NQ magazine March 2018
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and a whole lot more Pages 4 and 7
CYBER-SECURITY TRENDS YOU SHOULD KNOW ABOUT Page 12
INTEGRATED REPORTING
How an IIRC initiative has made corporate reporting easier to do Page 18
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THE BLOCKCHAIN CRYPTO-CURRENCIES AND THE BLOCKCHAIN – HOW THEY COULD CHANGE THE FACE OF ACCOUNTANCY
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WINNING THE TECH RACE ACCA report outlines how companies can make technology work for them
MONEY LAUNDERING How to protect yourself from accusations of money laundering
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COMMENT
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EDITOR’S COMMENTS Welcome to the first NQ magazine of 2018. This issue is a bit of a technology ‘special’. We take a look at blockchain, cyber-security, future trends and, perhaps most importantly, at how the CFO can remain relevant in this new digtal age. The ACCA’s Maggie McGhee stresses (on page 8) that it’s the CFOs who embrace new tools and technology who will have a huge opportunity to put finance at the centre of their enterprise’s value creation. There is also a warning: failure to do so will risk the future value that finance can achieve. Meanwhile, blockchain is a whole new method of record-keeping that has some really fascinating possibilities for accountants! It isn’t an easy concept to get your head around, as it doesn’t require an owner, controller, gatekeeper, master copy or authenticator. Looking at it simply, it is just a ledger of transactions that is shared among many people. What is interesting is the fact that anyone can add to it and these are both permanent and uneditable. You can find out more on page 10. So, will 2018 be the year when businesses of all sizes start to engage with the hype? Do we all need to throw away our tech fear? Maybe so. We also liked what PwC’s Neil Hampson said: “Data remains king – so while emerging technologies like AI, blockchain and drones are becoming the new ‘it’ crowd, let’s not forget about the magic ingredient behind them all – data.” He stresses it is vital you have a clear picture of the data assets you are sitting on. Another area where AI will become more apparent is in recruitment. It is, of course, already there. Graduates are used to being interviewed by a robot, but it isn’t a natural process for even the iPad generation, and not liked by many people we have spoken to. Enjoy the read… Graham Hambly, Editor (graham@pqaccountant.com)
debts run up by the failed Carillion group P4
72
percentage of young professionals having doubts about their career choice P7
10
cyber security trends to watch out for this year P12
400
number of groups consulted worldwide by the IIRC for its new framework P18
70%
seven out of 10 Brits feel stressed because of work P20
14
number of years you could get in prison for money laundering offences P22
NEWS CFOs have an unprecedented opportunity, as core contributors, to adopt new technologies to drive business growth. However, if they don’t embrace this opportunity they risk losing competitiveness and remaining relevant amid a fast-moving digital landscape, says the ACCA in its report ‘Race for Relevance: Technology opportunities for the finance function’. The concern is that CFOs who fail to take advantage of the opportunities could be removed from the strategic decisionmaking process and marginalised at the leadership table. The report says CFOs need to consider the impact of key technologies such as robotic process automation (RPA), the cloud, analytics, social media, cybersecurity and artificial intelligence on finance. Accountants are told they need to develop a roadmap that enables them to recognise the short-term benefits and the longer-term gains.
Don’t lose your relevance
The ACCA has even highlighted six imperatives for success: Align the strategy – understand the organisation’s wider goals and how finance, using technology can best support these ambitions. ● Build the business case – identify the business case for using specific tools and solutions. ● Appreciate the value of data – explore how CFOs can make better use of data analytics throughout finance and beyond. ● Managing the organisational impact of technological change – identify the organisational change required to embed new technologies successful. ● Focus on talent and skills – equip the organisation with the people and skills base needed to exploit the technology. ● Assess the impact of technology on governance and risk management – ensure investments are made with rigor and that the risks created by new technologies are properly monitored and controlled. ●
Accountant ordered to pay back £2.9m Management accountant Aquil Ahmed has been ordered to repay £2.9m within three months or face a further five years in jail. Along with co-conspirator Victor Shearer, Ahmed was found guilty in 2016 of defrauding HMRC of £6.9m in VAT, income tax, NICs and construction industry scheme deductions through fraudulent payroll schemes. Ahmed’s ‘Keepers’ accountancy businesses ran the payroll for Shearer’s company ‘Leaner Logistics Limited’. He admitted to conspiracy to cheat the public revenue in 2016 along with money laundering, and was sentenced to seven years and eight months in prison. The pair now face selling their assets to pay back a total of £3.5m after confiscation hearings at Maidstone Crown Court. 4
KPMG in the spotlight over Carillion audit The collapse of Carillion has put its auditors of nearly 20 years, KPMG, firmly in the spotlight, with the accountancy watchdog the FRC launching an investigation into the firm’s audit of the construction and services giant. The worry for many commentators is that the outsourcing company liquidation comes only months after being given a clean bill of health. PQ magazine columnist Professor Prem Sikka told The Times newspaper: “The accounts for 2016 were signed off on March 1, 2017, yet by July the company was in serious trouble. “The auditor is supposed to satisfy itself that a company is a going concern. It must look at cashflow forecasts and what kind of margin of error is built in. It is very strange that within three to four months the chief executive walked and the forecast was erroneous.” In all, Carillion issued three profit warnings last year, the first in July. CEO Richard Howson resigned, and it hired EY to carry out a review of its finances. It has been reported that the company quadrupled its borrowing from 2010 to 2013 and ran up debts of £900m and a pension deficit of £600m. The liquidators are PwC.
‘Punishment taxes’ for tech giants? The global tech giants could face tax ‘punishments’ for failing to help the UK government deal with the threat of terrorism, says security minister Ben Wallace. The minster said ‘ruthless profiteers’ would no longer be tolerated. He went on to claim that too many of these internet firms are slow to remove radical content online, forcing the government to police the web at the cost of hundreds of millions of pounds. It has been suggested that such a tax could be similar to the bank levy imposed on banks by the conservative government in 1981, or the windfall tax imposed on the excess profits of privatised utilities put in place in 1997 by the Blair government.
