGMAs (Chartered Global Management Accountant) finance professionals, including those working at CEO and CFO level, reveals 86% of organisations are struggling to turn growing volumes of data into valuable insight and are suffering as a result.

In addition, almost half (44%) of respondents said their organisation did not have the sufficient technology tools in place to understand new trends impacting their business and only 53% are investing in the capabilities to harness the benefits.

The top three reasons for organisations not introducing new or improved practices are; i) the costs ii) the value not being understood and iii) time availability The findings are in stark contrast to the estimated impact of big data in the future, with 87% of respondents saying big data and better analytics will change the way business is done over the next ten years and those who do not harness the concept will find themselves at a competitive disadvantage (86%) by the end of the decade.

Respondents said the main barriers their 12 November 2013

organisation face when attempting to extract valuable insight from data are: Difficulties in bringing data together from different databases and silos (62%) Ensuring the business captures reliable, good quality data in the first place (51%) Extracting insight from non-financial data (46%) Ensuring insight gained from data is used to improve performance (43%) Identifying meaningful trends and insights in a mass of data (39%) Intelligent visualisation and reporting of data (34%)

Geetu Ahuja – Head of GCC, CIMA said: “Big data is increasingly becoming a core business asset.

According to the survey, 93% of respondents agreed that finance has an essential role to play in helping organisations benefit from data-related projects."

RETURN ON INVESTMENT When asked who is responsible for ensuring their organisation gains a return on investment in data management technologies, respondents said:

61%

28% 18%

CFO

CIO

COO

4%

1%

MARKETING HR DIRECTOR DIRECTOR

13%

OTHER

86%

proportion of surveyed organisations that are struggling to turn growing volumes of data into valuable insight

Focus on EY

EY:

THE NEW PURPOSE

In this exclusive interview, Abdulaziz Al-Sowailim, Chairman of EY Middle East and North Africa, speaks to Accountant Middle East on the firm’s global rebranding, nine decades of doing business in the region and why MENA is still a great investment destination.

Q

. From July 1 2013, Ernst & Young changed its brand name to EY. Tell us more about the new global brand name and logo.

A. Our brand name has changed to EY. Shortening the name will provide consistency and ease of use for EY practices and clients around the world.

We have also redesigned our logo, reflecting our new brand name clearly in the design. Our new brand name and logo demonstrate clearly and boldly who we are and reflect the traits we need to have the best brand in our profession.

What does the new purpose mean?

Our purpose means that EY is committed to doing its part in building a better working world.

To us in the region, the message is very clear.

Building a better working world is not just about creating a better office environment. It’s about channeling our strong legacy as an organisation and who we are as individuals, working together as a region to achieve sustainable growth and make a positive impact in our communities.

Over the last 90 years EY has been a strong influence in the region, guiding business and working closely with the public sector. It is now 14 November 2013

up to us to create an even stronger EY for future generations. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies.

We develop outstanding leaders who team to deliver on our promises to all of our stakeholders.

In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

We know that building a better working world is an ambitious objective but it is an incredibly important aspiration and will be front and centre of everything we do as an organisation. We help our clients, our people and our communities one project at a time. Over time, the whole working world works better.

The region is blessed with several attributes that make it an attractive destination for business solid fundamentals, strong demographics and government willingness to improve the already concrete growth prospects.

Focus IFRS Special on EY

Abdulaziz Al-Sowailim, Chairman and CEO of EY Middle East and North Africa

15

Focus on EY

EY has completed 90 years in the Middle East and North Africa (MENA). How would you sum up this incredible journey?

Indeed, this is a milestone year for EY as it marks our 90th anniversary in the Middle East and North Africa. Our first MENA office opened in Iraq in 1923. Now EY is made up of more than 5,000 people in Bahrain, Lebanon, Qatar, Kuwait, Jordan, UAE, Saudi Arabia, Oman, Egypt, Palestine, Syria, Libya, Iraq and Pakistan.

Over the years, generations of EY people have proudly played a major role in helping regional businesses succeed. Today, EY is the largest and most established professional services organisation in the region providing assurance, tax, transaction and advisory services.

We are very proud of our MENA heritage and will continue to prioritise the development of our local communities. We help develop outstanding leaders who deliver exceptional services to our clients and who contribute to our clients and communities. In addition to passing this significant milestone we have had many developments globally too. This year, Mark Weinberger also became our new Global Chairman.

How important is the MENA region to EY?

EY was the first professional services organisation to operate in the region, so we were the first to see potential. Nine decades later, we are still growing and investing in MENA. Over the last 12 months, 26 partners joined the EY MENA practice. This is a significant addition to our leadership team in the region and is indicative of our ambitious investment and growth plans.

The region is going through challenging sociopolitical and economic changes and our new partners have a crucial role to play in leading this generation of EY and in helping our clients navigate through these times.

Why is the Middle East a good investment destination for global businesses looking at the emerging markets?

The region is blessed with several attributes that make it an attractive destination for business 16 November 2013

The global middle class Millions

Household income of US$10 to US$100 a day in PPP terms

3,500 3,000 2,500

Middle East and North Africa

2,000

Asia Pacific

Sub-Saharan Africa Central and South America Europe

1,500

North America 1,000 500 0 2009

2020

Source: OECD. 1 OECD (2010), The emerging middle class in developing countries, OECD Development Center, Working Paper No.285

Economic growth prospects: 2011–20 Emerging Asia Sub-Saharan Africa Middle East & North Africa

Latin America

US

Eurozone

0

1

2

3

4

5

6

7

Annual growth (%), US$ basis

Source: Oxford Economics.

solid fundamentals, strong demographics and government willingness to improve the already concrete growth prospects. The region’s large population is one of the youngest and wealthiest in the world.

Vast natural resources combined with steady and robust oil prices have created substantial budget surpluses among oil exporters. This helped many regional governments to increase their spending on infrastructure projects and efficiently drive their diversification efforts.

26

Number of Partners who have joined EY MENA practice, in the last 12 months

Focus on EY

Number of projects

FDI by value 1,070

GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE. The bulk of this has gone to the GCC ‘trio’ of UAE, Saudi Arabia and Qatar.

(thousand)

202.7

928

993

Job creation by FDI

(US$ billion)

261.4

861 693

164.4

118.8

584

134.8

99.6

479 362 359

58.5

72.9

68.5

43.0

2003 2004 2005 2006 2007 2008 2009 2010

2011

99.8

62.4 63.8

2003 2004 2005 2006 2007 2008 2009 2010

94.3

105.9

95.5

58.7 55.7

2011

2003 2004 2005 2006 2007 2008 2009 2010

2011

Source: fDi Intelligence.

To sustain this, the region needs to energise its innovation climate. They need to develop coherent links between all stakeholders in the innovation ecosystem such as academics, regulators, entrepreneurs and multinational corporations. As the innovation climate in the region improves, countries will find it easier to pursue economic diversification.

International investors see bigger internal markets, more accessible customers and better transport and logistics infrastructure as some of the most attractive features of the region.

The Middle East with its large market potential, coupled with investment and infrastructure programmes, and abundant natural resources make it a natural choice for consideration by foreign investors. However, challenges remain and the region must improve its technological readiness and regulatory environment, then — with a more stable political environment — it will be better able to compete with the larger rapid-growth markets for investment.

Share of FDI regional investment

With regards to the direction of inward investments - since 2003, the majority went to the

(2003–11)

North America

Western Europe

Middle East

Asia-Pacific

Projects

Projects

19%

17%

21%

Value 38%

Value

18%

18%

35% 24%

Jobs

Jobs 20%

15% 25% 36% Source: fDi intelligence.

You spoke about the trio GCC members UAE, Saudi Arabia and Qatar. What are the macro economic factors that you think businesses should be bullish about?

Let’s first look at the region as a whole before we speak about the fastest growing economies in the region. We expect the Middle East region to grow by 3.0% this year, down from growth of 3.7% last year, which partly reflects lower commodity prices. However, the recovery in global trade will boost the region next year, underpinning growth of 4% or more.

Still, our slightly more subdued forecast for activity in China will reduce demand for Middle Eastern exports a little in the medium term.

But in the key Rapid Growth Markets like Saudi Arabia, UAE and Qatar, a young population is helping to foster entrepreneurship and the growth of the non-oil sector is buoyant, protecting these economies from slower global oil demand.

How do you think Saudi Arabia will do?

We expect the Saudi economy to grow by 4.3% this year and 4.6% in 2014 — a slowdown from the 6.8% growth achieved in 2012. This slowdown largely reflects lower oil production.

A dip in Saudi production compared with recent years reflects a number of factors, including higher supply from Libya, Iraq and North America, as well as relatively weak oil prices. In contrast to developments in the oil sector, non-oil growth will remain robust in the next few years. Consumer spending will grow strongly, buoyed by fast growth in retail lending and a falling unemployment rate, particularly for males.

Meanwhile, fiscal policy will remain supportive, with government spending forecast to rise by an average of 7.4% per annum between 2014 –16. We expect growth to average 4.5% per annum in the medium term, supported by strong fundamentals. But there are a number of downside risks to our forecast. On the oil front, the development of shale oil and gas in the US 17

Focus on EY

“Over the last 90 years EY has been a strong influence in the region, guiding business and working closely with the public sector. It is now up to us to create an even stronger EY for future generations.”

FDI by country of origin Rank

Country

Number of projects 2011

Share in FDI 2011

Value Change 2011 vs. 2010

1

United States

180

19.4%

15.4%

2

UAE

129

13.9%

38.7%

3

UK

100

10.8%

4

India

76

8.2%

(US$ million) 2011 15,517 6,954

Share in FDI 2011

Jobs created 2011

Change 2011 vs. 2010

24.3%

96.4%

14,988

10.9%

-31.3%

16,823

-6.5%

1,782

2.8%

-77.4%

4,647

11.8%

4,956

7.8%

38.7%

9,819

5

France

61

6.6%

27.1%

5,304

8.3%

6

Kuwait

37

4.0%

164.3%

3,414

5.3%

-15.4%

7

Germany

33

3.6%

8

Switzerland

29

3.1%

-3.3%

8.2% 174.3%

7,853 7,411

947

1.5%

-58.4%

2,574

982

1.5%

-67.8%

2,395

9

Qatar

20

2.2%

300.0%

5,876

9.2%

251.6%

3,593

10

Japan

20

2.2%

0.0%

2,450

3.8%

107.5%

1,745

Others

243

26.2%

Total

928

100.0%

Source: fDI Intelligence.

18 November 2013

-13.5% 7.8%

15,634

24.5%

–

23,626

63,817

100.0%

2.2%

95,474

and rising supplies elsewhere threaten to limit potential oil output in a sustained way.

Qatar is one of the fastest growing economies in the world and is seeing a surge of infrastructure activity. What are your projections for the country?

Qatar is seeing a lot of fast paced activity. Our growth forecast is at 5% this year and 6% in 2014.

The growth was concentrated in manufacturing, construction and government services. These sectors will likely continue to be the main

Focus on EY

drivers of activity, with the hydrocarbon sector broadly flat.

Growth will be driven by a rise in the nonoil sector. More specifically, construction, transport and communications, trade and hotels, and government services will lead the way as the Government implements its huge infrastructure plans. This is driven by its planned hosting of the 2022 FIFA World Cup and also by an expanding population.

Hamad International Airport is set to open soon and the first contracts for a $36 billion rail system are due to be signed. The 2013–14 budget shows spending up 18% on 2012–13 plans.

There will be no additional gas export capacity until at least 2015 and we do not expect any rise in oil production this year. This reflects marginal spare capacity and no pressure to add to supply, because of added supplies elsewhere and potential price weakness. After posting double-digit rates in 2006–11, we expect GDP growth of around 6% over the medium term in Qatar.

Cross-country tables Real GDP growth 2015

2016

Americas

2011 4.2

2012 2.6

2013 2.8

4.4

4.4

4.1

Argentina

8.9

1.9

2.7

3.6

4.6

3.9

Brazil

2.7

0.9

2.4

4.1

4.2

4.0

Chile

5.8

5.6

4.5

4.7

4.6

Colombia

6.6

4.0

3.9

4.4

4.2

Mexico

3.9

3.9

2.8

4.8

EMEIA

6.3

3.8

Czech Republic

1.8

-1.2

Egypt

1.8

2.2

Ghana

14.4

3.5

2014

4.5

4.4 4.0 4.3

4.7

5.3

5.3

2.2

2.7

3.0

1.7

2.0

4.5

5.9

7.1

6.9

5.9

5.5

5.0

-1.0

India

7.5

5.1

5.1

6.4

7.5

7.6

Kazakhstan

7.5

5.0

5.7

6.9

7.1

6.7

Nigeria

7.4

6.5

Poland

4.5

2.0

0.9

6.2

5.0

3.4

2.7

3.4

4.1

4.1

4.3

4.6

4.3

4.0

Qatar

13.0

Russia

4.3

Saudi Arabia

8.5

6.8

6.5

6.1

5.5

5.1

2.5

3.3

3.6

6.0

6.1

South Africa

3.5

2.5

2.0

3.6

4.0

Turkey

8.8

2.2

3.5

5.4

5.2

6.0

4.4 5.2

Ukraine

5.2

0.1

0.3

3.9

4.5

4.4

United Arab Emirates

4.2

3.3

3.7

3.9

4.1

3.8

Asia

7.5

6.4

6.2

7.0

6.9

6.7

China and Hong Kong

9.1

7.5

7.3

7.8

7.7

7.5

Indonesia

6.5

6.1

6.0

5.6

5.5

6.2

Korea

3.7

2.0

2.1

4.1

4.4

4.1

Malaysia

5.1

5.6

4.7

5.7

4.5

4.5

6.5

4.2

Thailand

0.1

Vietnam

6.0

Total

6.4

5.0 4.7

4.9

5.0

5.5

5.5 6.9

7.1

6.6

4.6

5.7

5.9

5.8

What about the United Arab Emirates?

Growth in the UAE will remain robust in the medium term, averaging 3.9% between 2013 and 2016. Several factors will drive this, including broad-based recovery across key sectors (such as financial services and construction), where performance since the financial crisis has been underwhelming. Fiscal policy will remain accommodative in both Dubai and Abu Dhabi, with several infrastructure projects in the pipeline.

A generally brighter global outlook in 2013–14 and beyond will also benefit Dubai in particular, which accounts for 75% of the UAE’s non-oil trade. Risks to our forecast are broadly balanced.

Higher oil prices and safe-haven capital flows arising from instability elsewhere in the region could lead to a surprise on the upside.

Which sectors do you think are flourishing in the GCC?

Despite traditionally being seen as part of a region famous for its vast natural resources, the GCC countries have used the surplus cash to diversify into other sectors. The first half of 2012 continued to see increased diversity in the

sectors attracting FDI in the Middle East.

Retail and consumer products attracted over 20% of projects in the first half of 2012 and – along with business services, real estate, hospitality and construction – became a top choice for investors. The retail sector is capitalising on the region’s rich and expanding consumer base.

