June 2015
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THE VOICE OF ALL NQs Contact us
email: graham@pqaccountant.com twitter: @pqmagazine facebook: pqmag.com call: 020 7216 6444
CLOUD ACCOUNTING Five signs that show you are doing it wrong!
ALL THE NEWS YOU NEED and a whole lot more Pages 5 and 7
WHERE CAN YOU AFFORD TO LIVE? Page 18
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BE A CHANGEMAKER INTEGRATED REPORTING WILL GIVE YOU THE CHANCE TO MAKE YOUR MARK
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YOUR CAREER Tackling that allimportant interview
A GOOD READ Widen your knowledge with NQ’s recommended books Page 16
ETHICAL DILEMMA Should you blow the whistle?
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We’ll help you to see the light! FP&A Manager
Management Accountant
Financial Services, South West London
FMCG, Surrey
To £55,000 + Bonus
To £45k + Benefits
REF: LC50352
• CIMA/ACCA/ACA Newly Qualified. • To act as a commercial finance business partner, supporting the CEO and management team. • Providing insightful financial analysis to support decision making process. • Supporting key business performance management processes, pricing and new business structuring and strategy development. • Strengthening current planning, analysis and forecasting process. • Coordinate budget and planning processes. • Providing robust and relevant variance analysis. • Project analysis and due diligence on acquisitions. • Supporting business unit by providing ad hoc analytical input.
REF: LC50369
• CIMA/ACCA Qualified. • A key member of the Management Accounts team, responsible for the preparation of monthly management accounts. • Accounting for various cost/income streams and providing support to cost centre managers. • Calculation of accruals and prepayments and reconciliation of costs. • Monthly balance sheet reconciliations. • Revaluation of key control accounts. • Month end management reporting with variance analysis and commentary. • Maintenance of fixed asset register, posting monthly depreciation and amortisation charges. • Weekly and monthly intercompany accounting.
www.walkerdendle.co.uk T: +44 (0)20 8408 9999 E: info@walkerdendle.co.uk
COMMENT NUMBER CRUNCHING
83% EDITOR’S COMMENTS
You can be a ‘changemaker’! As a newly qualified finance professional you need to work out how you can make your mark. Leading your business on adopting integrate dreporting is, as the ACCA’s Faye Chua points out, a great way of making sure you are ahead of the curve. The ACCA has also provided us with the five key influences that will be shaping your future (see page 5). They include ‘economic volatility’ and ‘talent’. What is interesting is how the non-financial aspects of your job look set to have a bigger and bigger impact on how you are measured, and what you need to master to get to the top. By becoming the changemaker in your organisation you will get noticed! We have gone international in this latest issue, too. We shine a light on everyone’s favourite IFRS – that’s number nine, the one on financial instruments. The International Accounting Standards Board has also issued amendments of the IFRS on SMEs, so we take a look at that as well. Walker Dendle’s Lucy Clamp gives some sound advice on that all-important interview (see page 8). Perhaps the most important thing to remember is to smile – and have a question ready to ask them at the end. Don’t ask them about your holiday entitlement! Remember, you may need to get that interview if you want to afford somewhere to live. We take a look at just how much you need to earn, according to KPMG, to afford to buy your own house. In London that figure is around £77,000. That is, of course, after you have paid off any student loans and saved the 10% deposit (see page 18). There’s lots more to read in the issue, and we hope you enjoy it. The next issue of NQ magazine will hit your inbox in August. Enjoy the summer. Graham Hambly, Editor (graham@pqaccountant.com)
percentage of young people who said they had experienced loneliness P5
15.1%
the gender pay gap at accountancy giant PwC P7 of investors 93% percentage wanting to see more non-financial reporting P14
£7.99
price of the book HMRC: Her Majesty’s Roller Coaster, reviewed on P16
£77,000
what you need to earn to get on to London’s property ladder P18
£1 trillion
value of assets UK firms fail to capture in their financial statements P20
SECRETS TO SUCCESS TOP INTERVIEW TIPS As a newly-qualified accountant, the next important step in your career journey will be making sure that you present the very best version of yourself when it comes to meeting prospective employers. Our expert consultants in senior finance have created a list of tips and advice to help you prepare for and do your best in your all-important interviews. DO YOUR RESEARCH The better prepared you are, the more relaxed and comfortable you will be. Before the interview, it is a good idea to gather information about the company you may be working for and try to relate your experience to the specific duties of the job. LOOK THE PART Dress for success. At an interview it is extremely important to look, act and dress professionally as you won’t have a second chance at making a good first impression. Research has shown that an interviewer has made an impression within the first eight seconds of meeting the person. PLAN AHEAD Practice interviewing - enlist a friend to ask you sample questions. Practice making eye contact. Handle logistics early have your clothes, CV and directions to the interview site ready ahead of time to avoid any extra stress. ANTICIPATE LIKELY QUESTIONS To get to the motivations and working style of a potential employee, employers often turn to behavioural interviewing, an interviewing style which consists of a series of probing, incisive questions. This may sound a little intimidating, however with a little preparation you can feel confident before the interview. To find out more about jobs on offer visit us online, or for help with planning your career contact Jane Knight on 020 3465 0012 or email jane.knight@hays.com
Join the ‘Hays Accountancy and Finance UK’ Facebook community today. Hays Accountancy & Finance UK
hays.co.uk/nq
NEWS
Feeling lonely? A new landmark audit qualification CIPFA and ICAS have joined forces to offer a new integrated qualification in audit. The ground-breaking qualification will cover both the public and private sectors and offer dual membership of both bodies. The move is a response to the growing need for accountants to be able to audit all entities in all sectors, as many organisations operate in the mixed economy. CIPFA said that the increasing fluidity between public and private sectors means many employers now require staff to have a registered audit status in both public and company audit. The new qualification will go ‘live’ this autumn (2015) and is aimed at both prospective students and existing practitioners. It will be delivered in a classroom across three years or as a blended learning model. The integrated qualification of 15 modules comprises 11 ICAS modules which, alongside the relevant practical experience requirements, make up the CA element of the qualification, as well as covering relevant content in the CIPFA syllabus. The remaining four modules are specialist CIPFA ones, which allow the students to become CPFA qualified. Fast-track routes have also been designed to members who will have to take three modules and demonstrate a number of days audit experience. These fast-track routes can take as little as 12 months to complete. CIPFA CEO Rob Whiteman said: “With the public sector making up around one-third of UK GDP and increasing amounts of public spending carried out through the private sector, a joint qualification for auditors delivered by CIPFA and ICAS makes absolute sense for students and employers.”