New ICAS CEO unveiled
CA Bruce Cartwright, a former partner at PwC, has been appointed the new chief executive of ICAS. Bruce qualified as a chartered accountant in 1989 and spent the majority of his professional career in PwC’s restructuring team. He has also worked in Malaysia, Central Europe and Denmark. As CEO he said he would advance ICAS as a modern, leading and virtual professional body. He went on: “As a CA, ICAS is close to my heart. I intend to focus upon our partnerships within the global accountancy profession; grow the membership; and build on the strength of our communities wherever our members are in the world.” NQ Magazine March 2018
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NEWS
New economic crime centre created The government has introduced a series of measures it hopes will make the UK a more hostile environment for criminal gangs and money launderers. A new national economic crime centre has been created within the National Crime Agency (NCA). Its task will be to coordinate the national response to economic crime, hopefully backed by greater intelligence and analytical capabilities. New legislation will also allow the NCA to directly task the Serious Fraud Office (SFO) to investigate the worst offenders. It was pointed out that the SFO will continue to act as an independent organisation. Home Secretary Amber Rudd (pictured) said the changes will ensure government agencies have the tools and investment they need to investigate, prosecute and confiscate criminal assets. In addition the government has published its anticorruption strategy, which has six priorities: ● reducing the insider threat in high-risk domestic sectors such
The blockchain is coming Blockchain could one day replace both banks and lawyers, claims the ICAEW. A new report, ‘Blockchain and the future of accountancy ’, explains that blockchains that transact with one another could supersede central authorities such as banks, clearinghouses and lawyers. ICAEW’s David Lyford-Smith said blockchain means organisations can work together without an intermediary, but also no longer need to have institutional trust in each other. He ventured: “This is potentially a seismic shift in how we do business. It will have knock-on effects on everything from record keeping to supply chain management and accounting and audit.” Lyford-Smith felt that it could have the potential to remove the middleman institutions, gain transactional certainty, reduce costs and bias, and open up access to more participants. Blockchain is a foundational change in how financial records are kept and updated, akin to “universal entry bookkeeping”. Instead of having one single owner, blockchain records propagate identical copies to all their users. Any participant in the ledger can trace all previous transactions, allowing increased transparency and making the blockchain ‘self-auditing’ and transactions permanent.
as borders and ports. reducing corruption in public procurement and grants. ● promoting integrity across the public and private sectors. ● strengthening the integrity of the UK as an international financial centre. ● improving the business environment globally. ● working with other countries to combat corruption. A new anti-corruption champion, John Penrose, has also been appointed. The government has renewed its commitment to introducing an overseas companies beneficial ownership register. It will mean that overseas companies that own or buy property in the UK, or participate in central government procurement, will be required to provide details of their ultimate owners. ●
Auditors face £10m fines New £10m fines for seriously poor audit work could become the norm, following an independent review into the FRC’s enforcement sanctions. The report, chaired by former Court of Appeal judge, Sir Christopher Clarke, recommended the removal of any requirement for tribunals to consider themselves bound by previous cases when determining the appropriate sanction to impose. While Sir Christopher’s team said that it is not appropriate to set a tariff or range for financial sanctions, it suggested a fine of £10m or more could be deemed ’appropriate for cases involving seriously poor audit work, carried out by a Big 4 firm.’ This would effectively see a doubling of the current fines imposed. One of the highest fines to date was the £5.1m levied by the FRC on PwC last summer, for its audit of fellow accountancy firm RSM Tenon in 2011. The independent review also proposed at the same time an adjustment of settlement discount provisions to encourage timely settlements. Another key recommendation was for the FRC to pay greater attention to the use of non-financial penalties. The FRC said it will now carefully consider the report and decide which proposals it will incorporate into its revised sanctions guidelines.
‘Quarter-life’ crisis anyone? Having second doubts about your career drive? Well, you may not be alone. New research has revealed that seven in 10 young professionals (72%) believe they are encountering a ‘quarter-life crisis’, which is making them reassess their career path and life choices. The study, by LinkedIn, discovered that finding a career you are passionate about is causing many (57%) young professionals to experience feelings of crisis. Researchers have even put an age on when this crisis will hit – when you are 26 years and nine months old! A total of 31% of those surveyed felt they have wasted years in the wrong job, 35% have changed careers entirely and 22% have handed in their notice without having a job to go to. NQ Magazine March 2018
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TECHNOLOGY
Winning the tech race Maggie McGhee outlines how companies make technology work for them
T
echnology rules our lives. I’m sure Christmas 2017 saw many an opening of a techietype present – a shiny new phone, laptop or tablet, perhaps. And many of our homes now have technological innovations that mean we can switch on lights and adjust the heating with our phones. The workplace is not immune from such developments, either. Indeed, the very nature of work has changed over recent years, with staff being able to work from home and being contactable out of hours – a growing 21st century habit from which Porsche’s work council says workers need to be protected. Intrusions aside, new tech developments have made our working lives easier and more connected than ever before, and for the finance professional it’s imperative they understand just what is going on and where they fit in. In 2018 and beyond, chief financial officers (CFOs) will have an unprecedented opportunity as core contributors to the adoption of new 8
technologies to drive business growth. But if they don’t embrace this opportunity, they risk losing competitiveness and remaining relevant amid a fast-moving digital landscape. These are the two key points in a new report from ACCA called ‘Race for relevance: technology opportunities for the finance function’, the first in a series of reports and articles focusing on technology in finance. Race for relevance explores the opportunities and challenges that technology presents for the future in the face of extraordinary digital change impacting businesses. The report shares insights from leading executives across the world on the technologies changing the face of the finance function, and examines how finance can harness the explosion in digital capabilities to help drive business success. Our report looks at six technologies that are already impacting the profession and wider business world: robotic process automation; analytics;