Real estate has seen a revival in 2012 and attracted the most capital investment. Most regional governments are recognising their citizen’s social infrastructure needs. In addition to massive outlays to respond to this — and the

Steady and robust oil prices have created substantial budget surpluses among oil exporters.

This helped many regional governments to increase their spending on infrastructure projects and efficiently drive their diversification efforts.

19

Focus on EY

announcement of ambitious projects like the 2022 FIFA World Cup — the prospect for the infrastructure sector seems promising.

Real GDP growth % increase per year 10

Forecast

The business services sector is also becoming increasingly popular among investors and ranked second in terms of projects and third in terms of value. This sector draws strength from the presence of free trade zones.

8 Middle East and North Africa 6

Established investors see real estate and construction as the most promising growth sector for the future. More opportunities are also emerging in the private and business services sector, real estate, hospitality and construction, information and communications technology and life sciences sectors.

4

2

0 Saudi Arabia -2 1990

1993

1996

1999

2002

2005

2008

2011

Do you think markets share this optimism?

2014

Absolutely. Look at the way deals in the region are shaping up. The MENA value of disclosed inbound deals increased by 108% if you compare the first half of 2012 and 2013.

Source: Oxford Economics; World Bank.

Current account balance % of GDP

US$b 210

Forecast

180

90 75

150

60 US$b (left-hand side)

120

45

90 30 60 15

% of GDP (righ t- hand side)

30

0

0

-15

-30

-30

-60 1991

1994

1997

2000

2003

2006

2009

2012

2015

Source: Oxford Economics.

Simplified name and redesigned logo From July 1 2013, Ernst & Young changed its brand name to EY. According to the Global CEO Mark Weinberger, the objective was to shorten the brand name for the purposes of providing consistency and ease of use for EY practices and clients around the world. The firm also redesigned its logo, to reflect its new brand name in the design.

20 November 2013

This overall positive improvement of inbound investment could signify a continued level of confidence in the MENA market irrespective of the continued political uncertainty in the region.

The economies that you highlighted are oil majors. What about trade? Will MENA play an important role in trade – like the way it plays a crucial role in the energy mix?

MENA trade flows will grow fastest with Russia, India and China between now and 2020. While advanced economies muddle through the financial crisis, the rapid-growth markets are becoming an increasingly significant part of the global economy.

They will become an even more dominant force in global trade and as a result, businesses are going to have to adjust their strategies to reflect the increasingly regional pattern of world trade.

The degree of change in both the scale and direction of trade will have a profound impact on the competitive environment for all companies wherever they are located around the world.

Trade will also be increasingly focused around Asia, the Middle East and Africa, suggesting that the key geographical location for companies will change. Indeed, Europe's exports to Africa and the Middle East are forecast to be around 50% larger than its exports to the US.

Focus on EY

Heatmap of the compound annual growth in bilateral trade flows of goods Annual growth rate (%), 2010–20 Flows from:

US

Rest of Americas

China

India

Rest of

Japan

Europe

Russia

MENA

Sub-Saharan Africa

Total exports

US

0.0

9.5

15.6

15.9

9.7

8.4

12.0

10.7

11.5

Rest of Americas

8.5

7.2

12.7

13.0

7.1

9.5

7.1

9.4

7.9

9.2

8.5

China

13.0

12.1

0.0

18.5

12.1

14.3

12.0

14.5

13.1

13.2

13.3

India

16.4

15.3

21.7

0.0

15.5

17.0

15.3

18.0

16.3

16.7

16.7

Japan

6.4

5.4

11.3

11.6

0.0

8.1

4.7

7.9

6.0

6.5

6.7

8.6

7.9

13.0

13.5

8.0

9.3

7.7

10.6

9.3

9.1

9.7

Europe

7.9

7.5

13.2

13.4

7.0

8.9

6.6

10.3

9.1

8.9

8.4

Russia

6.9

6.1

11.7

12.1

6.1

10.8

6.3

-

9.1

6.9

7.1

11.7

10.8

MENA

8.4

8.0

12.5

13.5

7.3

10.0

7.7

14.4

9.2

8.6

9.1

Sub-Saharan Africa

6.8

5.8

12.0

12.3

7.7

9.6

7.8

11.5

9.8

7.9

7.9

Growth greater than world average of 9.4% Growth greater than 12% Growth greater than 15%

Heatmap of bilateral trade flows of services, 2010-20 Total increase in US$b 2010-20 Rest of Asia

US

Rest of Americas

China

India

Japan

-

164.4

52.7

30.9

45.4

Rest of Americas

85.0

19.5

28.0

6.2

6.2

China

34.4

23.1

-

18.2

28.5

288.8

Flows from: US

85.0 15.1

Europe

Eastern Europe

Africa and Middle East

Total

157.2

36.4

35.5

538.7

54.4

6.2

5.5

226.1

58.2

8.2

21.6

397.9

India

31.8

5.0

12.3

-

1.5

210.5

17.1

0.7

25.4

304.2

Japan

16.5

16.2

21.3

4.3

-

36.1

16.7

2.0

1.4

114.6

33.4

13.2

234.8

26.4

31.0

98.8

58.1

2.3

49.6

546.3

Europe

188.3

69.3

74.1

34.8

22.6

149.7

791.6

94.1

74.5

1,241.7

5.3

4.5

1.6

0.9

1.9

7.6

69.2

3.6

5.4

99.9

21.6

4.7

30.9

31.4

2.3

21.3

29.5

0.1

62.5

204.2

Eastern Europe Africa and Middle East

Increase of US $5b or less Increase between US$30b and US$70b Increase between US $71b and US $160b Increase greater than US $160b

Abdulaziz Al-Sowailim is Chairman and CEO of EY MENA. Abdulaziz has been with EY for nearly 25 uninterrupted years. He has provided assurance, tax and business advisory services to a range of private and public sector organisations in the financial services, energy, petrochemicals, manufacturing, trading and services sectors.

Upon graduation from King Saud University in 1986, Abdulaziz joined EY’s Riyadh office. He is member of the Saudi Organisation of Certified Public Accountants, Vice Chairman of the Saudi Accounting Association and a member of the American Institute of Certified Public Accountants (CPA). He leads the firm's business community and national training programmes, has lectured at several Universities and has been guest speaker at leading regional business forums.

New markets for exports are also opening up within MENA and Sub-Saharan Africa as these economies grow in size. Total exports to these regions are forecast to grow more rapidly than exports to the US, Europe, Japan and the rest of the Americas. Richer economies in the region, particularly the oil-exporting economies of the Middle East, will also represent increasingly important sources of final demand for manufactured products.

So how is EY helping organisations manage the profound changes in the region?

By 2050, 600 million people will call the Middle East and North Africa region their home – nearly 21

Focus on EY

“We are very proud of our MENA heritage and will continue to prioritise the development of our local communities.”

Share of total world exports 2010–20

double today’s population. As the population increases, housing, education and health facilities need to take priority – we are focusing on advising policy makers on the development of social infrastructure.

USA Sub-Saharan Africa Russia Rest of Asia

Women in the region now control $1 trillion of the assets. More people are recognising that gender equality is key to stability and growth. Our strong diversity and inclusiveness initiatives around the world make us the natural leader in this transition.

2020

N America ex USA

2010

MENA

2000

Latam & Car Japan

Even in the resource-rich Gulf, building a sustainable future is key. Through our Climate Change and Sustainability Services and our Cleantech groups, EY has always demonstrated its ability to help address this need for change.

India Europe China Aus, NZ, Oceania 0

Source: Oxford Economics.

22 November 2013

10

20

30

40

% 50

And today, MENA plays its part in the global economy – with over 5,000 of our people, we continue to support MENA's journey as an emerging market.

Focus on EY

GCC ECONOMIES

POWER ON

Diversification boost the rapid-growth markets as UAE expected to grow by 3.9%, Saudi Arabia by 4.3% and Qatar by 6.0% in the medium term, according to EY.

3.0%

Expected growth of Middle East region’s economy in 2013

A

CCORDING TO EY’s most recent Rapid-Growth Markets (RGMs) Forecast, the GCC can expect to see robust economic growth over the medium term and successful diversification of its local economies.

The UAE’s economy is expected to grow by 3.9%, Saudi Arabia by 4.3% and Qatar by 6.0% in the medium-term.

Bassam Hage, MENA Markets Leader, EY, says, “In the key Middle Eastern RGMs, a young population is helping to foster entrepreneurship and the growth of the non-oil sector is buoyant, protecting these economies from slower global oil demand.”

“The economies in the GCC in particular are growing at a fast rate and over the medium-term, the further development of international trade flows and the expanding middle class are expected to fuel future growth. Rising FDI flows are helping to transform trade opportunities across Turkey, the Middle East and Africa, with particular expansion in financial services,” he added.

Egypt’s political stability GDP in the MENA region is expected to grow by 3.0% in 2013, down from 3.7% in 2012. This decrease can be partly attributed to lower commodity prices and reduced demand for Middle East exports.

Bassam Hage, MENA Markets Leader, EY.

The current political situation in Egypt is also continuing to impact economic activity across the region. Egypt’s GDP is projected to rise by 1.7% in 2013 and 2.0% in 2014. More significant GDP

growth is dependent on Egypt’s political stability and consequent economic recovery.

The situation is very different in the GCC, particularly in the UAE, Saudi Arabia and Qatar. Growth in the UAE is predicted to reach 4.1% in 2015, up from 3.3% in 2012. This increase will be driven primarily by the recovery of key sectors, including financial services and construction. The UAE has focused on diversifying its economy and concentrating on the non-oil sectors, with significant infrastructure projects planned in both Dubai and Abu Dhabi.

Moreover, fiscal policy will remain accommodative in both Dubai and Abu Dhabi, with several infrastructure projects in the pipeline.

Falling unemployment rate GDP growth in Saudi Arabia is projected at 4.3% in 2013 and 4.6% in 2014. These figures represent a slowdown from 6.8% in 2012, which can be attributed to reduced oil production, down by 3.5% in 2013. In contrast to developments in the oil sector, non-oil growth will remain robust in the next few years. Consumer spending will grow strongly, buoyed by fast growth in retail lending and a falling unemployment rate, particularly for males.

Meanwhile, fiscal policy will remain supportive, with government spending forecast to rise by an average of 7.4% per annum across 2014–16.

Qatar also continues to demonstrate robust growth.

The economy’s focus has been on diversification in non-oil sectors such as manufacturing, construction, transport, communications, trade, hotels and government services, which are projected to increase by nearly 10% annually.

Rapidly expanding population The Qatari government has plans for massive infrastructural development, with 2013-2014 budgets showing an 18% increase in spending.

These include the construction of the Hamad International Airport and a US$36 billion rail system in preparation of hosting the FIFA World Cup in 2020 and a rapidly expanding population.

“As the leading RGM economies mature, their economies will gradually rebalance. Growth will be moderate, and driven increasingly by production and services targeting domestic consumers. This trend can be seen in Saudi Arabia, where an economy founded upon oil exports is gradually developing a manufacturing sector, with growing numbers of businesses targeting the needs of a rich population of 27 million consumers,” says Bassam.

23

Focus on EY

TAKAFUL GROWTH SOARS

Key countries continue to offer high prospects with low market penetration rates, but wider opportunities beckon in emerging markets, new EY study shows.

A

$11bn

Estimated global gross takaful contributions in 2012

24 November 2013

CCORDING TO EY’s latest report, ‘Global Takaful Insights 2013: Finding growth markets’, key markets continue to offer growth prospects with low market penetration rates, but wider opportunities beckon in emerging markets.

The global takaful industry grew 16% in 2012, a noticeable moderation from a 22% CAGR over 2007-2011. Takaful in most markets is still in its infancy, and its potential to replace conventional insurance in leading Islamic finance markets is still largely untapped.

The report also finds that in order for the industry to maintain its growth trajectory, there is a need for larger regional players who can provide leadership for building capacity in the industry and to address a number of business risks that the industry executives cite as challenges to the industry as a whole.

Regulatory frameworks Presently, Saudi Arabia, the United Arab Emirates and Malaysia lead the industry with their relatively well-developed Islamic finance industries, including Sukuk markets, strong customer reach and competitive pricing. The

Focus on EY

role of authorities in simplifying regulatory frameworks across borders and encouraging consolidation will also be key in propelling the industry’s expansion.

Ashar Nazim, Global Islamic Finance Leader at EY comments: “Takaful operators must adopt a clear strategy and capital plan that includes both organic and inorganic growth, and maintain and refine segmentation or exit and acquisition strategies, which can mitigate potential risks.”

Presently, Saudi Arabia, the UAE and Malaysia lead the industry with their relatively welldeveloped Islamic finance industries, including Sukuk markets, strong customer reach and competitive pricing.

Varying markets, varying potential As industry leaders look beyond their borders, a key take-away is that growth and profitability vary significantly by markets and sectors, depending on each market’s maturity, industry and regulatory structure. While it is common to focus on populous Muslim markets, operators should not lose sight of other markets across Europe, Africa and the Asia-Pacific.

“Adopting a multi-market approach not only helps manage risk diversification but also offers profitable opportunities in niche segments. Investing in rapid growth markets, which are often made up of young, growing populations, can lead to achieving critical mass very quickly. However, detailed market analysis and planning are required to ensure strategic success,” explains Abid Shakeel, Senior Director of EY’s Global Islamic Banking Center.

Growth does not equal profitability While Saudi Arabia, the UAE and Malaysia hold the lion’s share of the takaful market, the acquisition of market share has not necessarily translated into profitability in many instances.

Financial performance and managing key strategic issues remain challenging for takaful operators in many markets.

According to the report, there are three areas of development that need to be addressed in response to the issue of profitability. These include: i) Efficiency in operation - most operators have yet to achieve critical business volume despite incurring substantial establishment costs over formative years.

Ashar Nazim, Global Islamic Finance Leader at EY: “Takaful operators must adopt a clear strategy and capital plan that includes both organic and inorganic growth”

ii) Quality of underwritten business – access to quality customers and potentially lucrative commercial lines are limited due to underdeveloped broker relationships, operational history and scale.

iii) Solvency and capital requirements – smaller players need to quickly build scale or consider mergers in order to meet these requirements.

Growth potential of rapid growth markets Rapid growth markets are poised to become the new centers of development over the next 10 years. Infrastructure and new regulatory enhancements are presenting opportunities

25

Focus on EY

As industry leaders look beyond their borders, a key take-away is that growth and profitability vary significantly by markets and sectors, depending on each market’s maturity, industry and regulatory structure.

operational efficiency, ensured healthy and sustainable funding, and promoted uniformity across business practices for operators.

“The maturity of established regulations across all areas of Islamic finance in Malaysia, including Sukuk issuance, has made Malaysia one of the top destinations for global institutions seeking to tap into the strong demand for long-term investments. It has also strengthened Malaysia’s position as a regional center of excellence for the takaful industry,” shares Dato’ Rauf Rashid, Country Managing Partner of EY Malaysia.