Mid-tier merger
Together they have been providing accountancy services for over 330 years, now Chantrey VellaCott and Moore Stephens have become one firm. The combined partnership uses the Moore Stephens name and brand, and is a member of the Moore Stephens International network, which has a turnover of $2.7bn and offices in 103 countries. Moore Stephens managing partner Simon Gallagher said: “The merger provides a platform for continued sustainable growth.” He believes the firms’ people will make the merger a success. “The partners and staff are central to our strategy going forward. The merger provides genuine career and development opportunities through innovation, growth and financial success. It's going to be a really exciting time for our people, and I am sure this will translate into the service we provide to clients.” NQ Magazine June 2015
Ambition is great, but remember it can be lonely getting to the top. New research has found that loneliness is most acute among younger people because they are prioritising their career over socialising with family and friends. Some 83% of 18 to 34 year olds told researchers from Bolton University that they have experienced loneliness. It was also discovered that UK adults interact with only six friends, family members or neighbours in a typical week. Psychologist Rebecca Harris said younger people relied too heavily on social media as the tool for interaction because they felt too busy to make time for friends after work. For many in the 18-34 group you can add long commutes to the long working hours, so there’s not a lot of spare time. Harris felt this age group’s loneliness experience can be seen as very ‘Bridget Jones’. They are feeling unhappy, uncomfortable and change into their PJs after a long day and eat ice cream out of the tub! They may have been with people all day at work, but it isn’t always the right kind of interaction.
What is shaping your future role? There are five things you will need to ‘get a handle on’ if you want to make it to the top and become a CFO, says a new study from the ACCA. The key influences shaping the future roles of finance leaders of tomorrow are economic volatility, risk, data, technology and talent. The ACCA said these five influences show how the CFO role and the demands that come with the job are shifting as activities that drive business value change, adding: “It is vital that these are understood and acted upon if finance chiefs are to succeed in the job in the future.” The ACCA’s head of corporate sector, Jamie Lyon, explained: “The assets needed to be an effective CFO have changed. In a customercentric economy intangibles such as data, brand, talent and innovation are central to helping businesses succeed. How CFOs embrace and adapt to these is going to be really important in the future.” 5
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IASB completes review The International Accounting Standards Board (IASB) has issued limited amendments to the IFRS for SMEs following a comprehensive review. The Standard, which was specifically developed for small and medium-sized entities, has seen remarkable uptake, with millions of companies using it worldwide. The International Financial Reporting Standard for Small and Mediumsized Entities (IFRS for SMEs) was developed in response to international demand for the IASB to develop global standards for small and medium-sized entities (SMEs). After consulting widely with constituents, the IASB concluded that the IFRS for SMEs required little change. However, some areas were identified where targeted improvements could be made. The most significant changes that relate to transactions commonly encountered by SMEs are: ● Permitting SMEs to revalue property, plant and equipment. ● Aligning the main recognition and measurement requirements for deferred income tax with IFRS. The majority of the amendments clarify existing requirements or add supporting guidance, rather than change the
Grant Thornton consultation on shared enterprise model Grant Thornton is asking employees if they want to create a model of shared enterprise, similar in some ways to the John Lewis model. This would give its 4,500 staff more of a say and a bigger stake in the firm. Some 99% of Grant Thornton’s 185 partners backed the proposal by the leadership team led by CEO-elect Sacha Romanovitch, pictured. The firm wants to create an environment where everyone thinks and acts like an owner. It believes a move to the shared enterprise model will deliver higher profitability and points to a different, more inclusive form of ownership, which will be attractive to its people and clients alike. The consultation focuses on three proposals: shared ideas, shared responsibility and shared rewards. Romanovitch said: “Businesses with shared ownership structures significantly outperform other businesses.” The results of the consultation will be known soon, and Grant Thornton anticipates that the first stages of any new model could be in place as early as 1 July this year. NQ Magazine June 2015
NEWS underlying requirements in the IFRS for SMEs. Consequently, for most SMEs and users of their financial statements, the amendments are expected to improve understanding of the existing requirements, without having a significant effect on an SME’s financial reporting practices. IASB chairman Hans Hoogervorst, pictured, said: “The IFRS for SMEs has been a remarkable success and is now used by millions of companies worldwide. The amendments are expected to improve the Standard for companies and users of their financial statements. As a result we expect the adoption to spread further, improving reporting and consistency among companies without public accountability around the world." Entities reporting using the IFRS for SMEs are required to apply the amendments for annual periods beginning on or after 1 January 2017. Earlier application is permitted provided all amendments are applied at the same time.