cloud computing; cyber; artificial intelligence; and social media. Collectively, these technologies enable enhanced finance processes, support the communication of information both internally and externally, provide protection for information assets, and look to the future while building upon existing technologies. CFOs need to appreciate that there are significant opportunities to be gained from the use of technology in finance. They need to develop a roadmap that enables them to recognise the short-term benefits and the longer-term gains. They need to accept that with these technologies it is often better to fail fast and be able to move on, rather than to not try at all. The core elements of people, processes, technology and data thread through any activity. Addressing each NQ Magazine March 2018
TECHNOLOGY
The race for relevance
Technology opportunities for the finance function
of these within an organisational culture that supports innovation and creativity is important for harnessing emerging technologies. ACCA members interviewed for this research urged CFOs to build a coherent and logical programme for technology adoption – which ACCA calls the six imperatives for success. These are: ● Align the strategy: understand the organisation’s wider goals and how finance, using technology, can best support these ambitions. ● Build the business case: identify the business case for using specific tools and solutions. ● Appreciate the value of data: explore how CFOs can make better use of data and analytics throughout finance and beyond. ● Manage the organisational impact of technological change: identify NQ Magazine March 2018
the changes needed to embed new technologies successfully. ● Focus on talent and skills: equip the organisation with the people and skills base needed to exploit the technology. ● Assess the impact of technology on governance and risk management: ensure that investments are made with rigor and that the risks created by new technologies are properly monitored and controlled. Whatever the size of the business, technology change is having an impact. In this corporate race for future relevance, recognising the opportunity is essential. The revolution has started and adaptation is critical, so adopting new technology needs to be a high priority for finance. However, we have also cautioned that CFOs who fail to take advantage of the opportunities could be removed from the strategic decision-
making process and marginalised at the leadership table. CFOs and finance leaders must understand how technology can enable them to transform the finance function through the provision of brilliant, timely insights for business stakeholders to support real-time decision making in addition to its existing stewardship and reporting roles. CFOs need to consider the impact of key technologies such as Robotic Process Automation (RPA), cloud, analytics, social media, cybersecurity and artificial intelligence on finance. To achieve the goal of transforming the finance function, the CFO must understand the emerging technologies, how these relate to the wider use of technology in the organisation and appreciate the opportunities available. Ultimately, it’s the CFOs who embrace new tools and technologies who will have a huge opportunity to put finance at the centre of their enterprise’s value creation. Failure to do so will risk the future value NQ that finance can achieve.
● Maggie McGhee is director – professional insights, ACCA 9
BLOCKCHAIN
Blockchain
and the future of
accountancy With bitcoin seemingly always in the news there’s much interest around the blockchain concept. David Lyford-Smith explains what it is and how it works
I
t’s hard to avoid hearing about blockchain these days – mostly in the context of the rampant interest in cryptocurrencies such as bitcoin. Blockchain is the recording system that underpins bitcoin and effectively all cryptocurrencies – a distributed system that keeps everyone’s records in agreement, all without using a central database or organiser. Blockchain is a whole new method of record-keeping that has some fascinating possibilities for both the wider business community, and specifically for accountants. It’s also a difficult subject to get in to, as it’s very complicated and quite unlike anything else. But although the details behind how blockchain works are complex, it can be understood in terms of what impact it makes. That’s the goal of a new white paper from ICAEW’s IT Faculty, entitled ‘Blockchain and the future of accountancy’. I’ll be taking you through a few of the key lessons of the paper here; you can read the full paper at www.icaew.com/blockchain.
The key qualities of blockchain The three key features of blockchain according the paper are the three ‘Ps’: 10
1 Propagation of new information from origin to a group of collaborators, without a central control or ‘master copy’. 2 Permanence of transactions is assured, as everyone has their own copy and can identify and reject attempts to change the record. 3 Programmability can be added to blockchains, allowing selfexecuting contracts to be contained alongside transactions. The most important quality of a blockchain is that they can be decentralised – that is, there is no need for owner, controller, gatekeeper, master copy, or authenticator. While some blockchains might choose to have more centralisation, none is necessary and a blockchain can work as a network without a leader. In accounting terms, what we have is a ledger of transactions that is shared among many people. Anyone can add to it, and we know that additions are permanent and uneditable. What’s more, we don’t have to expend effort reconciling different ledgers, as the blockchain process automatically creates consensus between all the parties. So we could theoretically cut down on the work currently expended in performing consolidations and reconciliations. We
NQ Magazine March 2018
BLOCKCHAIN
BLOCKCHAIN FAQS Is it something to do with bitcoin? Yes – blockchain was originally created alongside bitcoin, and it’s the system that bitcoin uses to track ownership of the digital currency. But blockchain can be used for other things, and could be an asset registry or ledger instead of a currency. How does it work? The full answer is very complicated but, in essence, new transactions are bundled into blocks before being posted. Blocks are then verified by anyone that has the computing power free, which is a complex process. Blocks are then broadcast and added to each participant’s ledger. Blocks also refer back to the preceding block to avoid deletion or ambiguity. Does this mean anyone can see my data? It depends. The bitcoin blockchain is totally open, but many other variants allow encrypted data or limit access to known and trusted parties.