Large regional champions Presently, there is a dearth of takaful operators who are capable of providing leadership to the growing internationalisation of the industry.

Few can truly make the claim to being regional, let alone global. In order for the industry to be successful, a well-established regional or global player must emerge.

Malaysia has emerged as the world’s largest family takaful market, securing close to three quarters of its domestic takaful market share.

across all markets. For the takaful industry, the large populations of countries such as Indonesia and Turkey offer untapped potential demand.

Investors looking to establish new takaful operations in rapid growth markets must be prepared for the long haul and be aware that the nature of returns will not be comparable to those of conventional issuers. Investments must be made on commercial merit rather than for altruistic reasons. Learning from core Islamic finance markets is key to addressing the rising demand in these countries expeditiously.

Malaysia makes headway Malaysia has emerged as the world’s largest family takaful market, securing close to three quarters of its domestic takaful market share.

Its proven operating models, young Muslim population and regulatory initiatives such as the Takaful Operating Framework 2012, the Islamic Financial Services Act 2013, and the Risk-based Capital for Takaful (RBCT) have enhanced

26 November 2013

Any strategy to develop and grow into regional players must reflect the inception and growth of the insurance industry. Continual building of scale in commercial lines, determining which markets require physical presence versus presence in markets where local operators would not have the capacity to underwrite large risks, and the use of actuarial analysis to price such risks, are strategies operators must consider in their move towards becoming regional champions.

“For takaful operators looking to expand their regional footprint, achieving a unified approach across all markets will remain a challenge as no two markets are alike. Risk and product specialisation, growth strategies and familiarity with the regulatory framework of each market they choose to penetrate are key elements that require close attention,” says Ashar “In the medium term, traditional Muslim markets with established takaful practices will continue to provide favourable conditions. In the long term, however, operators must step out of their comfort zones and explore large rapid growth markets, of which the populous markets will provide them with the best prospects for the future,” he adds.

Focus on EY

Q3 IPO SLUMPS Summer months coinciding with Ramadan led to a slower paced environment for listings as value goes down 45.3% compared to Q3 2012.

A

CCORDING TO EY’s Middle East and North Africa (MENA) third quarter of 2013 IPO Update, $138 million was raised in Q3 2013, 45.3% lower than the $252.3 million raised in Q3 2012. The only IPO in MENA took place in Oman by Sembcorp Salalah Power and Water Company in the power and utilities sector.

$482.6m amount raised in the MENA IPO market in Q2 2013

Phil Gandier, MENA Head of Transaction Advisory Services, EY says: “The third quarter of the year is historically a slow period for IPOs. This year, the summer months coinciding with Ramadan led to a slower paced environment for raising money for IPOs. However, we have seen an increase in the number of companies in the region contemplating IPOs in the coming months so we expect activity to pick up.”

New facility of cross-listing In Q3 2012, there was only one IPO in Saudi Arabia with the listing of City Cement on the Tadawul exchange for $252.3 million.

“There is an appetite to invest in profitable local companies that have scale and Pan Arab operations. Within the Gulf, the Tadawul is

There is an appetite to invest in profitable local companies that have scale and Pan Arab operations. Within the Gulf, the Tadawul is expected to attract a large number of IPOs due to its high liquidity and the new facility of cross-listing for overseas companies.

Phil Gandier, MENA Head of Transaction Advisory Services, EY: “The third quarter of the year is historically a slow period for IPOs”

expected to attract a large number of IPOs due to its high liquidity and the new facility of crosslisting for overseas companies,” commented Phil.

“Additionally, the UAE has also been promoting inward investment and continues to play a key role in attracting investment to the region. The Gulf region as a whole has many of the investment qualities that companies look for such as solid fundamentals and strong demographic trends,” he added.

Lower levels of liquidity Going forward, the key challenge that the regional IPO market will face is the relatively lower levels of liquidity in the exchanges compared to international markets. The choice of other exchanges and valuation differential may also present a challenge for the regional exchanges, although this will depend on the sector and ‘go-to-market’ credentials of individual companies.

“However, the increased number of announcements is an indication of the positive direction the IPO market is headed in. We expect the market to pick up in the coming years as more and more companies proceed along the IPO journey and regional and global investors look towards the region for investment opportunities,” Phil said.

27

CITI ROUNDTABLE

Senior Finance Managers are all ears as Paul Godfrey, CPI Media Group’s Senior Editor, moderates the stimulating discussions that deliberated on the ‘Challenges in the Working Capital Cycle within the Manufacturing Industry’.

CAPITAL CONTROL

IN WAKE OF

CREDIT CRUNCH

‘Time is money’ is an overused cliché, but the truism took centre stage as CFOs and senior finance experts from the manufacturing sector gathered in a round-table event recently, to debate on the challenges in the working capital cycle. Joyce Njeri reports.

T

HE 2008-2010 global financial crisis followed by the infamous ‘Arab Spring’ delivered a doublewhammy thrashing to businesses in the region, leading to financial defaults, insolvencies, bankruptcies and increased risk of buyers defaulting on payments of goods purchased.

All the sectors of the global economy were largely affected; including the manufacturing, healthcare, hospitality, service sectors among others. This in

30 November 2013

turn forced many companies to take measures to guard against the risk of buyers defaulting on payments of goods purchased or services rendered, in order to ensure effective management of their working capital.

It is against this background that Accountant Middle East in conjunction with Citi Commercial Bank, took the initiative to address the challenges in the working capital cycle in the manufacturing sector, at a recent round-table event that brought together an influential group of Chief Financial

CITI ROUNDTABLE

The cash flow cycle is a crucially-important part of understanding how a business functions. Therefore, control of working capital is critical for the survival of the company, largely determined by the way it is managing its receivables, inventory and payables” - Vincent Valladares, Citi Commercial Bank’s Managing Director and Middle East Head.

Officer’s and Senior Finance professionals, in Dubai.

Survival of companies The objective of the round-table was to look into ways of how companies could effectively manage their working capital cycle, by highlighting how the financing decisions determine a company’s overall working capital position and why the management of working capital is critical for the survival of companies in the manufacturing industry.

Paul Godfrey, CPI Media Group’s Senior Editor, was the moderator of the round-table discussions and started off the session by underlining the significant role that the manufacturing sector plays in the UAE’s economy.

53%

Last year’s non-oil manufacturing exports from the UAE, according to Dubai Chamber of Commerce

Effective cash flows Post the global financial crisis, banks and other lending institutions have become more risk averse and are less willing to lend to companies if credit guarantees are not in place. On their part, companies have been putting measures into place to ensure effective cash flows in a cycle into, around and out of a business.

“The cash flow cycle is a crucially-important part of understanding how a business functions.

Therefore, control of working capital is critical for the survival of the company, largely determined by the way it is managing its receivables, inventory and payables,” said Vincent Valladares, Citi Commercial Bank’s Managing Director and Middle East Head.

“In this regard, there’s an urgent need today than ever before, to address the challenges that the manufacturing sector is experiencing as far as the management of working capital is concerned,” he added.

Of fundamental importance is the source of finance for companies, as effective management guidelines to minimise the costs of funding working capital requirements largely depends on where you get

Kevin Fairbotham, Head of Internal Audit, Ghanim Bin Saad & Sons Group Holdings asked about the dynamics of factoring in Islamic finance. “The Islamic financial services industry, which are largely required to be Shariah compliant, needs a completely integrated approach to risk” - he was told.

“The UAE has a vibrant manufacturing segment,” Paul said, adding that the industry is “amongst the highest contributing sectors to the country’s non-oil GDP over the last decade.”

Statistics from the Dubai Chamber of Commerce and Industry show that last year, manufacturing exports accounted for 53 per cent of the UAE’s total non-oil exports of merchandise goods, and 22 per cent of total exports including oil exports.

Manufactured exports from the country increased from $8.3 billion in 2000 to about $59.2 billion in 2012, registering a cumulative annual growth rate of about 18 per cent.

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CITI ROUNDTABLE

your funds from, whether from savings, banks, angel investors, IPO flotation, and family… among others.

Citibank’s financial products Among its broad range of financial products Citibank offers working capital solutions including overdraft facilities, term loans, syndications, trust receipt and short-term loans.

The Middle East region is only a paltry 1.2% of the global trade credit insurance market, but the scenario is faster changing as more companies are now making informed credit decisions to minimise losses and expand into new markets” - Anand Nagaraj, Citi Commercial Bank’s Vice President and Head of Product Development.

So, what are the main tests that companies face in the management of their working capital cycle?

The challenges mostly revolve around the administration and control of the working capital, ensuring that the company has enough cash, as this will save on bank interest and charges on overdraft, assuming that the company bought its inventories on credit.

One of the key topics that stood out strongly was the role that Trade Credit Insurance plays in the effective management of working capital.

When a company agrees to sell its goods or services on credit to a buyer, it automatically places itself at Accountant Middle East Editor Joyce Njeri and Citi Commercial Bank’s Shereen Abdulla (front 2nd left and 3rd respectively) join CFOs and Senior Finance experts from the manufacturing sector, during the recent roundtable event at the JW Marriott Marquis Hotel in Dubai.

32 November 2013

risk, and with economic conditions still unstable since the beginning of the global financial crisis in 2008, many companies are more and more taking insurance to mitigate the increasing risks of delayed payments or potential defaults.

Trade credit insurance Paul set off the stimulating session by expressing concern of how few companies made use of trade credit insurance in the past, but he added that this has significantly changed, particularly post the global financial crisis.

CITI ROUNDTABLE

“Companies are resorting to insuring trade deals as availability of credit remains tight,” he said.

Anand Nagaraj, Citi Commercial Bank’s Vice President and Head of Product Development, added that the Middle East region is only a paltry 1.2% of the global trade credit insurance market, but the scenario is faster changing as more companies are now making informed credit decisions to minimise losses and expand into new markets.

The 2008-2010 global financial crisis led to high demand for trade credit insurance, structured to help protect businesses, financial institutions and traders against the consequences of defaults, insolvencies and bankruptcies of their trading partners, trade credit insurance has been a valuable tool for corporates.

This is supported by statistics from one of the region’s top provider of trade-related credit insurance solutions - Euler Hermes – which show that Euler Hermes experienced 54 per cent growth in its GCC portfolio last year, as more companies took measures to guard against the risk of default on trade payments by their buyers.

Double-digit growth In the study, Euler Hermes said that demand for trade-related credit insurance in the GCC is Slow payment has a crippling effect on business. If you don’t manage debtors, they will begin to manage your business” - Ashit Sanghvi, the Financial Controller of Fikree Pipe LLC.

expected to rise by nearly 40 per cent this year as companies seek to improve their ability to secure finance and cover risks in Europe, Africa and other markets.

“We have seen huge growth in the credit market in the region and the reason for this is that it’s The Middle East has experienced a long period of restiveness in the last couple of years and there’s no doubt that this situation has affected businesses. The credit insurance has proved beneficial as it allows companies to manage political risks of trade and makes sure that invoices are paid in time” - Hubert Millasseau, Finance Director, Goodyear Middle East.

an increased credit risk awareness that has come out from entrepreneurs,” it stated, adding that it expects a double-digit growth again in 2014, “which could be around 30 per cent.”

While supporting the role and benefits of trade credit insurance, Hubert Millasseau, the Finance Director of Goodyear Middle East revealed that indemnifying the giant tyre business has helped turn around the position of the company’s working capital.

“Goodyear Middle East works closely with Euler Hermes and this relationship has helped protect our business from non-payment of commercial debt,” Millasseau said.

“The Middle East has experienced a long period of restiveness in the last couple of years and there’s no doubt that this situation has affected businesses.

The credit insurance has also proved beneficial as it allows companies to manage political risks of trade and makes sure that invoices are paid in time,” he added.

Role of factoring The process of authorising a third-party firm to pursue a client for debts, commonly known as factoring was also highlighted at the round table, with a number of participants revealing they

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CITI ROUNDTABLE

Effective cash management should be managed carefully to enhance the finance position of the company, and this calls for a strong team of money managers” - Akhil Jain, Head of Finance at Danube Group.

as it can leave the firm unable to pay its maturing obligations as they come due.

This is echoed in a CFO study done by Deloitte which shows that in the last two years, CFO optimism plummeted to its lowest levels due to expectations for their operating cash flow.

CFO concerns over continued social upheaval and conflict unfolding, and how these events are affecting businesses, remain across the Middle East region.

use the services of factoring firms to help their businesses in maintaining short payment cycles for optimal.

“Slow payment has a crippling effect on business.

If you don’t manage debtors, they will begin to manage your business,” said Ashit Sanghvi, the Financial Controller of Fikree Pipe LLC. “Many businesses have cash flow that varies and therefore the benefits of factoring in helping with prompt payments, administration of sales invoicing, as well as helping in chasing up any slow payers cannot be gainsaid,” Ashit added.

The greatest nightmare for most financial managers is the exhaustion of liquid resources, The demand for corporate accountability has never been central like it is today, especially in public listed companies” - Wai Leng Low, the CFO of Dubai Precast LLC.

“Delays in receipt of cash from sales can leave a firm without cash, despite overall profitability and therefore a company may want to depend on factoring to cover short falls in cash,” said Ashit.

Islamic financial industry While explaining the effectiveness of factoring, Jaydeep Singh, the CFO of Fakhruddin Holdings said; “A company can have relatively large amount of working capital in one period, and relatively small in another period. Due to this variations, businesses find it necessary to use factoring to enable them to cover their short term cash needs in those periods in which these needs exceed the cash flow.”

“If a business is operating profitably, then it should generate cash surpluses. If it doesn’t generate surpluses, it risks running out of cash and this can leave the firm unable to pay its maturing obligations,” Jaydeep added.

Kevin Fairbotham, Head of Internal Audit, Ghanim Bin Saad & Sons Group Holdings asked about the dynamics of factoring in Islamic finance.

“The Islamic financial services industry, which are largely required to be Shariah compliant, needs a completely integrated approach to risk,” Anand said.

“Breaking any requirement of these stringent laws in the Shariah compliance chain is a big challenge in enterprise risk management, which dictate that no aspect of your financial management should be outside of Shariah,” he explained.

“Much of today’s business is conducted on credit.

Islamic Shariah allows selling on credit as in murabaha, but there is still debate whether it allows the selling of debt,” Paul clarified.

34 November 2013

CITI ROUNDTABLE

Cash kept in a safe will not generate a return and therefore a company can invest excess/ surplus liquid funds in marketable securities that provide the best return possible, in order to achieve optimum cash levels” - Muhammad Faisal, Accounting Manager, Abaad Wood Industries.

“But why is there so much resistance to usage of factorers in this region?” Paul asked.

“Just like trade credit insurance, the concept of factoring is not clearly understood in this market,” Anand retorted.