● The IFRS has published the 2015 edition of ‘IFRS as global standards: a pocket guide’. Written by Paul Pacter, the guide provides a summary of where and how IFRS is used globally.
One firm comes clean
PwC has admitted that its gender pay gap is currently running at 15.1%. In a recent interview in The Times’ Top 50 Employers for Women 2015 pull-out the firm’s head of diversity, Sarah Churchman, said that while this figure looks ‘cavernous’ it has to be set against the 19.1% for the UK economy as a whole. PwC is one of just five companies in the UK that currently publish such figures, although by March 2016 reporting gender pay scales will become mandatory for big companies. One area Churchman will be focusing on to bring the pay gap down is discretionary bonuses. She believes bias can creep in where there is a degree of discretion involved. It also doesn’t help that often bonuses are kept secret. Another problem is just 17% of partners at the firm are female. There needs to be more women at the top of the organisations, she stressed. Churchman felt that there could be some sort of unfair mechanism in place that pushes more male middle managers up the career ladder and she will be looking into this, too.
● EY, KPMG and PwC are all on The Times’ Top 50 Employers for Women 2015 list. Other organisations that made it are BAE Systems, HMRC, HSBC, the Post Office and Unilever UK. 7
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CAREER ADVICE
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r e v t i ew n i t a
NQ Magazine June 2015
CAREER ADVICE
Lucy Clamp offers some sage advice on how you should approach that all-important interview
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e work so hard to perfect our CVs and put so much effort into searching for work that when we finally get invited to an interview we experience a sense of relief and assurance. However, it is important to remember that the challenge of finding your perfect job is far from over at this point. The interview is where you really need to put the hard work in, proving to your prospective employer that you are exactly what they are looking for – sometimes in the first five minutes! First impressions count. Research has proven that appearances have a major impact on how we are perceived. It takes just 0.1 seconds for us to judge someone and conjure up a first impression. This is before we have even had a chance to speak to them or shake their hand. So you should dress appropriately for the role and company, keep jewellery and make up minimal and... SMILE! It sounds obvious, but make sure you keep your phone switched off and out of sight. Whether it is phone alarms going off in interviews or candidates texting in reception, mobile phones are not positively received. It suggests that you are not fully engaging with the interview process. Turn your phone off and use your time pre-interview productively to read any company leaflets, brochures or your own CV. Make friends with the receptionist; they are sometimes invited to comment on candidates. Be organised – if you fail to plan, you plan to fail. Bring a folder containing a printed copy of your CV and the job spec. I would discourage taking a notepad to jot notes as it can lead to a lack of eye contact and engagement with your interviewer. Make sure that you have researched the company. Look into any recent acquisitions or any exciting changes that the company has been through. Familiarise yourself with the previous year’s profits and latest product launches. There are some specific questions that I have seen a number of candidates trip up on. NQ Magazine June 2015
When asked questions such as ‘where do you see yourself in five years?’ the employer isn’t really probing your lifelong aspirations, but is assessing whether you are as excited about their company as they are. Avoid answers that allude to working outside of their organisation, such as the ambition to own your own company. This might leave them feeling defensive and unwilling to invest in you. Answers such as ‘I hope to develop my skills within a successful company’ are more ‘vanilla’ and suggest you have no intentions to leave the business any time soon. You also need to think about how you talk about your past. When asked ‘why did you leave your last job?’ do not present your reasons for leaving as negative. No matter how much you hated your boss do not communicate this at interview. The interviewer has no evidence that it was your boss, and not you, who led to office friction, so may reject your application on the side of caution. Talk about things that you have achieved, but why you feel that it is time to move on. It could be that you are not able to develop your skills further where you are, or that you have gained qualifications that can be utilised elsewhere. When asked at the end of the interview if you have any questions, always try to ask something – it is unlikely that every aspect of the role and business has been covered. Questions to consider might be: Why has the position become available? What are the measures used to judge how successful I am in the role? What obstacles are commonly encountered in reaching these objectives? What can I expect in terms of development and support? Avoid asking questions about salary and holidays. Any questions on salary should be directed through your recruitment consultant. We will have all the necessary information on salary and benefits and will be happy to discuss these with you before interview. We will find out all the information you will need in terms of working hours and holiday entitlement on your behalf. Leave your agent to negotiate while you ‘wow’ at interview. Finally, always talk to your consultant if you have any specific worries about an interview. They should be able to provide you with preparation tips and chase for feedback on your behalf... it is then down to your consultant to settle the offer you are looking for. NQ
● Lucy Clamp is a recruitment consultant at Walker Dendle 9
ETHICAL DILEMMA
Are you a party pooper? Improper accounting for sales is the subject of our ethical dilemma, so should you blow the whistle? Outline of the case You are one of three partners in a firm of accountants. Five years ago the firm was appointed as external accountants to a young, successful and fast-growing company, engaged to prepare year end accounts and tax returns. The business had started trading with a handful of employees but now has a workforce of 200, while still remaining below the size of company requiring a statutory audit. Due to your close relationship with the directors of the company (who are its owners) and several of its staff, you become aware that staff purchases of goods manufactured by the company are authorised by production managers, and then processed outside the accounting system. The proceeds from these sales are used to fund the firm’s Christmas party.