could also use a blockchain-like system to add certainty and efficiency to unsure or slow markets, such as land registry. Blockchains are particularly useful where we have a large number of different parties involved in one business process. Maersk, for example, are investigating the use of blockchain in shipping, where a single crate might pass through over 100 transactions involving 40 or more parties. There are substantial technical, legal, regulatory, and governance issues to resolve before a solution like this can truly be put into place – but it could be a powerful application for this new method of recordkeeping. The paper outlines how blockchain could affect the accountancy profession. In a blockchain environment, there is little need to check that one participant’s records agree with another’s; this makes some transactional-level assurance obsolete, such as existence and accuracy. However, more complicated and judgmental areas, such as valuation and completeness, are if anything more important. There is also a greater need to test the controls of how new entries get onto the blockchain, and to what extent physical assets correlate with its content. NQ Magazine March 2018
All this likely means that accountants as a whole will shift to more high-value and judgment-driven work in a blockchain-driven environment. Technological understanding of blockchain might be a useful differentiator, but for the most part knowledge of its key strengths and weaknesses will be sufficient. But there may well be some contraction of services around bookkeeping, reconciliation, and other transactional work that may affect specific accountants if they aren’t prepared. Blockchain isn’t the right solution for everything – it currently is very costly and complex to run, and isn’t an improvement over a central database in all cases. But it is a potent new option to explore where there’s a need to keep a group of actors on the same page but where a central trusted party is unavailable or unaffordable. NQ
● David Lyford-Smith, ICAEW Technical Manager, IT and the Profession
11
CYBER SECURITY
Keep it
safe
David Ferbrache, chief technology officer in KPMG’s cyber security practice, highlights 10 cyber security trends we should look out for in 2018 1. EVERYONE WILL BE WAITING FOR 25 MAY This is the day that the General Data Protection Regulation (GDPR) comes into force. Most firms have taken time to understand what GDPR may mean for them, and in many cases have reviewed (or even partially disposed of) their holdings of personal data. It is far harder to predict quite how sanctions under GDPR will be applied by the various regulators. We can expect a few high-profile examples to be made early on, but perhaps not the tsunami some expect. Nevertheless, privacy rights are on the agenda, and we can expect zero regulatory tolerance for the long delays in notification of major breaches seen recently.
2. CRIMINALS WILL HUNT OUT THE WEAK POINTS Organised crime groups are on the hunt for new ways to monetise stolen information and access to systems, and in a post Bank of Bangladesh world they will be increasingly creative in how they do this. We can expect more attempts to initiate fraudulent payment transactions (often with a social engineering elements), as well as ongoing interest in our core financial infrastructure including payment and trading platform gateways. Growing demands are being placed on fraud control and anti-money laundering systems to catch these transactions, while customers demand instantaneous financial transfers. If these controls fail, expect to see a $100 million pay-out from a cyber-attack.
3. GOVERNMENTS WILL CONTINUE TO BLOCK AND TACKLE CYBERCRIME As criminals industrialise cyber-attacks using crime as
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a service model to rent attack tools and ransomware, governments are increasingly looking for ways to disrupt the infrastructure used by criminals. Closer links with telcos and service providers are being built along with the operational processes needs to block sites hosting malware, detect and counter phishing attacks. Trusted DNS services and Domain-based Message Authentication, Reporting and Conformance (DMARC) will be rolled out at scale across the community by both the National Cyber Security Centre and by organisations such as the Global Cyber Alliance. These community measures linked to improved intelligence sharing will start to make a difference.
4. A NEW MODEL OF CYBER SECURITY WILL EMERGE As firms invest more in cloud computing, a new model for cyber security is emerging. Increasingly, firms can look to cloud providers to embed good IT security, but firms still own the problem of setting their requirements and determining just who can access what. The shift towards DevOps and agile development, build on these more flexible infrastructures also demands new ways of embedding security into the development lifecycle and an equally agile test regime. Security can no longer engage at the end of development cycles, and if it does, it risks being seen as a blocker rather than an enabler.
5. AUTOMATION OF CONTROLS AND COMPLIANCE WILL BE THE ORDER OF THE DAY Firms are coming under pressure to contain their burgeoning cyber security budgets. Manpower intensive compliance processes are beginning to give way to
NQ Magazine March 2018
CYBER SECURITY
continuous testing and controls monitoring, helping firms build a more accurate picture of their IT estate – helping the CIO as well as the CISO. The growing demand for supply chain security and third party assurance will also lead to a burgeoning industry of testing firms offering risk scoring and testing services for those third parties.
6. DIGITAL CHANNELS WILL DEMAND CUSTOMER CENTRIC SECURITY Digital channels are becoming more and more sophisticated demanding new consumer identity and access management approaches, dynamic transaction risk scoring and fraud controls, and an emphasis on usable non-intrusive security measures which don’t impact the consumer’s experience. Open Banking and the arrival of Payment Services Directive 2 will drive richer interactions between a new ecosystem of payment service providers and the banks that handle our money. A new world of open API is on the horizon, but concerns over criminal exploitation of these rich interfaces abound.
7. THE INTERNET OF INSECURE THINGS CONTINUES Criminal groups continue to exploit insecure ‘internet of things’ devices as sources of attack traffic for denial of service attacks, leading to more and more extortion attacks but also an increasingly sophisticated response from the international community involving telcos, content delivery networks and Distributed Denial of Service (DDoS) mitigation firms. Unfortunately, this response won’t be consistent globally, and many nations may find themselves vulnerable to these attacks, which will cause major disruption in 2018.
NQ Magazine March 2018
8. THE SHADOW OF STATE ACTIVITY LENGTHENS As countries invest to develop their cyber espionage and offensive capabilities, we will see more signs of their activities. Disclosures of high end techniques used by nations will continue, fuelling the opportunistic repurposing of these vulnerabilities by less sophisticated states and organised crime groups. Expect more evidence of industrial control system attack tools being tested as states explore the potential of this new form of warfare.
9. ‘BALKANISATION’ CONTINUES AND PARANOIA GROWS States continue to intervene to protect their national security interests in cyberspace, risking an increasingly complex framework of international regulation and controls around the supply chain for critical infrastructure firms. While there will be some moves to align regulation across the global financial sector around the G7 fundamental elements of cyber security, this will take time and effort to achieve.