Role of qualified CFOs One topic though that generated intense debate was the role of role of qualified CFOs, accountants and key finance managers in determining how the financing and investment decisions are made.

“Effective cash management should be managed carefully to enhance the finance position of the company, and this calls for a strong team of many managers,” said Akhil Jain, Head of Finance at Danube Group Head.

“The role of the CFO is under greater scrutiny, internally and externally. CFOs economic uncertainty, increased regulatory requirements, financial restatements and increased investor scrutiny have forced them into the spotlight.

Given these factors, CFO turnover is on the rise,” the study states.

CFOs changing roles The Deloitte study continues to say that today’s CFOs are expected to play four diverse and challenging roles. The two traditional roles are steward, preserving the assets of the organisation by minimising risk and getting the books right, and operator, running a tight finance operation that is efficient and effective. It also adds that it’s increasingly important for CFOs to be strategists, helping to shape overall strategy and direction, and catalysts, instilling a financial approach and mind set throughout the organisation to help other parts of the business perform better.

“These varied roles make a CFO’s job more complex than ever,” the study states.

The poor quality of financial reporting was thought to be a significant factor leading to the recent global stock market run-up, and therefore If a business is operating profitably, then it should generate cash surpluses. If it doesn’t generate surpluses, it risks running out of cash and this can leave the firm unable to pay its maturing obligations” - Jaydeep Singh, CFO, Fakhruddin Holdings

“Purchasing initiates cash outflows and an overzealous purchasing function can create liquidity problems,” he warned.

Bhupen Shah, Divisional Financial Controller of Jotun Paints, was of the view that finance managers are today required to “not only have good accounting judgments and prepare accurate financial statements, but are also expected to possess other additional skills that may not be written in their job description.”

His sentiments are echoed in a recent Deloitte study titled; ‘The Four Faces of a CFO’, where the authors highlighted reasons why there was a high turn-over of CFOs in the region, attributing it to factors such as the never ending pressure to cut costs, grow revenue and ensure control.

35

CITI ROUNDTABLE

Round-Table Participants Wai Leng LOW, CFO, Dubai Precast LLC Bhupen Shah, Divisional Financial Controller, Jotun Hetal Popat, Finance Controller, Kemsol ME FZCO Srinivas Rao, Accounts Manager, Anglo Gulf Ltd Hubert Millasseau, Finance Director, Goodyear Middle East Kevin Fairbotham, Head of Internal Audit, Ghanim Bin Saad & Sons Group Holdings Ashit Sanghvi, Group Financial Controller, Fikree Pipe LLC Akhil Jain, Group Head – Finance, Danube Syed Hussain, Senior Financial Controller, Precious Metals FZC Baby Pallipadan, CFO, Rawji Group Nurani Sunder, Senior Finance Manager, Jotun Paints Farhan Shaikh, Finance Manager, Ultratech World Engg Muhammad Ali, Accounting Manager, Abaad Wood Industries Nilantha Dissanayake, Finance Manager, Emaar International Nassif Bazouzi, Group Finance Director, National Food Products Company Mahmoud Mamdouh, Accountant, Emirates Dates Factory Dharmendra Kumar, Senior Manager, Taghleef Industries Mustafa A Vakhariya, Senior Financial Controller, Sprint S.C.C. LLC Anand Nagaraj, Vice President, Head Product Development, Citi Commercial Bank Vincent Valladares, Managing Director, Middle East Head, Citi Commercial Bank Jaydeep Singh, CFO of Fakhruddin Holdings

36 November 2013

the role of corporate governance and best practices was also debated upon at the round-table.

“The demand for corporate accountability has never been central like it is today, especially in public listed companies,” said Wai Leng Low, the CFO of Dubai Precast LLC. “ With regards to allocat ion of f inances, management of working capital and investments decisions, corporate governance provides the structure through which the objectives of the company are set including short-term and long-term business strategy and plans,” Wai added.

Corporate governance Citi Commercial Bank’s Anand Nagaraj emphasised the importance of the quality of corporate governance practices in companies, as “some of the guidelines draw attention to specific areas of corporate governance that are especially important for financial institutions like Citibank.”

“As a bank, we check out each customer thoroughly before we offer credit. Therefore, companies’ corporate governance guidelines, for instance in areas such as risk governance, help to maintain the confidence of those companies in the eyes of financial lenders, and may provide support in the event that they need short/long term funding,” Anand added.

The length of the working capital cycle is also determined by the investment of any excess liquid funds in marketable securities that provide the best return possible. At the round-table forum CFOs debated this under the topic ‘Seizing opportunities’.

“Cash kept in a safe will not generate a return and therefore a company can invest excess/surplus liquid funds in marketable securities that provide the best return possible, in order to achieve optimum cash levels,” said Muhammad Faisal Ali, Accounting Manager at Abaad Wood Industries.

Wrapping up the invigorating session Citi Commercial Bank’s Vincent Valladares enlightened on the efficient inventory management by using an age-old cliché, ‘Time is Money’.

“If you can get money to move faster around the cycle, then the business will need to borrow less money to fund the working capital as it will be generating more cash. Always remember that the two dimensions of working capital are ‘Time and Money’,” Vincent said.

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Combating IFRS Special Fraud

CORRUPTION in

CONSTRUCTION

Fraud in building industry is causing significant threats to both the finances and reputations of companies, new Grant Thornton report shows. Danny McLaughlin, Partner of Fraud and Forensic at Grant Thornton UAE discusses the report further with Accountant Middle East.

F $1TRN

Estimated loss in revenues of construction businesses globally, caused by fraud

38 November 2013

RAUD AND cor r uption in the constr uction industr y is so commonplace that it is often accepted as a cost of doing business.

makes recommendations to help companies avoid falling victim to fraud.

This is highlighted by a report that has just been published by Grant Thornton following research carried out in Australia, Canada, India, the US and the UK. The report suggests important lessons for many similar economies including those in the GCC.

One suggestion is to make better use of information technology – an area where construction companies often lag. Vital lessons can be learned from policing, where technology has been instrumental in the reduction of crime and is increasingly used to identify, gather evidence, and even predict where crime will occur.

Time for new direction In a growing economy, opportunities for fraud increase and the construction industry is not immune from being targeted by fraudsters even as levels of other crime fall. The report, Time for a new direction: fighting fraud in Construction, argues that this does not have to be the case and

Threats and opportunities He goes on to say that “in business, information technology and the Internet offer both threats and opportunities. Better access to information and data offers great improvements gains in

Urgent action is required to manage fraud and corruption risk in the construction sector. There are significant threats to both the finances of companies and their reputations. Such threats also have the potential to hinder growth.

Danny McLaughlin, Partner and head of Fraud and Forensic at Grant Thornton UAE believes that “more companies need to recognise that fraud and corruption has a real cost. Corruption and the payment of commissions is often seen as the cost of doing business. This does not have to be the case.”

IFRS Combating Special Fraud

figure rising to US$1.5 trillion by 2025 if action is not taken. Danny McLaughlin, Partner of Fraud and Forensic at Grant Thornton UAE discusses the report further with Accountant ME.

Q

. What are the key highlights of the report?

A. The fact that fraud is so commonplace and that as construction activity ramps up we can expect fraud to increase as well. Organisations and governments have a big part to play in better detecting and punishing fraud. Technology also has a role to play in fighting fraud. Police have used these advances to help push down crime; Construction hasn’t – it makes itself a soft target.

How big is the issue of fraud and corruption in construction?

Urgent action is required to manage fraud and corruption risk in the construction sector. There are significant threats to both the finances of companies and their reputations.

It’s highly prevalent to the extent that it is accepted as the cost of doing business. And it’s going to cost businesses and other organisations a lot of money and loss of reputation unless they sit up and start to take action. Current estimates show fraud accounting for up to 10% of revenues worldwide. It’s a $1 trillion issue!

Is the situation getting worse?

efficiency and obtaining value for money but fraudsters can also misuse such technology.”

“From a business perspective, the use of data analytics can help not only to identify and thereby prevent fraud but also allow companies, particularly in the construction sector to spot poor procurement or contracting practices.”

As the industry begins to recover we estimate that incidents of fraud will increase. In the slow economic period companies had at least become more stringent; focussing on costs and a fewer

The report also recommends companies put aside some concerns about reputational issues and instead be more open about the reality of fraud and the risks it presents. This can foster a greater willingness by companies to internally debate and identify such threats and in turn move to prosecute perpetrators.

The report estimates that fraud could account for between 5% and 10% of revenues in the construction industry. If recent estimates are correct that the global construction industry is worth $8.6 trillion now and rising to $15 trillion by 2025 then fraud and corruption in the sector could be costing construction businesses almost $1trillion worldwide at the moment with this

Danny McLaughlin, Partner and Head of Fraud and Forensic at Grant Thornton UAE: “Corruption and the payment of commissions is often seen as the cost of doing business. This does not have to be the case.”

39

Combating Fraud

Different types of fraud are more prevalent in certain countries, but the overall impression is that it’s a pervasive issue. number of projects or transactions. As economic activity increases, applying this level of diligence will be more difficult and arguably become less of a priority. But the fact is, it acts as a materially significant drag on profits and it hits companies’ reputations hard.

What can companies do about it?

The first step is to get fraud on the board agenda and get them, and non-execs, to take ownership of the issue. Secondly; the industry can learn from what has worked in law enforcement. Technology has been instrumental in reducing crime – sifting data to flag issues and even using big data to help predict what types of fraud are most likely to occur. Whistle blowing is also vital to facilitate identification of fraud. And companies need to be prepared to prosecute to deter criminal activity. I would urge companies to look at our report.

Are some countries worse than others for fraud and corruption?

Essentially, what we’ve found is that it’s commonplace in the countries we looked at and it evident that it is a somewhat ‘silent’ issue in the UAE. Different types of fraud are more prevalent in certain countries, but the overall impression is that it’s a pervasive issue. Here in the UAE, we hear about commission payments as being an issue for companies. We have regularly investigated

tender manipulation and the use of fake companies or those owned or controlled by procurement personnel and other management members to subvert contracting processes.

The report talks about using technology. How might this help?

Technology can help in many ways. It can be used for something as simple as checking on Google for fictitious vendors – is a phone number recorded as being that of the company whose name appears on a quote? Are apparently different companies listed at the same address of using the same personnel?

There are also systems available that will analyse controls and flag issues. Industries such as finance effectively use technology to detect and fight fraud.

Construction can do the same.

Is the issue really common place?

The scale of the issue and our experience in dealing with fraud in the sector across a number of geographies demonstrates that in all its forms, fraud and corruption is commonplace. Companies really need to realise that they are at risk of fraud and often this can happen right under their nose, resulting in companies being hit with financial and reputational losses perpetrated by some of their most long-term and trusted personnel.

How will an increase in business activity affect construction fraud?

In the slow economic period companies had at least become more stringent; focussing on costs and a fewer number of projects or transactions.

As economic activity increases, applying this level of diligence will be more difficult and arguably less of a priority. When companies are making big money, it seems likely that fraudsters are too.

How do you get to the trillion dollar figure?

The report estimates that fraud could account for between 5% and 10% of revenues in the construction industry. If recent estimates that the global construction industry is worth $8.6 trillion now, rising to $15 trillion by 2025 are correct… then fraud and corruption in the sector could be costing businesses globally almost $1trillion now rising to $1.5 trillion by 2025 if the relevant action is not taken.

40 November 2013

From the IFRS Special Experts

COMPETENCY

CHECK Rita Rizk assesses the benefits of Psychometric Test… a controversial tool that measures individuals’ work skills, attitude and personality traits.

W

HEN I introduce myself as a psychologist, people often turn around with a smile and say:“so it means you now know who we are, what we think and what our intimate desires are!” Honestly, I wish I could have this gift!

Yet, when I decided to pursue my studies in Occupational Psychology, and completely changed career as an economist to a coach/ consultant, my only desire was to help people understand who they really are, what they really think, and to identify their goals in terms of career and self-achievement, in order for them to break down all the barriers that hinder their personal and professional development.

Attain personal goal However, I am not a psychic. I needed to learn and master a variety of tools that allow me to bring the best out of people by creating individual or group self-awareness, generating the drive to change, initiating a promise to develop, and establishing the means to attain personal and/ or group goals.

As with any craft, it takes time to learn to use the tools of the profession properly and skillfully.

In this article I will focus on one of the most controversial tools I use, namely Psychometric Assessments, specifically the tests that measure individuals’ work competencies and personality traits.

42 November 2013

Psychometric Tests do play an important role to help management and human resources professionals to make informed decisions about career planning and succession decisions for their organisations.

From IFRS the Special Experts

Availability of Psychometric Tools It is incredible to see the dramatic increase in the number of these tests available in the market. You can just go on the computer, Google: “free Psychometric assessment” and you get over 2 million results. Does this mean that an individual’s knowledge, skills, attitude and personality are so easily measured? Is it possible to draw accurate conclusions about who you really are by simply downloading one of the 2 million assessment weblinks?

Absolutely not! In fact, it is much more complicated than that. A Psychometric Test needs to be administered by experienced professionals who ensure implementation of best practice guidelines by test users, and who are able to understand and interpret the raw results to fit a specific organisational context.

Professional Guidelines Over the years, the British Psychology Society has found it necessary to create a code of conduct / user’s guide for Psychological Testing.

It became imperative to ensure that test users are competent, using technically sound tests and these are administered and applied ethically.

There are two main aspects here. The first elements to look for in a Psychological Test are reliability and validity. The second aspect is the role of the professional using the tests to properly validate the results. A well trained user will have the knowledge and skills needed to understand the information in the test manual, and to know what important information is missing so to be able to interpret it accordingly.

Let us look at these two components more closely: Rita Aoun Rizk is a qualified occupational psychologist with a passion to improve human capital performance and well-being at work. As a Managing Partner of Tamayyaz, she and her team have developed a range of tailored programmes targeted at the development of nationals as future leaders.

Her educational background and extensive experience in the region has allowed her to help people achieve and sustain real behavioural change.

Accuracy of Personality Tests 1. Reliability (consistency): is about how accurate or precise a test score is. A test is reliable when it is repeated on the same subjects, under the same circumstances, yielding consistent results.

2. Validity (accuracy): is the degree to which

an instrument measures what it intends to measure and the degree of the relevance of what it is measuring.

As a rule of thumb, a test is reliable when the reliability coefficients are between .70 and .90, and according to Cronbach (an American Psychologist) who was asked: “what is a good validity coefficient?” the only sensible answer he had was: “the best you can get”.

In testing theory, it is assumed that reliability is necessary for validity but does not guarantee it. However, in practice, when we deal with psychological traits such as ‘Extraversion’ for example, a result may be valid however, the reliability might change over time because the degree in which we use our Extraversion (interacting with lots of people, networking, working in teams..) can fluctuate depending on many factors (work context or pressure , personal trauma…).