Key fundamental principles Integrity: Would omitting income from staff sales result in the financial statements and returns to the tax authority being misleading? Is the practice dishonest, and what should be your involvement? Objectivity: In view of the trust that has built up between
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you and your client, and the threat brought about by the familiarity you have with the directors and staff of the company, how will you maintain your objectivity when deciding on a course of action? Professional competence and due care: You must ensure that the financial information that you produce on behalf of your client is in accordance with technical and professional standards. Professional behaviour: How should you act in order to protect your reputation and that of your firm and your profession?
Considerations Identify relevant facts: Consider relevant accounting standards and any applicable laws and regulations. Determine the system currently employed for controlling staff sales and funding the staff Christmas party. Identify affected parties: Key affected parties are you and your firm, your client company, its directors and staff, and users of the company’s accounts, including the tax authority. Who should be involved in the resolution: The reputation of your firm may be vulnerable, and you should disclose
NQ Magazine June 2015
ETHICAL DILEMMA
this ethical dilemma to your partners. Throughout the resolution process you should keep your partners informed and be alert to any possible requirement to notify your professional indemnity insurers. It is not appropriate to discuss the matter with any of the staff of the client company, although the directors should be informed of the issue as soon as possible, and be involved in the resolution.
Possible course of action Having brought the issue to the attention of your partners, and obtained the relevant details of the client’s system for accounting for staff sales, you should raise your concerns with the directors of the client company. You will also have to determine whether the financial statements of previous years are likely to be misleading and, if so, consider your responsibility (or that of your client) to inform the relevant authorities (including the tax authority). You should strongly advise the directors that a staff sales policy should be introduced to ensure that these sales are fully recorded in the company’s accounting system in the future. You should explain to the directors the implications of
NQ Magazine June 2015
their actions, and that you are safeguarding the interests of the company and its staff in advising how the situation may be rectified. If the directors are co-operative, you should advise them of the recommended changes to the accounting system and how they might disclose the past undisclosed income to the tax authority. If the directors appear unwilling to change the system in respect of staff sales, you are obliged to disassociate yourself from any involvement with the company’s financial statements, and this will require your firm to resign as the company’s accountant. At any time, you may seek advice from your professional body. In view of your client’s conduct, you are obliged to consider your whistleblowing obligations, and may have to report the matter to one or more authorities. You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgement is challenged in the future. NQ ● This article is taken from a series of Ethical Dilemmas Case Studies, published by the CCAB. See http://www. ccab.org.uk/reports.php
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INTERNATIONAL STANDARDS
Big changes ahead:
accounting for financial instruments Sue Lloyd outlines the impact the new standard IFRS 9 will have as it replaces the little-loved IAS 39
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inancial instruments come in all shapes and forms. Many such instruments are very simple, such as a loan provided by a bank. But they can also be hugely complex. This means that accounting for financial instruments can be a challenge. And even when the financial instrument is a simple loan, providing information about loan loss expectations in a useful way can be a difficult task. Encouraged by the G20, the Financial Stability Board and others, the International Accounting Standards Board (IASB) last year completed a project to improve the way in which financial instruments are accounted for. This entailed improving the information that is provided about financial instruments to those who 12
read financial statements and make investment decisions. The new Standard, called IFRS 9 Financial Instruments, replaces the old Standard, IAS 39 Financial Instruments: Recognition and Measurement, which was seen as difficult to understand, apply and interpret both by those preparing financial statements and those reading them. IFRS 9 brings together all aspects of the accounting for financial instruments: classification and measurement, impairment and hedge accounting. Improved disclosures are also provided. The biggest difference under the new Standard will be in the accounting for impairment or loan loss provisions, because we are moving from an incurred loss model to an expected loss model.
The new loan loss accounting model Currently most standards on accounting for loan losses, including those published by the IASB, only require (and in fact only allow) provisions for these losses to be recognised when there is evidence that a loss event has occurred. In practice this has often meant that loan losses are only accounted for once borrowers default. And even then, the amount of losses that can be booked is restricted to reflecting the current situation. Even if a bank expects events to occur that will cause the borrower further problems, they cannot recognise that additional loss until those events happen. During the financial crisis this resulted in criticism that loan loss provisions were recognised ‘too little, too late’. NQ Magazine June 2015
INTERNATIONAL STANDARDS IFRS 9 seeks to address this by requiring financial institutions and other companies to estimate and account for expected credit losses from when they first lend money or invest in a financial instrument, such as a bond. When measuring expected credit losses, companies will also be required to use all relevant information that is available to them. This is important, because it includes not only historical loss information and current information, but reasonable and supportable forward-looking information as well. Consequently, if a financial institution expects credit conditions to decline over the life of a loan, they must reflect that in their loan loss calculations immediately. In addition to improving the timeliness of loan loss recognition, the new impairment model provides important information to assist users of financial statements to understand changes in the credit risk performance of financial instruments. This is done by looking at loan losses separately for financial assets that are performing as, or better than, expected and those that are performing worse than expected. For example, suppose that a bank lends money and
grades the loan as a ‘C’ on the bank’s credit rating scale. Simply put, as long as the loan is graded ‘C’ or better, a loan loss provision will be recognised that reflects a portion of the total losses expected on such a loan over its life. However, if that loan is subsequently downgraded and is considered by the bank to have ‘significantly increased in credit risk’, in other words to be underperforming, the bank would need to increase the loan loss provision to reflect the full lifetime loss expected to occur over the life of the loan, because of its new lower credit quality. An economic loss is suffered so this is reflected in the financial statements. The US Financial Accounting Standards Board (FASB) is also proposing a move to a forwardlooking expected credit loss model for companies using US Generally Accepted Accounting Principles (GAAP). However, while the direction of travel for both the IASB and the FASB is towards a more forward-looking model, the two standard-setters have a slightly different approach despite efforts to agree on the same solution. The FASB’s model will require that all expected credit losses (as for the underperforming loan in the example above) are always recognised.