10. RESILIENCE AND SPEED MATTERS Regulators are focusing on resilience – the ability of an organisation to anticipate, absorb and adapt to disruptive events – whether cyber-attack, technology failure, physical events or collapse of a key supplier. Exercises and playbooks are in fashion as firms try to build the muscle memory they need to respond to a cyber-attack quickly and confidently, while cyber insurance is finding its place not just as a means of cost reimbursement but as a channel for access to specialist support in a crisis. NQ
13
TECHNOLOGY
What does
the future
hold?
PwC’s experts provide their tech predictions for 2018
J
on Andrews, head of technology and investment: “I believe 2018 will be the year in which businesses of all sizes engage with the hype and get to grips with the difference between tech for tech’s sake and understanding how it can be used to augment human capability. This is the year to overcome the tech fear.”
Artificial Intelligence (AI) and automation Euan Cameron, UK AI leader: “2018 is the year when AI will start to become mainstream in many organisations. The ability to provide comfort that these systems are built, deployed and operated in a responsible and transparent fashion will be critical. There will be significant benefits for organisations which adopt this approach when implementing AI, but potential pitfalls for those that decide to ‘play it by ear’.” Sultan Mahmood, robotic process automation leader: “Over the past year many companies have embarked on pilot and small deployments of robotic technologies to automate manual, 14
mundane, repetitive tasks and have seen varying levels of success. The stage is set for 2018 to be the year in which companies deliver automation at scale which, when combined with transformed business process and operational improvements, will result in many thousands of robots being deployed in organisations. These will vastly improve employees’ roles by removing monotony and allowing for more creative work.” On AI in financial services, Aldous Birchall, AI solutions leader in Technology Consulting: “Our clients are moving beyond viewing AI and Machine Learning as experimental technology and shifting their focus to implementing commercially driven, end-to-end business applications. 2018 will be the year when many come to understand the limitations of trying to fully automate existing human processes and think more creatively about alternative operating models. The result will be a move away from the anthropomorphic concepts commonly used in the business AI community towards increasing sophistication around the
possibilities for operating in ways that currently have no human equivalent.”
Blockchain Seamus Cushley, blockchain director: “The increasing demand in the ICO (initial coin offering) space will become yet more prevalent next year. This will disrupt traditional organisation structures and the means of investments and raising funds. We’re starting to see a move away from only financial services organisations looking at uses for blockchain, and are seeing more activity in energy and utilities, manufacturing and healthcare, which we predict will continue in the year ahead. There is a big opportunity for blockchain to provide transparency and accountability in the supply chain. Blockchain for digital identity purposes will also become more tangible over the next 12–18 months.”
Cyber security James Hampshire, cyber security senior manager: “2018 will be the year in which organisations deliver a stepchange in their cyber security capability NQ Magazine March 2018
TECHNOLOGY
with providing a ‘golden record’ of the site for handover to the maintenance side of the business along with supporting any potentially lengthy litigation claims.”
Future of Work
by embracing emerging technologies, most notably AI and blockchain. Historically, we have seen confidentiality of data as the primary goal of cyber security. In 2017, Wannacry and NotPetya elevated availability of systems and data to the same level on organisations’ radars. 2018 could be the year that the third leg of the information security triad, integrity of data, really comes to the fore. All organisations rely on the integrity of their data to function, from the food supply chain, to the medical profession, to any company reporting financial results. An attacker that can cause a question mark to appear over the integrity of their target’s data could potentially cause huge damage.”
Data analytics Neil Hampson, data analytics leader: “Data remains king – so, while emerging technologies like AI, blockchain and drones are becoming the new ‘it’ crowd, let’s not forget about the magic ingredient behind them all – data. In the coming year it will be more important than ever for organisations to ensure NQ Magazine March 2018
they have a clear picture of the data assets they’re sitting on, in order to mine it for better business outcomes and to take advantage of the latest technologies.”
Drones Elaine Whyte, UK drones expert: “The drones market will continue to move from an early adopter tool to a mature professional service offering. Drones will become a key tool in enabling organisations to gather data about their operations quicker, more easily and more cheaply than ever before. “For example, we predict a real take-up in the use of drones in capital and infrastructure projects to provide an interactive 3D visual of the site to enhance all stages of the build. Uses include assisting the planning application process by providing 3D data with BIM (building information modelling) overlays and the visualisation of proposed infrastructure for local communities, monitoring performance during the build (including adherence to design, contractor performance and interactive stakeholder reporting), along
Rob McCargow, AI programme leader: “2018 will likely see a proliferation of companies applying AI for a wide range of uses. The area that I believe requires the most scrutiny is the adoption of AI in HR and workforce management. AIaugmented recruitment stands out as a key growth area with a range of offerings in the market from CV selection, to advanced assessment through video analysis, and improved ‘candidate journeys’ supported by conversational agents. Marching in lockstep with this plethora of opportunity is an abundance of risk. Whilst AI can be marshalled to drive efficiencies and make HR processes more fair, if not governed and implemented responsibly, it can lead to an amplification of bias and discrimination. As these technologies become more pervasive in the workplace, expect to see increased demand from candidates and employees seeking clear and transparent policies setting out how their data is used to make decisions.”
GDPR Stewart Room, lead partner for GDPR and data protection: “The GDPR introduces new data subject rights and personal data breach notification from May 2018. These rules will shine an intense spotlight on the performance of technology systems and their ability to deliver on the law’s requirements. Data controllers and processors may have a rude awakening if they have overlooked technology systems during their GDPR preparations.”