However, in practice many people decisions have been taken in regard to Psychological Testing solely based on the results - this is Not ethical or in accordance with Best Practices. As Einstein (or possibly another) once said: “Not everything that counts can be counted, and not everything that can be counted counts!”

Real Life Examples One of my clients, who completed a series of Psychometric Tests, together with a one-on-one coaching validation session, emerged as a clear strategic thinker and a visionary.

He tells the following story.

Six years ago, the company he was working for decided to put him through a reliable and valid Psychometric Test to decide whether he was capable to run a new division that required a visionary and strategic person. Not only was the test wrongly applied for recruitment 43

From the Experts

purposes but also, nobody took him through the process of validating the results to make sure that he was in actuality not a strategic person.

Consequently, he was not selected for the position. Since then, he left that company and was recruited elsewhere, proving to be a natural strategic decision maker, and has led a very successful and satisfactory work life.

Introverted personality Another episode was of that of a marketing director, who was recruited for being apparently highly Extraverted (according to her Psychometric results), and who for seven years had succeeded beyond expectations. However, when she asked me for a one on one coaching session recently, she was drained and tired, and

As a tool, Psychometric Testing has some shortcomings that can limit its effectiveness, and only experienced psychologists, trained in the interpretation of tests and human behaviors, are capable of correctly interpreting and validating the results.

44 November 2013

needed to understand herself to refocus on her future career objectives.

She discovered during our session that actually she is an Introverted personality who was constantly acting as an Extraverted type. This discovery liberated her, and she wrote to me: “I might never change my role as a marketing director, but I surely know now how I need to manage my life accordingly in order to reach a healthy balanced life. Thank you.�

I can continue on drawing many stories about so many candidates that have been selected for major appointments according to their Psychometric Test scores, and yet these selections have been proved fundamentally wrong over time.

So, valid and reliable test are not enough to make sound conclusions about individual competencies for roles in organisations. In fact, proper Psychometric Testing involves evaluating a person's psychological attributes in far more in depth.

As a tool, Psychometric Testing has some shortcomings that can limit its effectiveness, and only experienced psychologists, trained in the interpretation of tests and human behaviors, are capable of correctly interpreting and validating the results.

From the Experts

Psychologists’ role during the validation: The second component for effective and ethical use of testing tools is the responsibility of skilled professionals working under approved guidelines to validate the raw test results. Here are the key elements:

i) Check the accuracy of the answers: sometimes individuals give misleading answers because they think that this is what the assessors want to hear. Or, they try to minimise what they perceive as negative attributes and to maximise what they perceive as the positive ones. ii) Check the truth in the “labeling”: The results of Psychometric assessments usually label a person; he/she will emerge as “Extroverted” for example. However, in reality he/she might act as both Extravert and Introvert depending on the context.

The interpretation of human behaviour is subjective by virtue of its nature and only an experienced psychologist may extract the difference between being, preferring and acting.

iii) Examine the unasked questions: Test takers are often forced to select an answer even though none of the choices offered completely applies to their personality.

Psychometric Tests don’t take into account the complexity of each individual’s mind and therefore the results don’t always offer complete accuracy. iv) Check the understanding: When a test is administered in a language other than the user’s native language, it is difficult to assess whether or not individuals have misinterpreted certain questions and or have answered them incorrectly.

v) Use the results to fit a specific context: In order to set the context and properly evaluate the Psychometric results, key information needs to be understood:

The skills that the organisation is looking for The mode of the organisation, whether it is expanding or downsizing The culture of the organisation The behaviours the organisation wants to promote

Only skilled and experienced professionals who are aware of, and most importantly, rigorously follow approved best practice guidelines can make proper judgments on the raw Psychometric Test results.

For example, I have seen some organisations promoting innovation, team work and ethical behaviour; whilst others were concerned about hierarchy and ensuring processes and procedures are well in place. What is then an apparent strength in one context becomes a weakness in another environment.

Key Conclusions The purpose of this article is to highlight that Psychometric Tests do play an important role to help management and human resources professionals to make informed decisions about career planning and succession decisions for their organisations.

However, these tests should not be used in isolation, and it is vital that the raw results are validated alongside other measures and tools. The misapplication of these tests has been shown to have dramatic consequences for individuals and organisations in terms of wasting time, talent and money. Think again of the CEO who left the company, because of a flawed process using Psychometric Tests.

Only skilled and experienced professionals who are aware of, and most importantly, rigorously follow approved best practice guidelines can make proper judgments on the raw Psychometric Test results.

Like all of us who appreciate the skilled use of tools by a craftsman, let’s make sure that Psychometric Tools are used properly, in context, and not just downloaded as a tick-box from the internet to save costs in the short-term. In this way, organizations will improve productivity, staff retention and make wise decisions about the management of their key staff resources in the future.

45

Personality & Practice

Murtaza Chevel, Chief Financial Officer of one of UAE’s leading property investment developers, Union Properties.

46 November 2013

Personality & Practice

THERE’S ALWAYS

A SOLUTION Union Properties CFO - Murtaza Chevel – explains a paradox that ambitious accountants face when attempting to advance into an executive role.

“

IF YOU think in the definitive, you are not going to get out of the box,” says Murtaza Chevel, the Chief Financial Officer of one of UAE’s leading property investment developers, Union Properties.

SHANE PHILLIPS Managing Director, Shane Phillips Consultants

In an interview with Accountant Middle East, Chevel describes again and again how a definitive mind-set – the very kind accountants are trained to have – is the giant barrier to being able to think creatively and dynamically.

“While the accounting qualification is a necessary passport into the CFO position, it is at the same time its biggest blockade,” he adds.

Chevel explains that one of the reasons behind this hindrance is accountants may perceive a sense of security in their qualification, but a person who wishes to advance into a CFO role must be willing to let go of that. He emphasises the importance of a grown mind-set and a confident, yet humble attitude – not being afraid to admit when someone else is right – as keys to becoming a dynamic leader in the company.

His beginnings Chevel was born in Karachi, Pakistan, and lived there until he was in Grade 4, but the IndoPakistani war eventually forced his family to move to Kuwait. There he finished grade school, but says he did not ever think he would become an accountant.

He expressed a desire to trade stocks, but his grandfather, a stock broker, said it was too risky and suggested he becomes an accountant, which is something he had never considered or knew anything about.

Kuwait at the time was a bustling business hub of the Middle East and many of Dubai’s business elite found their roots in the city.

“I still remember going to Jashanmal’s store as a young boy, of course nobody knew how big he [of famed Jashanmal Group] would become,” says Chevel.

Other moguls started in Kuwait as well such as Rizwan Sajan the founder of Danube.

“I never thought of becoming a billionaire, but I did want to be successful. In my mind I was going to go to American University in Beirut because at the time that was one of the top schools you could go to,” the CFO says.

Enrolling with ACCA Over the next several years he finished his A-Levels in Kuwait and had plans to go to American University in Beirut but the civil war broke out and so he never ended up going to university. He decided he would be best off as an accountant and enrolled with the ACCA while still in Kuwait and then he moved to London and spent five years completing his qualifications there.

47

Personality & Practice

He was immediately hired by a mid-sized firm, Hodgson Impey and into the rat race young Cheval went. He has fond memories of his time in London during his ACCA training and his first job.

Chevel lived on his own in Hampstead in a small bed-sitter that cost him £150 a month. He recalls the wonder and excitement of living in the big city, especially in that high-end area which was liberally peppered with famous people living there.

The first job He says he developed a strong relationship with the landlord and for extra money eventually became the trusted caretaker of the property’s accounts. While doing book keeping was a procedural task which revolted Chevel, it was work… and for that he thanks the ACCA. As he says “it is tough to find an out of work accountant.”

A little later, at Hodgson Impey, Chevel spent most of this time auditing businesses, a process that he declared “good fun” because it often required going to interesting places and seeing different parts of London.

He enjoyed that romantic, inspiring period of his first job, and nostalgically reminisces about that extra gumption that one has on their first job in a big city.

“My niece is now working her first job on Wall Street and you can see the same unmatched enthusiasm that she has. Your first job is always a magic time; unfortunately sometimes you don’t realise that until it’s too late.”

Continuous growth During the Iran-Iraq war in the mid-80s, Chevel’s family moved from the now-volatile Kuwait to a safer place, Dubai. Chevel felt that moving to the Middle East would do wonders for his career and asked his father to photocopy the yellow pages of accounting firms in Dubai.

He started sending inquiry letters to these firms and landed an interview with Deloitte Haskins & Sells. By 1987 Chevel was at his desk in Dubai.

“It was a magic place even back then, much smaller of course but Dubai always had a buzz about it,” says Chevel.

Yet, he stayed only three years before moving to Canada with his new job at Ernst & Young. There 48 November 2013

he had to do his CA all over again, but during this period he worked as a manager without the official title. After qualifying with Ernst & Young, he graduated from management and moved into Corporate Finance. The sexy world of Mergers & Acquisitions, Chevel’s financial acumen was put to the test.

In 2001 Chevel returned to Dubai where he worked with the Head Office of Ernst & Young in Bahrain. This was the E&Y Middle East Head Office at the time. Chevel was working his way up the ladder but deep down, he says he did not want to continue working for an accounting firm.

“I wanted to feel the wind in my face and get my hands into the nuts and bolts of a real business,” he says.

Becoming CFO His wishes were answered as while he was working for one of his clients, Dubai Investments PJSE, Khalid Bin Kalban the CEO, asked him to join them as Group CFO. “Dubai Investments PJSE was an investment company, in the real sense that now includes thirty-eight companies but when I joined in 2003 we only had 18,” he narrates his journey into CFO.

“The first year was really tough as we had to put a lot of infrastructure into the company and I institutionalised the MIS for the 18 companies.

What a lot of CFOs don’t realise is that changing systems is one thing but changing culture is another. Whenever you change systems you are affecting the culture so you need to approach this with emotional intelligence not just technical excellence.”

“After we got through the ground work done, things began to start moving and by 2005 Dubai took off like a rocket and money was falling

At the height of the global financial crisis, Union Properties had some major challenges as the company was swimming in debt, but Chevel worked with his team to reduce the debt from AED7.5 billion to AED360 million over two years.

Personality & Practice

20%; if we don’t make you anything, we don’t take anything.”

One of Chevel’s last assignments for Ernst & Young in 2003 was advising the set-up of the premier investment company - Istithmar - where he got to know Ahmed Butti, the Director General of Customs.

Chevel describes how this came to help him later: “Fast forward to 2007 when he [Butti] calls me out of the blue and said, ‘I need a CFO’. I was quite happy doing what I was doing with my friends but I thought about it.”

He considered the success he was having with Habib Investments, but did not know how long it would last, and so he decided to take a “real job” with Palm Utilities, owned by Istithmar, in 2008.

Business was booming at that developing time, but it did not last.

Getting fired: A great experience In 2009 the global financial crisis hit and all of the senior management, including the CEO, at Palm Utilities were asked to leave. Chevel describes getting fired as a great experience, an “ah-ha moment”, and a time when a man realises who his friends really are.

“You find out when you get fired that some people are just around you because of your title, you lose your title and they are gone. It is always good to know who your real friends are,” he says.

WORDS OF WISDOM: “Accountants may perceive a sense of security in their qualification, but a person who wishes to advance into a CFO role must be willing to let go of that.”

from the sky. I was in the right place at the right time. The toughest thing then was managing the growth and knowing which opportunities to follow through with and which ones to ignore.”

Setting up a business Dubai Investments went from 18 to 38 companies in just two years. It was phenomenal and Chevel decided to leave Dubai Investments and joined a few friends that banded together to make a private wealth management company, Habib Investments.

He recalls, “Our motto was very straight-forward – Your money. If we make you something we take

He goes on to say that being fired brought him back down to earth. He then spent six months freelancing, putting a banking syndicate together in Singapore, which he says was “good fun.”

Then his ex-boss at Dubai Investments, Khalid Bin Kalban, offered him a CFO position at Union Properties. Once again, Chevel weighed the variables, and was interested in the opportunity to make a difference in one of the region’s leading property companies.

Growth mind-set At Union Properties, Chevel had some major challenges as the company was swimming in debt and the property market in Dubai had been dealt a punishing blow by the financial crisis.

Chevel worked with his team to reduce the debt from AED7.5 billion to AED360 million over two years.

49

Personality & Practice

“If you are trained to be an accountant; if you think like an accountant…you will never be a CFO, because you are trained to get things in place, and get to a definitive end. If you are thinking of your target as a definitive end, you will never be able to think creatively.”

So what makes a CFO a CFO and not anything else?

Chevel says the successful CFO “has to think, ‘Okay, what’s next? I’m not happy with closing the accounts and getting the consolidations done or getting the annual report out.’ It’s ‘What’s next? I don’t have debt now [so it’s] what are we thinking of next?’ I’ve got some ideas of course I’ll discuss with the board, present them to the board, and sometimes the board thinks I’m nuts. I tell them, ‘I’m going to give you wacky ideas. Well calculated wacky ideas, but you’ve got to decide what you want to do’. It is all about creating that vision and strategy that will take the organisation to the next level.”

He says that the CFO needs to be more creative to fuel the growth of the company.

“Fuel is money: you borrow or you are organic, or you change the capital structure; you need to do something. You need to come up with different ways of doing things. You can’t just say, ‘I’m going to the bank to borrow’.”

He lists some of these different and creative ways of collecting money as bank borrowings, property swaps, negotiations with contractors, and sale to lease.

TACTFUL: “What a lot of CFOs don’t realise is that changing systems is one thing… but changing culture is another. Whenever you change systems you are affecting the culture so you need to approach this with emotional intelligence not just technical excellence.”

He describes the mind-set behind this: “You’ve got to be switched on…You need to be negotiating with the banks all the time. It’s a collective effort of the board, your team, and your stakeholders, but if you’re not driven to do it, it’s not going to happen. That’s why you have a CFO who is a CFO and an accountant who thinks he is a CFO. You can’t do accounting and CFO work at the same time. Accounting is definitive, financial strategy is limitless. As a CFO you need to create solutions that don’t exist, sometimes you have to make the impossible, possible.”

50 November 2013

Dangers of definitive thinking Chevel cautions, “If you are trained to be an accountant; if you think like an accountant… you will never be a CFO [because] you are trained to get things in place, and get to a definitive end. If you are thinking of your target as a definitive end, you will never [be able to] think creatively.”

He chuckles at this common dilemma and muses, “It’s like so many times I say, ‘OK, we need to get this project going; how much money do we need?

We need X many dirhams. How are we going to do it?’ I say, ‘I don’t know; I’ll figure it out.’ If you accept the fact that there’s a solution, you can work backward to get to it.”

He explains that a definitive-thinking person will say things like, “The bank’s not going to give me money” or “We don’t have enough collateral” or “The 80/20, 70/30 ratio isn’t going to work,” but these are all dead-end statements that can kill any creative progress or thought. He reminds us again that “There’s always a solution."