That recognition will start from the day a loan is made or a financial instrument is acquired. The IASB does not believe that recognising full lifetime losses on day one faithfully represent the economic situation (a bank does not suffer such a loss when it lends on market terms). The IASB is also concerned that requiring banks to recognise all expected losses whenever money is lent would allow a bank to improve its profits by curtailing lending and thus decreasing its loan loss provisions. This could have unintended economic consequences, especially in an economic downturn.
Implementation The change from an incurred to an expected loss model for loan loss provisions is a fundamental change in accounting. It will require considerable changes by many financial institutions and other companies. Banks that have already applied advanced approaches – as specified by the Basel Committee – to calculate expected losses for regulatory purposes should be able to use their existing systems and information as a basis for building the necessary models. Nevertheless, a number of systems changes and new data needs are expected as a result of this change. Because of this, these new requirements only become mandatory for annual reporting periods from 1 January 2018, to allow sufficient time NQ for a robust implementation.
● Sue Lloyd is a member of the IASB. This article first appeared in Banking magazine, the journal of the Association of Banks in Israel
NQ Magazine June 2015
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INTEGRATED REPORTING
Be a changemaker Integrated reporting will give aspiring young accountants a chance to make their mark, says Faye Chua
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NQ Magazine June 2015
INTEGRATED REPORTING
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or some finance professionals, they already know what role they will play should the business they work for adopt integrated reporting (IR). New findings from an ACCA paper – ‘Accountants and Strategic Leadership’ – showed that one in three surveyed confirmed they, as ACCA finance professionals, would lead their business on adopting IR. But with moves to make non-financial reporting compulsory a step closer, with the recent passing of legislation at the European Union requiring some 6,000 businesses across the continent to provide non-financial information such as social and environmental impacts, could it mean the more reluctant finance professionals get left behind? The new report showed that accountants must become ‘changemakers’ to ensure the profession keeps up-to-date with developing trends, leading to more informative reporting for investors and stakeholders as integrated reporting becomes more widely used in years to come. From some of ACCA’s other research (the Understanding Investors series) it emerged that 93% of investors wanted to see more non-financial reporting, and yet just 40% of finance leaders were actively taking steps to introduce (IR) in the next few years. There is, perhaps, more change-making to do. There has been a lot said about whether or not the relationship between society and corporations is changing, and IR has potentially wide-ranging implications for the way the latter communicate with their investors and the public at large. Accountants and Strategic Leadership details two strategic drivers that could impact the finance function – the first being that the finance function is being invested with a broader remit to contribute, through a more holistic approach, to strategic management decisions. The other driver is a wider concept of organisational success, broadening out from financial (profit, return on investments, etc.) linked to wider social and environmental concerns. We have already identified an opportunity for accountants to be more central in their organisations. In our ‘100 Drivers of Change for the Global Accountancy Profession’ report we defined accountants making the most of current opportunities as ‘changemakers’, with corporate reporting identified as a key issue for the profession in the short and medium-term. With the introduction of IR and the framework being developed by the International Integrated Reporting Council (IIRC) in December 2013, the paper claims it is “well positioned to be the future of corporate reporting in years to come”.
NQ Magazine June 2015
The profession must realign itself and accountants should aspire to be ‘changemakers’. Corporate reporting, in particular IR, is an area in which the profession can show its leadership. Even though one might see the role of corporations as limited to the maximisation of profits for shareholders, new insight can be gained by stakeholders from IR through the disclosure of a more coherent and complete picture of a company, including its strategic priorities, risks and forwardlooking statements. As finance professionals we need to consider how we can continue to lead the initiative and show strategic leadership in corporate reporting, and also consider the broader implications, such as the impact on the relationship between strategy and finance teams. NQ
● Faye Chua is head of future research at ACCA
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REVIEWS
Book reviews NQ May 2015
NQ rating I am sure there are many outsiders desperate to be insiders, and vise versa. What is perhaps most important is being given the chance to be heard.
NQ rating This is a fanastic book – it is easy to read and its different perceptive is refreshing.