Virtual Reality (VR) Jeremy Dalton, VR/AR lead: “With the release of standalone virtual reality headsets like the Oculus Go set for early 2018, we will see a significant increase in adoption of VR technology by consumers. Standalone headsets mitigate two of the serious challenges VR is facing in the goal for mainstream adoption – cost and user NQ experience.” 15
LEADERSHIP
How to build credibility as a leader Credibility is not only the key to getting ahead in your career, but it is also the foundation of leadership. But how can you effectively and swiftly build and sustain your credibility as a leader? Sebastian Salicru explains all
C
redibility is the quality of displaying integrity, being deemed trustworthy and believable and, therefore, convincing. In the leadership context, credibility matters because it triggers a chain reaction that determines your leadership impact on your followers, team members or stakeholders, their performance outcomes, and your business results. Credibility also goes beyond the either/ or paradigm – whether you have it or not. In fact, credibility is a matter of degree. It can be measured, monitored and improved. Let’s unpack all of this.
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Credibility has three main components: fulfilment of expectations, trust and fairness. The degree to which you are credible depends on others’ assessment of three key aspects of your behaviour: ● the degree to which your team members believe you have fulfilled their expectations. ● how much they trust you. ● whether they believe you are a fair leader. Credibility arises out of integrity – being a role model of the principles, values and behaviours you uphold. You build and sustain integrity by being true to your word and being open and proactive if ever this is not possible. By acting with integrity, you fulfil your promises,
NQ Magazine March 2018
LEADERSHIP
earn and maintain trust, behave in a way that is reasoned and equitable — and leadership is transformed.
Fulfilment of expectations Fulfilment of expectations measures the degree to which you deliver on your promises, expectations, and obligations to others as they perceive them. Although often implicit and unwritten, expectations have a strong promissory nature, are pervasive, and govern the quality of your relationships. Perceived breaches of expectations usually have severe consequences on levels of credibility. These are the top five expectations your followers have of you: ● Honesty. ● Forward-looking. ● Inspiring. ● Competent. ● Intelligent. If you want to be perceived as an extraordinary leader capable of game-changing improvements, you absolutely must be seen as honest. Honesty is the most important characteristic of admired leaders. In addition to meeting expectations, the two elements that really matter to establishing credibility are trust and fairness.
Trust Trust is critical to establishing credibility. It is a measure of the level of confidence team members and other stakeholders have in you. Being trusted by your stakeholders is absolutely critical if you are to lead successfully and deliver extraordinary results. Gaining your team’s trust relies on you being respectful, welcoming feedback and admitting mistakes when appropriate. Trust is the key that unlocks the door to more innovative, agile and productive organisations. Maintaining trust is, and always will be, crucial for business leaders. You can do this by working towards putting your people, and customers, at the centre of everything you do. Strategies to build trust ● communicate openly, honestly and respectfully. ● be competent. ● demonstrate good judgement. ● ensure that you can be relied upon. ● deliver your promises. ● share important information openly and transparently. ● never blame others when things go wrong. NQ Magazine March 2018
Fairness Fairness indicates how equitable or impartial you are in your team members’ eyes. Whether you are considered fair has a huge impact on what they think about you, their willingness to follow you and, ultimately, what they do at work. Perceptions of fairness influence your team members’ levels of commitment and discretionary effort. Strategies to build fairness ● provide opportunities for your team members to share their views. ● display consistency in decision-making. ● resolve/address disputes or conflicts promptly and on a fair basis. ● share influence and power appropriately. ● never display favouritism. ● never bully or abuse your power or discriminate against others.
The impact of credibility As I mentioned at the beginning, your credibility underpins your leadership impact and works in sequence – like a chain reaction. It influences your team’s engagement – their emotional reaction to your leadership. This includes their levels of commitment and satisfaction. The higher your credibility, the higher the level of engagement of your team will be. In turn, their engagement determines their level of performance. This includes their creative thinking and innovative behaviour (their openness to change and to embrace new ideas), and their discretionary effort (the extra time and effort they put into their work). That is, going above and beyond what is required of them and being able to move mountains. Finally, their performance determines your collective business results. The better your team’s performance, the better your business results will be. That’s why your NQ credibility as a leader is so critical.
● Sebastian Salicru is a leadership development expert and author of ‘Leadership Results: How to Create Adaptive Leaders and High-performing Organisations for an Uncertain World’. See www.leadershipresults. com.au
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INTEGRATED REPORTING
Keeping it simple Neil Stevenson explains why integrated reporting is now easier to do
L
ast year, the International Integrated Reporting Council (IIRC) held a consultation on the adoption of Integrated Reporting. The review received over 400 contributions including from focus groups held in 19 countries around the world. It found that the IR Framework is standing up to the test of implementation. It demonstrated that the concepts of Integrated Reporting have been widely accepted and embraced, with the focus now on enabling better implementation. Following this exercise, we will be releasing guidance and thought leadership on a series of topics to meet concerns and questions raised in the exercise. This includes guidance on how to apply the IIRC’s ‘multi-capitals’ model; how to access intellectual, human, and social and relationship capital metrics relevant to the organisation; and research on how better connections can be made between information and improved decision making. Through the guidance and case studies which we will produce, we aim to help businesses get the most out of corporate reporting and to help meet the challenges of adoption.