Student Accountant

Professor Taisier Zoubi, American University of Sharjah’s Head of Accounting: “Changes in professional standards and technology are defining the accounting profession. We are continuously striving to bring in these changes to the classrooms.”

MSA

PROGRAMME NOW IN UAE

As American University of Sharjah launches first-of-a-kind Master of Science in Accounting, the Head of Accounting at the school - Professor Taisier Zoubi - tells us what makes the qualification tick.

52 November 2013

Student Accountant

Joyce Njeri Editor, Accountant Middle East

Q

. In today’s competitive job market, a credential next to one’s name can help their resume stand out. Why is the Master of Science in Accounting (MSA) degree a necessity for anyone pursuing a career in accounting?

Most of the Master programmes offered by institutions require work experience from prospective applicants. So, working professionals, fresh students, business starters - Who should take the Master of Science in Accounting course? What kind of profile is your programme looking for?

A. Employers seek professional accountants who are part of the management team. MSA degree holders provide assurances that employers are hiring individuals who are thinkers and add value to the enterprise and not just to provide bookkeeping services.

Our MSA programme is geared toward professional accountants who are looking to advance in the upper level of the corporate ladder and those students who are pursuing professional certifications in accounting such as the CPA, CMA, and CIA. In addition, the programme adequately trains those who are inspired to pursue a Doctorate degree for careers in academia and research.

An MSA in Accounting is considered to be the terminal degree for professionals who are not pursuing teaching career. As a result, an accountant who is seeking a higher position in the top corporate ladder or government will pursue the MSA. What courses are included in the Master of Science in Accounting programme?

To earn the MSA degree, each student must complete 18 credits of required accounting courses, six credits of accounting electives and six credits of general business (MBA) electives.

Accounting courses include, but not limited to, advanced financial reporting topics, advanced auditing and attestation services, topics in international accounting, fraud examination, and international taxation among others.

An MSA in Accounting is considered to be the terminal degree for professionals who are not pursuing teaching career. As a result, an accountant who is seeking a higher position in the top corporate ladder or government will pursue the MSA.

Some say that the education taught in classrooms is different from the actual onthe-job skills necessary for success. As an educator, do you think there needs to be continuous adjustments in the education curriculum to bridge the gap?

As a matter of fact, our MSA program can be distinguished from other degrees based on the ground that we expose our students to real life cases. Furthermore, our graduate courses are updated continuously to incorporate new accounting rules; regulations and standards to ensure that our students can cope with the everchanging accounting profession. In addition, many of our faculty have practical experiences and thus bring practical issues to the classroom through the use of cases and changes in professional standards.

Accounting has evolved from its initial traditional functions and developed into a broad field encompassing a number of disciplines including book keeping, auditing, taxation, forensic accounting, new standards etc. When admitting potential students into your programme, do you really consult with them to understand what their individual needs are in terms of their interests, roles and sectors where 53

Student Accountant

they work, in order to tailor their courses accordingly?

Our MSA programme has three different specialisations (Auditing, Forensic Accounting, and International Taxation) and other areas in accounting such as oil and gas that potential students can choose from. Hence, once a student is admitted, we meet with him/her in order to draft a plan of course work that meet his/her career needs.

Today’s accounting and finance professionals must possess knowledge, experience, and a well-developed set of technical skills to meet the challenges of a wide range of business environments. Are these challenges adequately addressed by your Master of Science in Accountancy (MSA) programme?

Changes in professional standards and technology are defining the accounting profession. We are continuously striving to bring in these changes to the classrooms. One example, the American Institute of CPAs has overhauled its auditing standards to converge with International Standards on Auditing. Our faculty members are up to date on these changes and they are bringing these changes to the classroom. Another example is the integration of XBRL in our accounting system courses on the undergraduate and graduate levels.

In addition, as mentioned earlier, our students would be rigorously exposed to real life cases, which would enhance their understanding of what really they might be facing while working as accountants in government and private sector. We will bring some leading accounting professionals from various business enterprises as guest lecturers in various classes, who would inform the students about how their business is meeting the unique challenges accountants are facing.

How long does it take to complete the Master of Science in Accounting at American University of Sharjah?

Potential MSA students can complete the MSA programme within two years if they decided to take two courses a semester. However, some may finish the entire course within a year and half.

54 November 2012

Student Accountant

American University of Sharjah (AUS) recently launched a Master of Science in Accounting (MSA) programme, the first of its kind in the UAE.

How many people apply to the AUS Master of Science in Accounting Programme each year?

We admitted 17 students in the Fall 2013, the semester of launching the MSA programme and we expect the course to grow significantly once the business community in the GCC is aware of it through publications like yours.

Can potential students apply for admission to pursue Master of Science in Accounting if their undergraduate degree is in a nonbusiness field?

The MSA programme is open to any students with a bachelor degree in any field. However, students with non-business field must complete all the undergraduate business and accounting requirements before they start the MSA programme.

Recently, staffing firm Manpower Group published its annual Talent Shortage Survey, on the top 10 jobs that are the hardest for employers to fill, and for the third year in a row, ‘Accounting’ made the list. Why, in your opinion, is there a ‘deficit of accountants’?

Two factors contributed to the shortage in accountants.

First, in the USA, Big accounting firms as well corporations prefer a job applicant with a Certified Public Accountant (CPA) to have a good career in accounting. The requirement for certification has increased from 120 to 150 credit hours and as a result, not too many people are willing to stay for 5+ years in college to finish the needed credits.

Second, the regulatory bodies in the USA as well as around the world have issued many regulations that require monitoring for compliance such as the Sarbanes Oxley Act, changes in tax laws, and enforcement of banking reporting rules resulted from the US FATCA law (Foreign Account Tax Compliance Act) [incidentally this law will be effective in the UAE and all the GCC countries on January 1, 2014].

In addition, many organisations are in need of qualified and highly trained accountants to monitor fraudulent activities and strengthen the fight against white collar crime. That is one reason the MSA programme at AUS has decided to create a concentration of forensic accounting.

55

IFRS SPECIAL

IFRS SHIPPING

FOR

INDUSTRY Moore Stephens Partners hold key seminar in Dubai to enlighten on crucial issues arising in connection with financial reporting for shipping companies.

T John Adcock Moore Stephens Partner in Dubai and Chairman of Moore Stephens International Middle East john.adcock@ moorestephens-uae.com

56 November 2013

HE DIFFICULTIES experienced in recent years with freight rates and vessel values arising from the slowdown in the global economy and in international trade have been accompanied by issues arising in connection with financial reporting for shipping companies.

In particular, there have been questions relating to vessel impairment, residual values and useful economic life for the purpose of depreciation calculations, charter terminations, financing issues and going concern.

These subjects formed the basis of a seminar organised by Moore Stephens, widely acknowledged as the world’s leading financial adviser to the shipping industry, held recently in Dubai. There were approximately 100 attendees at the high profile event, representing a broad spectrum of the regional shipping fraternity ranging from ship owners, to brokers and ship managers.

Risk management systems Specifically, the seminar sought to highlight and clarify to senior shipping personnel the impact of those International Financial Reporting Standards (IFRS) most relevant to regional shipping companies in the current economic climate and highlighting the importance of implementing robust risk management systems.

It also looked at some of the key proposals for the future of financial reporting and how these could affect shipping companies. The key speakers were from the shipping departments of Moore Stephens in Dubai and London. The topics included an initial

IFRS SPECIAL

IFRS for SME’s Farad Lakdawala, a Partner with Moore Stephens in Dubai began the seminar by providing an overview of the development and use of financial statements in accordance with IFRS by companies in the region and explained that financial statements prepared in accordance with IFRS for SME’s is not yet widely adopted by companies in the region.

Richard Greiner, a Partner with the Moore Stephens shipping team in London, outlined the key issues that arise for a shipping company generally in its financial statements.

Richard then spoke in detail about accounting for the principal asset of a shipping company, the vessel.

This covered an explanation of the nature of the costs which comprise the asset, including the treatment to be adopted for dry docking and special survey costs, an explanation of which amounts can be capitalised and so added to the vessel cost, and which amounts would be repair costs that should be expensed through profit and loss. The accounting impact from changes in the useful economic of vessels, including early scrapping, was also explained.

overview of global shipping and IFRS financial statements, accounting for ships, financing issues, risk management for shipping companies, current accounting issues and a summary of recent and future accounting developments.

John Adcock, a Partner with Moore Stephens in Dubai and Chairman of Moore Stephens International Middle East, said, “Moore Stephens has accumulated an unparalleled depth of knowledge and unrivalled experience, and is therefore in a unique position to provide the growing shipping industry in the region with the relevant advice and support across a range of services.”

Loan covenant breaches Jamie Tomlin of the Moore Stephens London technical department spoke in detail about a number of financing issues in the current economic climate and the challenges facing some shipping companies arising from loan covenant breaches and the restructuring of loan facilities.

Michael Simms, also a Partner with the Moore Stephens shipping team in London spoke in detail about the accounting challenges arising from impairment, provisions and claims, and onerous contracts, and explained how these can be addressed for financial reporting purposes. The difficult conditions experienced by some sectors have led to severe downward pressures on vessel values, with consequences for the strength of the balance sheet.

57

IFRS SPECIAL

Partners with Moore Stephens pose for a photograph during a recent seminar on IFRS for the Shipping Industry. The firm is noted for a number of industry specialisations and is widely acknowledged as a leading shipping adviser.

Michael also explained how the existence or otherwise of an impairment should be determined, recognising that this can be extremely difficult where there is only limited activity in vessel transactions to support broker valuations and that the complexities in calculating value in use can be equally challenging. The effect of these factors on the going concern status, and the possible consequences that follow where this may be in doubt, were also explained.

Accounting and reporting is fluid. Being knowledgeable about changes to accounting requirements presents a further challenge, requiring the preparer of financial statements to understand how standards have changed.

58 November 2013

Corporate governance Another London-based Partner, Robert Noye-Allen, a specialist in advising shipping companies on corporate governance and risk management, provided an overview of the recent developments in corporate governance applicable to companies in the region.

Robert explained how senior management and those charged with governance can improve the formal process of identifying and mitigating risk by the use of Enterprise Risk Management (ERM) software, which included a short introduction to the Moore Stephens online risk management software system called “Rhiza�.

Robert provided examples of identified risks relating to shipping companies such as crewing, safety, environmental, and regulatory. Finally, Robert explained the process of identification and mitigation of risks in the context of shipping companies and reiterated the growing

IFRS SPECIAL

importance of implementing timely efficient risk management systems.

and

Changes to accounting Accounting and reporting is fluid.

Being knowledgeable about changes to accounting requirements presents a further challenge, requiring the preparer of financial statements to understand how standards have changed, the effect on financial reporting and the need to plan for system changes to capture information to enable compliance.

The seminar ended with Jamie Tomlin outlining some recent developments, including changes to the determination of the nature of interests held and whether they comprise a subsidiary in accordance with IFRS10 (Consolidated Financial Statements), or, where sole control is absent, whether they could be a joint venture or joint operation in accordance with IFRS11 (Joint Arrangements).

Fundamental to this for the shipping industry are the proposals for accounting for leases which in the fullness of time are expected to replace IAS17 (Leases).

Draft on leases Jamie explained to the delegates at the seminar the most significant changes in the proposed IFRS relating to accounting for leases, in particular the move towards recognising all leases, other than very short ones in the balance sheet. The proposals would remove the fundamental difference in accounting for leases that arise under current standards where the distinction between an operating lease and a finance lease may be very fine.

The IASB recently issued a second exposure draft dealing with leases, following on from

Michael Simms, a Partner with the Moore Stephens shipping team in London spoke in detail about the accounting challenges arising from impairment, provisions and claims, and onerous contracts, and explained how these can be addressed for financial reporting purposes.

The changes which came into effect in 2013 require an assessment of whether one party has power over another such that it can use that power to affect the amount of return, and possibly profit, that it is exposed to.

Complex arrangements There is greater emphasis on looking at returns and the relevant activities that most significantly affect those returns. This has particular relevance for the shipping industry through the use of pooling-type arrangements or in the case of more complex arrangements.

For example, there have been a number of cases in recent years of shipping companies being unable to meet their debt obligations. If the vessels operated by such companies are then sold, no accounting issues arise and the bank has simply realised its loss. In some cases, though, the bank does not wish to sell the vessel and it is transferred to a new entity in which the bank retains some form of interest. The question is whether, in such cases, that entity is a subsidiary of the bank.

The ability to engage early in the development of standards and to try and influence the direction they take was brought to mind when considering the direction in which the International Accounting Standards Board (IASB) is headed with its future proposals.

59

IFRS SPECIAL

The IASB recently issued a second exposure draft dealing with leases, following on from the draft issued in 2010. It proposed that all leases of more than one year will be recorded in the balance sheet as an asset and a liability by the lessee.

charters, where those charters are currently classified as operating leases. In simple terms, such companies will have to record their interest in the vessels as an asset with a corresponding liability, at the fair value of the future payments under the charter.”

For time charters, the amounts payable will need to be split between the bareboat element and the service element. Only the bareboat element will give rise to an asset and liability.

The current even spread of chartering costs will also often be replaced with a front-loaded model, so that the early periods of a charter will ref lect higher costs than the later ones.

Deterioration in gearing ratios Some companies will find that their balance sheets do not look as good after the change.

If additional assets and liabilities appear, this will lead to a deterioration in gearing ratios.

Some companies may even find that they are in breach of loan covenants where these are based on the level of liabilities shown in the balance sheet.

The proposed changes will also affect owners chartering out tonnage, but in their case the impact will be much less. After all, they already have an asset in the balance sheet, so altering its classification is not so dramatic a change.

Richard Greiner, a Partner with the Moore Stephens shipping team in London, enlightens on ‘accounting for vessels’. This covered an explanation of the nature of the costs which comprise vessels, including the treatment to be adopted for dry docking.

the draft issued in 2010. There have been many changes to the proposals since the original draft. But the key proposal has not changed; the IASB continues to propose that all leases of more than one year will be recorded in the balance sheet as an asset and a liability by the lessee.

Jamie said, “If the proposals go through, many shipping companies will find that their accounts change substantially. The greatest impact will be on those who charter in tonnage, whether under bareboat or time 60 November 2013

There have been extensive discussions relating to two exposure drafts on leasing but, as Jamie noted, the proposals have probably received more attention than many other standards due to their significant impact upon some key industry sectors. It is likely that there will be further amendments from the second draft. If a new standard is issued it may not be effective for another three to four years. Its importance to - and impact on - all aspects of the shipping industry cannot be understated, and Moore Stephens is ideally placed to advise on this as the proposals develop.

There were a number of questions raised by the delegates, which stimulated thoughtful discussion throughout the day and the feedback from delegates was very positive.

Overall there was strong support for more shipping industry-specific events of this nature in the future.

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Career Development

CFO MENTORSHIP

COURSE ON

Sessions to be provided through in-person meetings or tele-mentoring.