The Outside Edge: how outsiders can succeed in a world made by insiders Robert Kelsey (Capstone, £9.99)
Fighting Corporate Abuse: Beyond Predatory Capitalism The Corporate Reform Collective (Pluto Books, £16)
So are you an outsider? Author Robert Kelsey suggests in his latest tome that our culture purports to celebrate outsiders, but in reality it slams the door in their faces. These are the innovators, the original thinkers who are often pushed to the edge of society. Kesley, who believes he is one, says that outsiders can achieve great things in a world run by the insiders, without having to compromise their individuality. You do this by forging an ‘edge’. Perhaps we should start at what makes an outsider. JD Salinger wasn’t one, nor George Orwell, according to Kesley. The former is described as an elite rejectionist, the latter an old Etonian. He points out even Richard Branson is a privately-educated son of a barrister. So who is on Kesley’s outsiders list? He names DH Lawrence and Alan Sillitoe, and says for every Richard Branson there is an Apple’s Steve Jobs, the adopted son of a garage mechanic. Kesley appears to be saying you can’t be an outside if you come from the ‘insider class’. It all begins to sound a bit like a Brave New World or Divergence! Helpfully, though, Kelsey provides an outsiders’ checklist early on. Here are some of the attributes you need: sensitivity, poor social competence, distorted empathy (rooting for the bad guy), detachment (sometimes masked by acting cool), dislike of authority, and perfectionism. Sounds like most teenagers I know! At the end of the book we are given 10 rules for outsiders to obey. Among them (no 8) is the suggestion that you have to accept that they’ll always be the boss! It is the reason Kelsey believes many outsiders become entrepreneurs.
A quick flick through the chapter headings will give you a good idea of where the authors of this book are coming from. We have ‘tax evasion and avoidance’, ‘cover-up accounting and auditing’ and ‘bad banking and market manipulation, part 2’, to name just three. The members of the Corporate Reform Group are many, and among them is our PQ magazine columnist Professor Prem Sikka. Together they are putting forward ideas for legislation and regulation that they feel will actually deal with current abuses in the corporate sector. For them, capitalism is still in crisis. The problem is that the corporate form has been manipulated, and the creation of highly complex corporate groups only adds to the (permitted) abuses. The collective tackles head on the issues they feel create a corrupt system – we are talking tax evasion, extraction of value and asset-stripping here. Some of the arguments have been created in Ivory Towers, but the authors honestly believe that things can be done differently, and you have to admire their dedication to the cause. Even if you don’t agree with their conclusions it is vital that you take a look at their arguments. We have found that Professor Sikka has often been ahead of the curve; many of the things he was calling for 10 years ago are now being taken on board as good corporate practice.
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NQ Magazine June 2015
REVIEWS
HMRC: Her Majesty’s Roller Coaster – Daniel Dover and Tim Hindle (Profile Books, £7.99)
NQ rating The big lesson here is that you devise your own OST.
Winners and how they succeed Alastair Campbell (Hutchinson Random House, £20) As a former spin doctor for one Tony Blair, and a key architect of New Labour’s three successive general election wins, Campbell knows a great deal about the winning ‘mindset’. In this book he sets out to discover others’ secrets of success; his interviewees include Floyd Mayweather, Anna Wintour, José Mourinho and Albanian PM Edi Rama among others. With them he discusses his three planks of winning – objective, strategy and tactics, or OST, as he calls them. Key to success, says Campbell, is identifying your objective, then devising a strategy to achieve that goal, and devising tactics to help drive the strategy. Too many people – even highpowered business and political figures – confuse the strategy with the tactics, says the author. To explain it, Campbell uses the example of dieting: “It’s not difficult to turn a vague ‘I want to lose weight’ into a campaign with a clear O, S and a credible set of Ts. Objective: lose 10 kilos. Strategy: diet (eat less, exercise more). Tactics: record calorie intake and exercise output; visualise thinner me, possibly with photos on fridge; use stairs not lift; join up with other dieters. Expressed like this, a real sense of purpose is injected into what is being planned.” There are some surprises here, too. Campbell is astonished at how many of the top people he spoke to were driven more by a fear of failure. Top cycling coach Dave Brailsford summed it up: “I hate losing more than I love winning,” he said. It’s a theme that constantly recurs. One criticism of this book is that winning is defined in materialistic and status terms, a Thatcherite conceit that’s somewhat ironic given Campbell’s left-of-centre credentials. There are, after all, other ways of achieving – and defining – success. What price happiness? On the plus side, this book is very well writen, and divided into easily digestible chunks, and it’s chock-full of fascinating insights. NQ Magazine June 2015
The amount of tax people pay – or don’t pay – has been a political hot potato over the past few years. In this book, Dover (a BDO partner) and Hindle (business author) explain what you – or a client – should do when subject to an investigation. Like the Hitchhiker’s Guide to the Galaxy, the mantra here is ‘Don’t Panic!’ The writers pull no punches when they describe what a tough assignment it can be to take on the taxman, but they do so with warmth and wit, and the relaxed prose style makes this a very easy read. And we loved the cartoons by the excellent Pugh, which litter the text. At the end is an appendix of ‘Our Top Ten Tips’, which provides a neat summary of the content – tip number 4 is emphatic in its advice: ‘Don’t lie to HMRC’. NQ rating A must-buy that tells you everything you need to know if you are facing a tax investigation