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Taking practical steps Alongside this valuable work, organisations continue to take practical steps to increase the connections between reporting and value creation. Overall, there are common starting points that have helped organisations successfully move to Integrated Reporting, such as: what are the ‘reporting drivers’ in the organisation and who is the sponsor? What do I mean by ‘reporting drivers’? This could be expressed as ‘what are we trying to fix?’ For some, it will be a strategic driver – communicating a new strategy, a desire to be more transparent, a need to ensure wider value creation factors are embedded in the thinking and reporting of the organisation. For some sectors, such as the financial sector, a driver will be a ‘social license to operate’. But there are others too, such as user needs (investors increasingly looking for more information on strategy, the business model and future prospects). Or a desire to make better sense of the reporting suite, including more concise reporting – major banks such as HSBC have used IR in this way. And, of course, a move to a digital world is an overall trend that is starting to be reflected in reporting. The
work of the UK’s Financial Reporting Council on reporting and technology, through its Lab, and the IIRC’s own IR Technology Initiative are good examples. As to the sponsor, we find that having the sponsorship of the CFO or equivalent enhances both the pace and quality of Integrated Reporting and in particular the linkages to strategy, performance, governance and prospects. The finance executive director of the large Brazilian bank Itau Unibanco, for example, writing in our paper on IR and the CFO, notes that IR provides ‘broader and deeper insight into the factors that drive value creation’. Alexendra Broedel Lopes notes that the process helps an organisation to “understand linkages between strategy, the value creation model and performance indicators”. He also set out the role of the finance team, for example using its unique closeness to the “entire operations of the NQ Magazine March 2018
INTEGRATED REPORTING
organisation” to capture and measure value creation.
Getting started Whatever your starting point, some key steps on the journey are common to many organisations. Here are some questions that organisations use to help them. ● Have you set out your business model and how you use resources NQ Magazine March 2018
and relationships to create value? The report of insurance giant Aegon is a good example of setting out the value creation process. ● Have you brought together your reporting teams in a way that allows them to consider reporting in a more integrated way and identify and effectively measure relevant performance metrics? ● Is performance measurement aligned
to the strategy and business model? ● Is there a clear understanding of key stakeholders and their needs and expectations? ● What mechanisms and internal controls are we deploying to ensure the quality of key performance information? Whatever the starting point, the experience of organisations who adopt Integrated Reporting is that each step brings benefits. The IR Framework provides a point of reference to help map the journey. It also provides a personal reference point for professional development, highlighting the different aspects of value creation where expertise in integrating systems, thinking and reporting can enhance NQ performance and prospects.
● Neil Stevenson, Managing Director – Global Implementation, the International Integrated Reporting Council 19
MONEY LAUNDERING
What accounta must do to avoi ML accusations A
With the Treasury warning about accountants’ vulnerability to money laundering, Aziz Rahman examines what accountants can do to protect themselves
ccountants must be aware that the Treasury is concerned that accountancy services appeal to money launders as they can help them gain legitimacy, create corporate structures or transfer value. In its second national risk assessment (NRA) of money laundering and terrorist financing in the UK, it says there is the possibility that negligent or unwitting accountants are risking involvement in money laundering. The NRA goes as far as to say: “Some of those accountants involved in money laundering cases are assessed to be complicit or wilfully blind to money laundering risks, though the majority of these cases are likely to involve criminal exploitation of negligent or unwitting professionals.’’ Quite how accurate the Treasury’s claims are is debatable. It is hard to believe that there are many accountants who are prepared to either help those looking to launder the proceeds of crime or “turn a blind eye’’ to laundering. As for accountants being negligent or unwitting, these are descriptions that surely cannot apply to many in the accountancy profession. It is important accountants implement strict procedures to help recognise potential laundering and 22
ensure they react to it in the appropriate way. Failure to do this can be immensely damaging to an accountant’s reputation, professional standing and earning prospects not to mention putting them at risk of a criminal prosecution. Accountants are qualified professionals who are expected to uphold certain working standards. The Code of Ethics of the ICAEW expects accountants to demonstrate the highest standards of professional conduct and to take into consideration the public interest. It emphasises that ethical behaviour by accountants plays a vital role in ensuring public trust in financial reporting and business practices and is crucial to upholding the reputation of the accountancy profession. Having signed up to the Code, I would argue that the vast majority of accountants are aware of their duties and fulfil them competently and honestly. Yet, under the Proceeds of Crime Act 2002 (POCA), penalties of up to 14 years in prison can be handed down for money laundering. With that in mind, accountants must be focused and aware of the risks of money laundering. Accountants are likely to be among the first in a company to have the
opportunity – some may call it a responsibility – to identify money laundering. They have to know what it is, what the signs of it are and what they should do if they spot those signs. At any firm, it is vital accountants take heed on advice that is given to them from solicitors. They cannot afford to function without appropriate procedures to prevent money laundering. Without such procedures, an accountant’s reputation, ability to practise and even their liberty can be at risk. Money laundering is the disguising of the origins of money so it cannot be identified as the proceeds of crime. Money can be self-laundered, which is where a person launders their own criminal proceeds. It can also be laundered by someone on behalf of another person. These are both offences under POCA and both carry the maximum 14-year prison sentence. Section 327 of POCA makes it an offence to conceal, disguise, convert, transfer or remove criminal property from the jurisdiction. Section 328 makes it an offence to enter into or become concerned with an arrangement to acquire, retain or use the proceeds of crime. There is also the offence of having possession of criminal NQ Magazine March 2018
MONEY LAUNDERING
ants id s
property, which comes under Section 329 of the Act. Accountants have to be equally mindful of sections 330 to 332 of POCA, which make it an offence to fail to disclose any knowledge or suspicion of money laundering. These relate to the legal obligation to disclose the identity of a suspect, any knowledge or suspicion they have of money laundering and the possible whereabouts of money or other assets that are being, or have been, laundered. Similarly, the Money Laundering Regulations place a duty on accountants to make an “authorised disclosure’’ of any money laundering suspicions under section 338 of POCA. None of these offences will involve law-abiding accountants who are diligent when it comes to looking out for money laundering. But the position that accountants occupy in a company means that they can never afford to be ignorant of the potential for money laundering or of POCA. They have to have an awareness of the relevant legislation. If they feel this is beyond them, they need to seek immediate legal advice from specialists in this area. Accountants and the companies they work for must have procedures in place that prevent, or at least deter and identify, money laundering. Such procedures can be fine-tuned to the individual business. But whatever sector a company is working in, it has to be able to make thorough checks on the identity of customers and clients, establish the real beneficiaries of a deal and pinpoint the precise status of everyone in the business relationship. With the role of the accountant being central to the movement of money in any organisation, they need to be capable of examining each and every transaction for signs of money laundering. This is the case whether the accountant is a full-time member of staff or a hired hand called in to “do the books’’. Each accountant’s situation may be slightly different from the next when it comes to working arrangements. But all face the risk of money laundering. And none can afford to be unaware of NQ that risk.