“Thanks to all MECA members and our business partners and sponsors who supported and participated the event, the forum proved yet again the need to equip financial managers with the necessary skills to face the challenges of today’s competitive business market,” said Saleem Sufi, MECA’s Founder & President.

Founder and President of Middle East CFO Alliance, Saleem Sufi, addresses CFOs and Senior Finance professionals at a recent conference held at the Burj Al Arab Hotel, in Dubai.

M

IDDLE EAST CFO Alliance (MECA), the largest CFO networking group in the region has announced the final details of its CFO Mentorship Programme for 2014.

The programme will formally kick off with a Mentoring 101 Leadership workshop to be held on November 9, 2013 at Dusit Thani Hotel, Dubai for all registered Mentors and Mentees.

More than 100 CFOs across the region have volunteered to be the Mentors for early and mid-career Finance Professionals registered in the programme.

The mentoring sessions will be provided through inperson meetings or tele-mentoring (Skype/telephone) further enhanced by e-mentoring.

The course is open in all locations across the Middle East including, UAE, KSA, Pakistan and other Gulf countries. To get further details or to join the programme as a Mentor or a Mentee, visit: www. mecacfoalliance.com/cfomentorship/ Huge success On the same note, the CFO Strategy Summit held recently in Dubai was a huge success again, according to the event organisers.

62 November 2013

Among the speakers were the Chief Economist from Dubai Chamber of Commerce & Industry, Regional CFO of SAP, Group CFO from Al Batha group, and a lineup of other top executives from local, regional and international business organisations. The delegates travelled from USA, Canada, UK, India, Pakistan and other Gulf countries to attend the event. Among the professional institutions that supported the CFO Strategy Summit were ACCA, IMA, AFP, ICAP and ICAI.

The main highlight of the event was the launch of the long awaited MECA CFO Mentorship Programme.

During the summit, one conclusion that came up loud and clear is that today CFOs, to be successful in their roles need to get involved in the strategy process more than ever. According to a McKinsey survey more than 50% of CEOs expect their CFOs to challenge their company strategy.

Strategy workshops To get the CFOs prepared for this critical challenge, MECA, in collaboration with the Institute of Business Strategy of New Jersey, is organising two advanced level CFO Strategy Workshops in Dubai: i) The CFO: Becoming a Strategic Partner - A 3-Day Advanced Leadership Programme for CFOs, Nov 30 – Dec 2, 2013 - The Address Dubai Marina ii) Driving Corporate Performance through Balanced Scorecard - A 2-Day Advanced Strategy Workshop for Executives, Dec 4-5, 2013 - The Address Dubai Marina

IFRS Career Special Development

“These intense, content-rich workshops are designed to equip CFOs with the necessary strategy tools and practical knowledge of the strategy processes to help them quickly get started with their company strategy.

In just 2-3 days you will develop a fresh perspective how you approach your role as CFO. The workshop faculty is comprised of two highly qualified and experienced subject matter experts who are traveling from United States to conduct the program.

For registration or more information contact the Programme Organiser: Motivaluate Consulting & Training FZ LLC

Email: Shridhar@motivaluate.com, Info@ motivaluate.com Office: +971 4 446 5708 Cell: +971 50 940 7401 “This was the third major CFO event from Middle East CFO Alliance. Our next regional CFO conference to be held on December 11, 2013 will mark the fourth

CFO conference from MECA in a record period of 12 months,” said Saleem.

“This has all been possible due to passionate support to MECA from the senior Finance community all across the Middle East. We are soon going to announce the full schedule of MECA’s event and programmes for the year 2014 which will be a milestone year for MECA and its supporters,” he added.

Regional conference MECA has also announced that due to the high demand from the Senior Finance community to attend the upcoming Regional CFO conference in December, the event has been moved to the Ritz Carlton at DIFC to accommodate larger participation.

The conference is now set to be held as per the following: Regional CFO Conference: “Driving Corporate Performance through Finance Excellence”

Date: December 12, 2013 (Thursday), Venue: The Ritz Carlton, DIFC, Dubai

Registration is now open. You may register at http://www.mecacfoalliance.com/

63

Combating IFRS Special Fraud

COUNTERING THE

COST

BDO Audit Partner Justin Crowley outlines some basic steps to follow in managing fraud risk within businesses.

W

HETHER OR not we might like to admit it, it is likely that our businesses will be the victim of fraud at some point.

Whether in the form of petty theft, or large scale complex fraud involving manipulation of sophisticated systems, fraudsters will seek to find ways of beating the system – some will be motivated by their personal circumstances while others may simply enjoy the challenge.

While we may never actually establish accurate data as to the extent or cost of fraud (much of it goes undiscovered), there are some published official data sources that

Whether in the form of petty theft, or large scale complex fraud involving manipulation of sophisticated systems, fraudsters will always seek to find ways of beating the system.

64 November 2013

provide an indication. In the UK for example, the governments National Fraud Agency, in its 2013 fraud indicator report quoted the latest estimated annual value of frauds committed within the UK at GPB 73billion (appx AED 430billion) - equivalent to 3% of GDP. On average, according to the NFA, businesses lose 1.5% of their annual revenue to fraud.

Key tips to manage fraud risk We can all take actions to reduce our exposure to fraud, and this needn’t be a terribly complicated exercise. This article aims to set out some basic steps to follow in m anaging fraud risk within your business:

IFRS Combating Special Fraud

1. Know your enemy Spend time mapping out your transaction flows and identify where your higher risk areas lie. You might find that it is useful to do this with your management team as they might best understand how controls can be over-ridden.

Pull together a fraud risk register of all of the ways in which fraud might be committed, and what assets might be at risk of abuse or theft and then set about identifying any existing controls that mitigate these risks – the chances are you’ll identify gaps that can be plugged with fairly straightforward controls.

2. Adopt a culture of openness

Let your staff know that you acknowledge the risk of fraud in your operations and that you are actively managing and monitoring that risk. Ensure that staff fully understand policies and procedures and continually emphasise the importance of following them.

Most of your staff will also acknowledge the reality of fraud risk to the business, so none of them should be troubled by discussing it. Some of the best counter-fraud control environments I have come across have been in organisations which talk openly about fraud control – examples include the UK health service which many entities have dedicated counter-fraud personnel who work alongside internal auditors.

Announce your intentions in combating fraud and let staff know what to do if they themselves have suspicions.

Case Study 1 Company 1 is a large group involved in the provision of care to vulnerable adults. Management had concerns regarding possible abuse of consumables ranging from housewares to foodstuffs and fuel.

After making an announcement to staff of their intention to monitor such expenditure more closely and revise procurement procedures, finance staff reported an immediate change in purchasing trends and a reduction in expenditure without implementing a single change in procedure.

3. Monitor trends

Some of the most effective of all counter-fraud controls are those that involve monitoring of data and trends and comparing them to expectations.

Take a step back from your business and think about the way in which resources are consumed

Auditors are forever advising their clients to make sure that as far as possible, duties are segregated, but for good reason – if done properly this can restrict the ability of the fraudster to act in isolation.

– try to formulate high-level expectations about efficiency in different processes, whether that involves throughput of raw materials in a complex process, or something as simple and fuel usage.

Once you have mapped out your processes and set tolerance levels for efficiency or loss, monitor causes of deviance against those standards.

Case study 2 Company 2 is involved in the manufacture and distribution of products used in the construction industry. Very careful tolerance levels were set for production processes, but monitoring of costs ended once products had left the factory gates. Monitoring of delivery costs per mile identified significant variations between drivers. Surveillance of those drivers later uncovered a practice of fuel theft wherein drivers would fill illicit on-board barrels with fuel for subsequent black market re-sale.

1.5%

Amount of their annual revenue that businesses in UK lose to fraud, according to National Fraud Agency.

4. Segregate duties Auditors are forever advising their clients to make sure that as far as possible, duties are segregated, but for good reason – if done properly this can restrict the ability of the fraudster to act

Justin Crowley – ACA Audit Partner, BDO After graduating with a degree in Economics from the London School of Economics, Justin joined the Audit & Advisory Department at PwC in the UK where he spent 9 years before taking up audit principal roles with other leading firms.

He has led internal and external audit assignments on a large number of clients working within regulated industries, the oil & gas sector, manufacturing, construction, financial services and government departments. An internal control specialist, Justin has delivered complex Sarbannes-Oxley assignments across a wide range of sectors and has led teams supporting the work of the Serious Fraud Office in the UK.

65

Combating Fraud

Give consideration to changing the duties of accounting staff on a rotational basis – this can help to increase their skill and versatility levels but it also makes it more risky for the fraudster themselves.

account breached credit limits. Incidentally, monitoring controls detailing the average age of debt by geographical area would also have identified this fraud earlier.

5. Restrict the use of portable assets Portable assets, particularly cash, are usually more prone to fraud or theft due to their very nature.

The use of cash as a medium for transactions should be discouraged at every level unless there are compelling reasons otherwise.

Recent years have seen a very significant increase in the use of online banking, including online banking for companies. Be sure to use banking staff/IT staff to give you comfort over the continuing appropriateness of inbuilt controls and delegation limits/authorities over transactions.

Encourage your clients/customers as far as possible to also avoid using cash.

We can all take actions to reduce our exposure to fraud, and this needn’t be a terribly complicated exercise.

6. Undertake random spot checks

in isolation. For example, in a creditor payments cycle it is preferable to have different personnel responsible for setting up creditor accounts, setting limits, completing and reviewing orders, inputting and approving orders, approving invoices, approving payment, and then processing payment.

Limitations on the size of accounting team can of course restrict the extent to which segregation is possible. It is usually necessary to find a balance between efficiency and absolute control in the real world. Also give consideration to changing the duties of accounting staff on a rotational basis – this can help to increase their skill and versatility levels but it also makes it more risky for the fraudster themselves.

Case study 3 Company 3 is in the government sector. Teams of staff are responsible for making collections, either in cash or cheque, from a large population.

Each staff member has responsibility for a wide geographical area. Following a recommendation to rotate staff by geographical area, the new staff member for a particular area started to uncover a large number of anomalies within client accounts. His predecessor had been teaming and lading for a number of years, shifting funds from one client to another so that no particular

66 November 2013

This does not have to be intrusive, particularly if part of a routine controls review process. The checks you perform will be driven by your own business risk. You might for example review key customer accounts for appropriateness of transactions. You might want to consider reviewing the overall commerciality of rates being applied to customer accounts, or being charged to your business for certain supplies. Even in a well controlled accounting environment, the creative fraudster may collude with an external party.

Case study 4 Company 4 is in the service industry and has a large number of employees, each of whom is issued with various high-tec mobile and static devices. Spot checking of supplier accounts identified one supplier (who also was the preferred supplier) charging significantly above market rates for devices. Upon further investigation it was discovered that the purchasing manager received a ‘loyalty reward’ personally from the supplier in the form of gifts delivered directly to his home.

Summary It is an unfortunate truth that most of our businesses have been, or will be victims of fraud.

There are relatively simple steps we can all take in countering the cost of fraud. The first and most important steps are to acknowledge the risk and make a register of all of your susceptibilities then start to plan your response in a co-ordinated manner.

Private IFRS Special Equity

PRIVATE EQUITY CYCLE UPS GEAR More than half of respondents in Deloitte MENA survey expect an increase in investment activity, as another 69% of study participants say they plan to raise a new fund within the next 12 months.

T

HE RESULTS of Deloitte’s sixth Middle East and North Africa Private Equity Confidence Survey, which serves to provide a barometer of market perception and confidence amongst private equity professionals investing within the MENA region, confirm a continued optimism for growth in the regional investment activity, but a shift in immediate focus for many General Partners (GPs) towards asset monetisation, from vintage funds and capital raising, for a new round of acquisitions.

The survey confirms that market confidence remains high with over 65% of respondents expecting an increase in investment activity over the next year, primarily driven by convergence of the buyer-seller valuation gap and higher levels of free cash in both corporates and family offices.

Pre-crisis era For many GPs, the continued appetite for new investment will be balanced with a more immediate focus on securing future capital. With regional funds raised during the pre-crisis era running low on cash reserves, over two thirds of 68 November 2013

respondents will be looking to raise a new fund within the next 12 months. The success of these fundraisings is likely to be highly correlated to historical performance.

“We are now at a point where Limited Partners (LPs) are increasingly keen to see realised value on previous investments,” said Declan Hayes, Managing Director, Deloitte Corporate Finance Ltd in the MENA region.

“GPs still hold a backlog of portfolio companies, many of which have required extended holding periods - adequate preparation to achieve value maximisation on exit will be crucial to demonstrate a positive track record and persuade LPs to commit to new fundraisings.”

Viable exit option Two thirds of respondents expect an increase in exit activity within their fund this year - 23% confirming it will be their primary focus. The most likely exit route, a trade sale to a strategic buyer, remains unchanged from prior year; however confidence in exit via IPO has increased significantly with nearly a third of respondents indicating that a regional or international listing would be their most viable exit option.

According to the Deloitte survey, there remains a general preference towards defensive investments, with a number of respondents indicating a preference towards favourites such as oilfield services, education and healthcare.

Private Equity

69%

proportion of respondents who plan to raise a new fund within the next 12 months recognition that the favourites such as education, healthcare and oilfield services are now very competitive, and diversification into less familiar sectors may be necessary to secure the required IRR. “GPs remain optimistic towards continued longterm growth prospects in the MENA region; however, as the industry enters a new investment cycle and LPs increasingly consider direct or co-investment options as a viable alternative to blind pool investing, the focus on exits is critical,” says Chris Carney, Assistant Director, Deloitte Corporate Finance Ltd in the MENA region.

“A more sophisticated approach, including the growing trend to use vendor due diligence, will improve individual asset returns and safeguard future funding,” he adds.

Globally, private equity firms are adapting to a “new fundraising road map”, according to the 2013 Global Private Equity Report, released by Grant Thornton.

The target geographical area for regional PE houses is becoming focused on fewer countries with the majority of respondents confirming their investment activity will be centred around KSA and UAE. Despite the very favourable demographics of these locations, private equity investors note that the most significant challenge over the next 12 months will likely relate to the limitation of suitable assets available within the more concentrated target area.

From an industry perspective, there remains a general preference towards defensive investments.

Long-term growth prospects Around 34% of respondents indicate a preference towards retail and consumer businesses including food and beverage. There is, however, also

Now in its third year, the report is the result of 156 in-depth interviews with senior private equity practitioners around the globe.

The report provides insight into private equity general partners’ expectations for numerous aspects of the fundraising and investment cycle. This year the report takes a closer look at fundraising and reveals how private equity firms

The target geographical area for regional private equity houses is becoming focused on fewer countries with the majority of respondents confirming their investment activity will be centred around Saudi Arabia and UAE.

69

Private Equity

are adapting their approach to increase their chances of a successful fundraise.

Fundraising sentiment While the private equity fundraising environment around the world is still seen as challenging, there has been a marked improvement in sentiment across all geographies since last year’s report, with more than half of the executives surveyed (54 per cent) having either a positive or neutral outlook. This compares with just a quarter (27 per cent) last year.