The Small Big Steve Martin, Noah Goldstein and Robert Cialdini (Profile Books, £11.99) So it’s finally been proved – the little things really do matter. In their book The Small Big, intellectual heavyweights Martin, Goldstein and Cialdini argue that making even tiny adjustments to strategies or processes can glean the greatest of rewards. But this is far from academic thesis; it is an invaluable handbook for those wanting to progess both the fortunes of their firm and their own career prospects. This book is broken down into 52 bite-sized chapters, each tackling a specific theme or conundrum – for example, chapters are entitled ‘What small big can ensure your influence attempts don’t backfire?’, and ‘What small big can help you keep your customers hooked?’. Each deals with the psychology behind the decisions we all make and there are some surprising revelations; in the former chapter mentioned above, experiments showed that where recycling facilities are provided, office workers actually waste more resources than where there are none (in other words, the law of unintended consequences). For more of this and countless fascinating scenarios you are going to have to buy this book. NQ rating Gripping stuff 17
HOUSING DILEMMA
Getting on the
ladder So what will you need to earn to get on the housing ladder? New research from KPMG says in the capital you will need to earn £77,000
T
he divergence between house prices and wages has grown so wide that a first time buyer in London would need an annual wage of £76,971 to get onto the property ladder, with the actual average annual wage in the capital at just £27,999, says new research from KPMG. These figures are based on a 10% deposit and borrowing the remaining 90% at a loan to income ratio of 4.5. Figures also vary widely between the South and North, with the gap between actual and required annual wage being much narrower in the North, and in Scotland. Northern Ireland sees the smallest gap with the actual average wage at £18,857 against the £21,219 needed; in England the narrowest gap is in the North East with £20,149 against £23,616. However, there is a substantial gap in every UK region between the actual and required wages needed, creating an environment where only those earning over the average can afford to buy. 18
But it’s not just home ownership that’s the issue – a KPMG-commissioned poll has revealed that some 69% of people feel there is not enough housing in the UK that is affordable, with 30% concerned about how they will afford or continue to afford their own home or pay their rent. And it seems these concerns about affording a home are hitting the younger generation the hardest, with that figure rising to 57% for 16-17 year olds and 52% for 18-24 year olds. And yet, despite the growing divergence between prices and wages, and the nation’s concerns about affordability, the poll showed that we’re still a country of wannabe homeowners, with 73% of people saying they’d prefer to buy than rent. KPMG agreed a deal with Clydesdale & Yorkshire bank last September under which the firm would guarantee staff preferential mortgage rates after working with Shelter, the homeless charity, on the NQ reasons for the housing crisis. NQ Magazine June 2015
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ACCOUNTING FOR INTANGIBLES
Know your worth UK companies are needlessly at risk of takeover and exploitation due to failure to account for intangibles, says a new CIMA report
U
K companies are vulnerable to underpriced bids and subsequent exploitation due to a failure to capture over £1 trillion of assets in their financial statements. This was revealed in the world’s most extensive research of intangible assets, Brand Finance and CIMA’s Global Intangible Finance Tracker (GIFT) report. The comprehensive annual study of 58,000 companies, across 120 stock markets, highlights how a collective blind spot for business decision makers and policy makers has been allowed 20
to develop. Many of the UK’s company directors and government ministers are in the dark about the value of the assets they control and influence. Intangible assets can be grouped into three broad categories: rights (contracts and agreements, etc), relationships (workforce, customer relationships, etc) and intellectual property (marketing strategies, business knowledge, etc). These cannot always be captured on a balance sheet but are often significant in value. Since 2012, undisclosed intangible value has grown 50% to $27 trillion.
It now accounts for more than a third of the average firm’s enterprise value, rising as high as 70% in sectors such as pharmaceuticals and advertising. Failing to account for intangibles favours short-term economic gains over long-term value and undermines service-sector dominated economies such as the UK. This failure also risks the undervaluation and acquisition of strong brands such as Cadbury’s, threatening jobs, government income and the success of the government’s ‘long-term economic plan’. The UK is particularly good at NQ Magazine June 2015
ACCOUNTING FOR INTANGIBLES
creating strong brands and is a centre for industries heavily reliant on intangible assets, such as luxury, aerospace and engineering, making Britain the fourth most ‘intangible economy’ behind only the US, Denmark and Belgium. Intangibles account for two thirds (64%) of the true, total value of UK companies, a growth of 17% since 2012. Over $1.58 trillion (£1 trillion) of those intangible assets are ‘undisclosed’ on balance sheets and are all too easily overlooked by those who should be protecting NQ Magazine June 2015
them, whether at the corporate or government level. Markets are erratic and a dip in share price leaves British companies open to opportunistic bids. Ownership, profits and expertise may flow out of the UK as a result or worse, the acquisition may be by asset strippers with no concern for the long-term interests of the business, its employees or the country. Regular valuation of intangibles ensures that the true value of a company is known, affording protection against underpriced bids. Pfizer’s controversial and ultimately aborted attempt to