● Aziz Rahman is Senior Partner and founder of serious fraud specialists Rahman Ravelli NQ Magazine March 2018
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ETHICAL DILEMMA
How much disclose Outline of the case You are a qualified accountant in practice, and you lead a team providing management consultancy services. In recent years your practice has undertaken several assignments on manufacturing efficiency improvements for a medium-sized, quoted group of companies. It operates through a number of divisions, but line responsibility appears complicated, and so significant control rests with four semi-autonomous regional directors. The authority of these directors is enhanced by their seats on the group’s main board. You have cultivated a good working relationship with the regional director with whom you are in contact most frequently. Three weeks ago that regional director asked you to investigate, as a matter of urgency, a particular project, Project A. He had been irritated to be told, informally, of the likely deferral of the agreed delivery date for the components on this sophisticated design-and-build contract. Project A comes within the regional director’s responsibility primarily because of the location of the factory that makes the key components. Once on site, your team had discovered a range of difficulties with the project, starting with fundamental design faults and extending deep into the manufacturing processes. It is clear that various contracts will be breached, and litigation is likely to follow. Your team has produced a prioritised list of actions and begun working to establish a revised schedule to take the project to completion. At a recent meeting, you gave the regional director and the factory manager your estimate that the delay to Project A will be a minimum of three months. You indicated that extra direct costs are likely to be £7 million to £10 million. This is before any potential claims for compensation. On the instructions of the regional director, your team has been working on a formal report specifying detailed recommendations. While still incomplete, the report appears certain to support your previous estimates. You are aware, from the financial press, that the group is rumoured to have difficulties with its bankers. You assume that the situation with Project A is likely to be seriously detrimental to the group’s financial position. One week before the final version of the report is due, you receive a surprise telephone call from the group’s finance director. He explains that he is about to enter a main board meeting, but needs to know a date for delivery of the report on Project A. 24
Late the previous evening, the regional director had informed the finance director that your firm had been asked to provide the report. He says: “I appreciate that you have only just started, so there are no reliable estimates yet. But the regional director mentioned that Project A could incur around £4 million to £5 million in extra costs, with income delayed by perhaps six to eight weeks. The regional director has sent his apologies to the board meeting, as he has to attend a family funeral.” He adds: “Hopefully, the regional director is being cautious, but if something does turn out to be as wrong with Project A as those numbers suggest, the extra costs and deferred income have serious implications for the group’s cash flow. The full board will need to start planning remedial action now. When will your report be ready?”
Key fundamental principles Integrity: How do you maintain your professional integrity – by responding only to the question asked or by immediately alerting the finance director and the main board to the seriousness of the situation? Objectivity: Does loyalty to the regional director, from whom your firm usually takes instructions, outweigh your responsibility to the main board? If not, can you resist any feeling of intimidation from the regional director that you may be experiencing? Confidentiality: Confidentiality is fundamental to the assignment as a whole. But to whom is the duty of confidentiality owed? Professional behaviour: The information you have could assist the main board significantly with the discharge of its duties. Whether you disclose the information now or restrict the information you provide pending a discussion with the regional director, how can you protect your reputation and that of your firm?
NQ Magazine March 2018
ETHICAL DILEMMA
should you e to the FD? ‘Project A’ is going badly wrong, and you are one of the few people in the know. So where do your loyalties lie?
Considerations Identify relevant facts: You should establish why the finance director appears to have incorrect information. Is there a mistake or misunderstanding, or some other explanation for the discrepancies in the extra costs and the time frame? You must establish from your engagement letter to whom you owe a duty of confidentiality, in order to resolve your potential conflict of loyalty. Identify affected parties: Key affected parties are you, the regional director, the finance director and the board. Indirectly, investors and other stakeholders in the group are affected, due to the group’s recent cash flow problems. Who should be involved in the resolution? You should involve the regional manager as early as possible, and the finance director and the main board if necessary.
Possible course of action You should take care not to make a hasty decision while on the telephone to the finance director. If necessary, you should state when your report will be ready, and end the telephone conversation, so that you may establish the facts. It should be possible to call the finance director back later, even if that means interrupting the board meeting. As soon as you are able, you should review the firm’s letter of engagement, which will establish who the client is for the purpose of your duty of confidentiality. Your firm is engaged as consultants, rather than as auditors, and if your engagement is with the division overseen by the regional director, it could be argued that communication to the main board is an internal matter for which you have no direct responsibility. NQ Magazine March 2018
In the meantime, you should attempt to contact the regional director to inform him of the finance director’s misunderstanding, and reconcile the conflicting estimates. You should not take part in any deliberate attempt to mislead the main board. It is possible that the future of the group as a going concern could be under threat. If a review of the engagement letter reveals that your engagement is with the main board, in the absence of an explanation from the regional director, you should call the finance director and explain that the report is likely to reveal estimates that are very different from those mentioned earlier. If the engagement is with the regional director’s group company, a duty of confidentiality is owed to that client and, if the finance director seeks further information from you, you should make your position clear. Nevertheless, when you are able to contact the regional director, you should discuss with him the call you received from the finance director. If you are then of the opinion that the regional director has deliberately misled the main board, you should ask him to rectify the position. If he does not, you might have a conflict of interest. You could seek advice from your professional body. In addition, in order to determine your responsibilities (and those of the regional director towards the main board), you may seek independent legal advice. You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical NQ judgement is challenged in the future.
● Thanks to the CCAB for this article 25
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