How do you view the current fundraising environment?

2013

2012

2011

Very Positive

0%

1%

4%

Positive

29%

11%

24%

Neutral

25%

15%

26%

Negative

33%

33%

33%

Very Negative

13%

39%

13%

Source: Global Private Equity Report 2013/14, Grant Thornton

“There is a brighter view of the fundraising environment across nearly all the major private equity markets in the world. The percentage of respondents describing the environment as positive is up in North America, Asia Pacific, Middle East & North Africa and even Europe,” said Hisham Farouk, Managing Partner of Grant Thornton UAE. Which of the following strategies are you considering using as part of your next fundraising to help attract investors?

Co-investment opportunities

35%

Advisory board representation

27%

Early-bird discount/ fee concessions

16%

Greater GP commitment to fund

14%

Segregated accounts

8%

Source: Global Private Equity Report 2013/14, Grant Thornton

Fund structures changing A majority of GPs around the world (56 per cent) predict an increase in the use of alternative fund structures over the next three years, as limited partners explore options beyond the traditional 10-year blind pool fund. The alternative structure most commonly cited by GPs is deal-by-deal, 70 November 2013

whereby investors are presented investment opportunities and can either opt in or out on a case-by-case basis.

“Some GPs note that while there are disadvantages to most fund structures, alternatives to the limited partnership can provide a means to: tailor programmes to an individual LP’s needs; adopt a flexible approach to match market circumstances, for GPs to access carry more quickly than via a 10year fund; and make investments in areas out of favour with LPs and which therefore would not fit in a blind pool model. In the majority of cases, GPs point to deal-by-deal fundraising as being the most common alternative to the limited partnership,” the Global Private Equity Report 2013 from Grant Thornton states.

Fundraising: longer, slower, harder While there is more general positivity around fundraising prospects, there is also a recognition among the survey respondents that the process has become costlier and more onerous. Many report that the distinction between “fundraising” and “investor relations” had become more blurred and fundraising is seen more as a constant process of relationship building and reporting rather than a cyclical exercise.

“Momentum is widely understood as a prerequisite for successful fundraising. An early first close on a good proportion of the target is often seen as key to how the process is perceived and, therefore, whether other LPs will feel confident enough to come on board. Much of the drive for momentum is rooted in extended LP pre-qualification and pre-marketing phases, as well as ensuring likely information requirements are prepared for ahead of the ‘official’ launch,” the study adds.

As well as ensuring they are fully prepared for the official launch of their fundraising, GPs are considering alternative incentives to attract new investors. Co-investment opportunities are the most commonly cited strategy.

“With the power shifted to the LP, GPs are reconciled to accepting new demands or offering incentives and concessions (fee discounts, advisory board seats, co-investment rights), encouraging LPs to commit, especially ahead of the important first close,” states the Global Private Equity Report 2013 from Grant Thornton.

When asked to compare their most recent fundraise

Private Equity

with previous experiences, private equity firms most commonly cited the amount of due diligence by prospective LPs as an area where the process had changed. The time it takes to push investors over the line and the sheer number of LP meetings, were also areas where changes were noted.

Across the world, 65 per cent of private equity firms expect to be on the fundraising trail within the next 12 months. More firms than ever (22 per cent) expect their funds to be dominated by new LP relationships.

How did your most recent experience of fundraising differ from previous ones?

Extent of LP due diligence (demand for information, forward pipeline visibility, LP portfolio visits, dataroom strategy etc)

53%

Conversion rates (timing, size of commitment etc)

20%

Number of LP meetings (roadshows, LP visits etc)

16%

Depth and breadth of LP base contacted (type/location etc)

9%

Other

2%

“There is a brighter view of the fundraising environment across nearly all the major private equity markets in the world,” says Hisham Farouk, Managing Partner of Grant Thornton UAE.

Source: Global Private Equity Report 2013/14, Grant Thornton

Dividend recaps set to rise By far and away the most common “pressure point” in the GP-LP relationship is the question of distributions and exits, with 23 per cent of respondents citing this as being the area of most LP pressure. This is followed by the firm’s strategy in light of market conditions (13 per cent), fees (12 per cent) and ESG policy (12 per cent).

In light of the pressure for exits, it is perhaps unsurprising that the majority of GPs (51 per cent) predict there will be an increase in dividend recapitalization activity over the next 12 months.

Only 2 per cent expect there to be a decrease and 47 per cent expect activity levels to stay the same.

What proportion of your next fund (by percentage of investors) do you expect to be first time investors with you?

Proportion

2013

2012

2011

Majority

22%

18%

16%

Half

21%

18%

8%

Significant minority

22%

27%

28%

Minority

33%

35%

44%

None

2%

2%

4%

Source: Global Private Equity Report 2013/14, Grant Thornton

The bullishness was most pronounced in North America, where 64 per cent of GPs are expecting an increase.

The wider PE environment As well as assessing the market for private equity fundraising, the Global Private Equity Report delivers an in-depth examination of prospects for deal flow, access to debt finance, exit activity and portfolio company performance drivers.

“While the results from our third annual global private equity survey indicate that there numerous challenges facing the industry remain, there appears to be signs of growing optimism amongst respondents, suggesting that perhaps we are at the dawn of a new phase of increased activity, especially in the core private equity markets of North America and Western Europe.

“With the continuing improvement in debt markets in North America and the potential follow on impact this may have globally, as well as signs of positive economic news from Europe and sustained high growth rates across the Asia Pacific region, there appears to be supporting evidence underpinning these early signs of returning confidence,” the Grant Thornton’s Global Private Equity Report 2013, states.

71

Corporate Treasury

REWARDING RELATIONSHIPS It is essential for treasurers to communicate honestly and openly if they want to get the best from their banks, argues Sarah Boyce.

A

BANK group should have a footpr int (both product and geographic) that meets the needs of the organisation. So an ideal relationship bank will need to be able to: Act as a trusted adviser; Provide solutions tailored to the requirements of the company; and Offer support in challenging times (often at short notice).

But in order to do all of the above, the bank must understand the business.

Meanwhile, treasury needs to ensure that it has oversight of all the bank relationships across the group. This can be relatively straightforward in a small or highly centralised group, but in a more international or decentralised organisation, local businesses may be using a large number of banks without treasury being aware.

Irrespective of the size of the bank group, there are certain key considerations when managing any relationship:

1. Mutual respect and openness a) Spend time ensuring that banks understand the business as much as possible – not only does it strengthen the relationship, but it will assist the relationship managers when they are having internal conversations.

b) Understand your bank as far as you can since each bank will have different strengths and weaknesses – their objective is to make a profit 72 November 2013

from the relationship, so understand their key drivers.

c) Treat them as a valued business partner, rather than as a vendor, and focus on establishing a mutually beneficial relationship.

d) Be aware of any possible conflicts of interest.

A register of all interactions between the bank and the organisation should be maintained to ensure that no undue influence is being exerted by either side. e) Be as open and honest as you can be, and demand the same from your bank.

2. Clear communication

a) Help your relationship manager to manage their internal relationships – banks frequently operate in silos, much like corporates, so the messaging must be clear (and may need to be regularly repeated).

Corporate Treasury

b) Hold regular meetings. These can be oneto-one, but it is also good to arrange wider debt investor meetings, which all banks in the relationship pool can attend together (for example, following public announcements such as the annual results). Debt investor meetings are a popular solution to ensure that banks get information in a timely manner and have access to senior managers (in a way that is efficient for management).

c)

In addition to formal meetings, other opportunities, such as factory tours or visits to sites, will help the bank to understand the business.

d) Don’t forget that although a bank will speak to the treasurer and FD formally, it will also talk (possibly much more frequently) to other members of the treasury team, trade finance users and many others in the company, so the entire organisation needs to be ‘on message’. e) Be consistent in your dealings with the banks – banks hate surprises.

3. Monitor and report performance –

using both qualitative and quantitative measures a) Qualitative measures will vary between organisations, but may include security of the counterparty (measured by their credit rating, credit default swaps spread and as much

market awareness as possible); flexibility to respond to the needs of the organisation; the range of products offered by the bank and their relevance to the organisation; and the extent to which the bank footprint overlaps with the organisation.

b) Implementing quantitative measures can be complicated and many corporates don’t try to measure their relationships in this way. But identifying share of wallet can be relatively straightforward to calculate within a treasury management system and electronic dealing platforms can refine data related to deals won and lost – which will help to identify any ongoing pricing issues.

Arguably, bank relationships are more important than ever to corporates as liquidity is scarcer and banks have become more selective as their balance sheets are squeezed by increased regulation and historic losses. Therefore, spending time on establishing and maintaining bank relationships is essential.

But it is worth remembering that even if you develop strong and enduring relationships, bank strategies may change (and your relationship manager may not have any influence over the outcome), which may result in a bank entering or leaving some lines of business and geographies. Therefore, however strong the relationship, it is always prudent to have a fallback plan.

ACT Middle East

Key dates from the chartered body for treasury

We are committed to providing support to the treasury profession, with our events and training courses focusing on key issues facing treasurers in the Middle East region. They also provide an unrivalled opportunity for treasury, risk and finance professionals to come together for networking.

Widen your potential by taking part in our upcoming key events for the region: • Effective Treasury Management (training course) 24-25 November 2013 | The Ritz-Carlton, DIFC, Dubai Here’s your chance to critically review key elements of your company’s treasury function and the means by which to add value and enhance efficiency. You will learn about current best practices, which will be supported with real-life case studies. www.treasurers.org/treasuryfundamentalsetm

Exclusive offer: FREE ACT Middle East Annual Conference place for registered training delegates on this course (worth up to $1599).

Email training@treasurer.org for details quoting “Accountant ME”

• ACT Middle East Annual Conference 2013 26-27 November 2013 | The Ritz-Carlton, DIFC, Dubai Join over 400 professionals at the largest treasury conference and exhibition in the GCC. To help inspire your organisation’s growth plans, our thought provoking programme covers everything from innovations in cash and liquidity management to supply chain finance and investment strategy. www.actmiddleeast.org/annualconference Email actme@treasurer.org for full details quoting ‘Accountant ME’

73

Industry Appointments

APPOINTMENTS If you have made a new appointment, promotion or have any relevant hiring news, please email the details and a photo to accountancy@cpidubai.com

KPMG has appointed a Global Islamic Finance Leadership Team (GIFLT) to support the continued growth and development of KPMG’s Global Islamic Finance practice. The team comprises of senior Islamic Finance practitioners from across KPMG’s global network of member firms, and is led by Samer Hijazi (top) of KPMG in the UK. Muhammad Tariq (below) who is the Head of Audit for the UAE practice will lead this initiative in the UAE. KPMG’s announcement follows His Highness Shaikh Mohammed bin Rashid Al Maktoum move, where he recently launched the strategic plan to position Dubai as the capital of the Islamic economy. His Highness expressed his strong commitment to the success of the Islamic economy sector and about placing Dubai on the international economic map as the global destination of choice that provides Islamic products, finance and services as well as raising the standards for the management and quality of this sector to new levels.

Access Prepaid Worldwide, a MasterCard company, has announced the appointment of Rajeev Kumar as Regional Director and General Manager for the Middle East and Africa. In his new role, Rajeev will be responsible for overseeing the expansion strategies and existing business operations of Access in the region while also strengthening the company’s position for future growth.

Prior to this role, Rajeev served as a Senior Director for Prepaid Business Development at MasterCard where he was instrumental in driving MasterCard’s success in Prepaid and its marketing leading position in the region. He joined MasterCard in 2005 74 November 2013

where he has held a series of senior positions including Vice President and Country Manager for Bahrain and Director of Member Relations for Oman, Kuwait and Bahrain.

and power & utilities sectors around the globe. As well as his leadership role, Gerard will remain an active consulting Partner to a number of our key clients across the region.

Ajman Bank Board of Directors has announced the appointment of Seifeldin Abdelkareem to the position of Acting CEO of the bank. In a statement, the bank said; “Generating consistent and quality earnings is a key priority for us as we continue to serve our clients and communities. We have got in place the very best systems, practices, controls and technology managed by an exceptional team to meet the highest standards. We are confident these measures will enable us to capitalise on the right opportunities to deliver superior results while maintaining steady growth in all critical areas.” Ajman Bank began its operations in 2008 and is the first Shariah compliant Islamic bank incorporated and headquartered in the Emirate of Ajman. It now operates 11 branches spread across the UAE.

Du, the UAEs second-biggest telecommunications operator, has named Amer Kazim as its new chief financial officer, replacing longstanding incumbent Mark Shuttleworth. Kazim is due to take up the position in December. In a statement, du said the appointment of Kazim comes at a time of a new phase of growth, which would see the firm focus on strengthening its employment of Emiratis in senior management positions, adding that Shuttleworth was stepping down “to pursue other business opportunities.”

EY has announced the appointment of Gerard Gallagher as the new Managing Partner for the firm’s advisory business across the Middle East & North Africa (MENA). Gerard’s substantial experience as a consulting partner in EY’s global business, combined with his extensive experience of rapidly building and leading advisory businesses across the globe, will further drive the growth of EY’s MENA advisory practice. Prior to joining EY, Gerard spent a significant part of his career as a chartered engineer, delivering major global capital investment programs in the infrastructure, mining, oil & gas

Deutsche Bank has announced the appointment of Fahad Albader and Adel Dagher as Co-Heads of Asset Management Coverage for Deutsche Asset & Wealth Management (DeAWM) in the Middle East and North Africa (MENA). Albader and Dagher have joint responsibility for representing DeAWM and its investment capabilities to institutional clients across the MENA region. Based in Dubai, they report to Peter Roemer, Head of DeAWM's Global Client Group, Europe Middle East and Africa. Dagher joins after 12 years with Man Group, where he most recently helped to develop Man’s institutional business in MENA, with a focus on alternatives. Albader joins from Deutsche Bank’s Corporate Banking and Securities (CB&S) division where he was most recently Head of Coverage for Kuwait as well as serving institutional clients in the MENA region in relation to corporate finance and capital markets transactions.

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ACCOUNTING FOR EXCELLENCE THE MIDDLE EAST ACCOUNTANCY AND FINANCE EXCELLENCE AWARDS WEDNESDAY 11 DECEMBER 2013 AT THE RITZ CARLTON, ABU DHABI once again, the very best talent in the world of accountancy and finance will be celebrated by icAew at a stellar awards ceremony. icAew is a professional membership organisation supporting over 140,000 chartered accountants around the world. And, on wednesday 11 december 2013, at the ritz carlton in Abu dhabi, we’ll be recognising excellence in twelve categories featuring: cfo of the year, corporate finance deal of the year and the internal Audit excellence Award with an impressive line up of speakers, special guests and entertainment, it all adds up to a truly memorable evening. to submit a nomination or for more information, visit icaew.ae/awards nominations close on 1 november 2013

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