acquire Astra Zeneca, might have been rebuffed much sooner had all intangibles been accounted for. Despite moves in 2001 by the then Department of Trade and Industry that identified seven sources of intangible value, until late last year no effective method of considering the value of intangibles existed. In 2014, CIMA and the America Institute of Certified Public Accountants (AICPA) published a set of global management accounting principles to analyse value in its broadest sense and to safely move beyond the Historical Cost Convention (HCC). The HCC, created at a time when economies were dominated by physical assets, prevents creative accounting and the distortion of reported assets but it fails to recognise the market value of the majority of intangible assets. The new global management accounting principles provide a framework for communicating an organisation’s true value and consequently help UK businesses get a fair deal at the negotiating table. It is time for the implicit acknowledgement of intangible value to be made explicit and to address the questions raised in CIMA’s previous work on the importance of reporting in an integrated way. Value is worth that can be exchanged, but this depends on a fair exchange of information between the two parties leading to fair valuation for buyers, sellers, investors and wider society. Although this is clearly a challenge to those leading the debate on our national economic policy, business decision makers must also take note. Undisclosed intangible value is higher for the world’s most valuable companies, with the firms generating the most enterprise value, doing so through the management and creation of intangible value. It makes strategic, operational and common sense that assets of this importance be understood, managed, nurtured and leveraged by all stakeholders in order to drive economic and shareholder value into the future. Taking well-informed decisions requires fit for purpose management information. This is as true for a country as it is for a company. Best practice in management accounting makes the intangible tangible, giving decision makers the right information when taking crucial judgment calls on the future prosperity of the UK. NQ 21
TECHNOLOGY
Head in the
clouds? W
hy not hand over all of your finance department’s IT worries to a cloud provider? That way, you can simply log in to the accounting system over the internet and focus on your finance expertise instead of grappling with IT issues. Right? Not so fast. When listening to the enticing marketing message of cloud providers and exciting success stories of cloud adopters, one could easily forget the – less advertised – fact that there is no reward without risk and investment. So hold your horses! Before jumping on the cloud bandwagon, consider the five most common mistakes that we have come across when working with cloud accountants on daily basis.
1
You have not calculated the ROI for your cloud project A business case for any investment must make financial sense. Cloud projects are no different. Unfortunately, the traditional financial metrics used for estimating the viability of business investments may be challenging to apply to cloud computing, with its abstract nature, variety of services offered, uncertain time-frames and inconsistent information disclosures. So what is an accountant to do? Focus on finding the right data to produce valid estimates. For example, the ‘true’ total cost of ownership calculation of cloud software needs to account for not only the recurring subscription fees, but also one-off costs, such as the selection process, retirement of the existing on-premise system, migration of data and applications into the cloud, along with system
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customisation, integration and any add-ons required. The overall price tag of a cloud solution can also increase significantly as a result of compliance requirements, service unavailability or security breaches.
2
You have succumbed to the marketing hype When it comes to cloud-ware one size does not fit all. Also, the product with the loudest marketing message may not be the most suitable solution for your circumstances. Do invest enough time into the selection process of your cloud accounting software. Navigate through the marketing hype to select a solution that suits your business size and growth needs, the nature and complexity of your operations, the industry you are in, the risk appetite of your organisation and, of course, your budget. Ask around, look around, shop around.
3
You are not aware of cloud regulatory risks and opportunities In the cloud, data is typically distributed dynamically across virtualised infrastructure that can be located anywhere in the world and managed by any number of entities. This complexity generally leads to more challenging compliance requirements. As authorities struggle to incorporate the effects of new technologies and business models into their outdated regulations, the global regulatory landscape is riddled with inconsistencies and gaps. Interestingly, this creates potential for additional compliance risks as well as opportunities. For example,
NQ Magazine June 2015
TECHNOLOGY
Emilie Novotna points to five signs that indicate you are doing cloud accounting wrong a viable cloud investment pre-tax could easily turn into a project with negative ROI after tax. And vice versa. In order to take advantage of the opportunities and avoid the risks include regulatory experts into the cloud software implementation process as soon as possible.
4
You believe security is the cloud provider’s responsibility Cloud security is a team effort. As such an holistic security approach should not focus only on the operations of cloud providers. Having malware present in a cloud customer’s internal IT system goes counter to protecting the security and privacy of cloud resources. And so cloud accountants and their clients need to take their share of responsibility for securing the devices and applications they use for interaction with the cloud. This also applies to the data transfer across uncontrolled network connections susceptible to monitoring, interception and modification. It’s your turn to protect your IT environment interacting with the cloud.
5
You are trying to reinvent the wheel Even where not directly applicable to cloud computing or your entity, a number of IT assurance frameworks have been developed to help users assess the governance levels at a service organisation that cloud users can learn from. These standards include ISO 27000 series, ISAE 3402 and its localised variations, SOC reports, COBIT5, WebTrust/SysTrust, PCI DSS, EuroCloud, ENISA Cloud Computing Information Assurance Framework, ISACA Cloud
NQ Magazine June 2015
Computing Management Audit Assurance Program, CSA STAR, or US FedRAMP. Why invest your otherwise billable time into reinventing the wheel when you can learn from best practice instead?
● Emilie Novotna is a cloud accounting author, consultant and trainer with the International Association of Qualified Cloud Accountants
About IAQCA IAQCA is the only international professional body that prepares finance professionals for the unique challenges (and opportunities!) of rapidly changing technologies by providing ● Cloud accounting certifications: Qualified Cloud Accountant, Qualified Cloud CFO, and Qualified Cloud Bookkeeper; as well as ● Cloud accounting CPD courses including the subjects of Cloud Audit & Tax, Cloud Law & Regulation, Cloud Security & Cybercrime. Find out more at http://www.IAQCA.com/
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