The CFO Middle East | Issue 10

Vol. 1 ISSUE 10

VAt implications for UAE CFOs

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Raising islamic finance’s Profile

UAE AED 15 | Bahrain BHD 1.5 | Qatar QR 15 | Oman OR 1.5 | Saudi Arabia SR 15 | Kuwait KD 1.2

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Rub of the green Jumeirah Golf Estates’ CFO Faheem Ahmad drives the company’s success Download the FREE ‘The CFO ME’ app and explore your favourite magazine

PUBLICATION LICENSED BY IMPZ

Integrated thinking MANAGEMENT Dominic De Sousa Chairman Nadeem Hood Group CEO Rajashree Rammohan Publishing Director EDITORIAL Group Editor Jeevan Thankappan jeevan.thankappan@cpimediagroup.com +971 4 375 5678 Editorial Assistant Adelle Louise Geronimo adelle.geronimo@cpimediagroup.com +971 4 375 5683 Contributing Editors Annie Bricker annie.bricker@cpimediagroup.com +971 4 375 1643 James Dartnell james.dartnell@cpimediagroup.com +971 4 375 5684 ADVERTISING Commercial Director - Business Division Chris Stevenson chris.stevenson@cpimediagroup.com +971 4 375 5674 Group Sales Director Kausar Syed kausar.syed@cpimediagroup.com +971 4 375 1647 DESIGN Neha Kalvani neha.kalvani@cpimediagroup.com Analou Balbero analou.balbero@cpimediagroup.com

With more and more companies getting listed on the bourses, there is an increasing emphasis on greater transparency and better quality of corporate reporting. Without doubt, the corporate reporting landscape in the region is undergoing a sea-change and CFOs are setting the reformation agenda.

Why is following best practices on corporate reporting so important? The CFO is the voice of a company when it comes to financial reporting and communicating with the board and stakeholders. In the Middle East, financial statements of some firms hide more than they reveal, leading to uncertainty and putting investors at risk. Companies that are upfront and transparent with clear and meaningful information in their corporate reports are more likely to earn investor trust and better valuations than those with inscrutable financials.

A recent PwC study of investment professionals reveals that reporting quality can have a direct financial impact for companies and it is imperative for CFOs to understand the needs and opinions of investors to prepare truly useful financial reports and accounts. Financial statements and supplemental notes are the best tools CFOs have at their disposal to communicate company performance to the investor community, and they have to make sure there is a clear linkage between your financial performance and your business model, strategy and risk disclosures.

Corporate reporting may mean different things to different people, and has become needlessly complicated with many standards. To address this, International Integrated Reporting Council has launched an initiative dubbed Corporate Reporting Dialogue, bringing together eight different corporate reporting organisations and their standards and related requirements onto a single framework. Known as Integrated Reporting, this new approach to corporate reporting is rapidly gaining ground. Industry experts believe this will help us move beyond compliance and financial reporting to long-term business sustainability, helping stakeholder to assess the overall performance of a business. CFOs have to play a central role in this and help their organisations transform integrated reporting from an aspiration to reality.

Photographer Charls Thomas Production Manager James Tharian Data Manager Rajeesh Melath

Jeevan Thankappan Group Editor Printed by Printwell Printing Press Š Copyright 2015 CPI. All rights reserved. While the publishers have made every effort to ensure the accuracy of all information in this magazine, they will not be held responsible for any errors therein.

Head Office PO Box 13700, Dubai, UAE Tel: +971 (0) 4 440 9100 Fax: +971 (0) 4 447 2409

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WE CANNOT SOLVE OUR PROBLEMS W I T H T H E S A M E

THINKING WE USED WHEN WE CREATED THEM - Albert Einstein

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tHE CFO MIDDLE EAST

Advisory Panel The CFO Middle East’s Advisory Panel comprises a dynamic group of experts and leaders in various aspects of finance.

As industry captains arriving from world-leading organisations and specialising in financial strategies, accounting and management, these key personalities will play a vital role in ensuring the delivery of relevant and accurate analyses of the latest trends and issues in the business community.

Ahmad Darwish Ahmad Darwish is a Board Member and Secretary General of the UAE’s Accountants and Auditors Association (AAA), an organisation tasked with the promotion and development of the accounting profession in the country. He is also the Senior Manager for Financial Accounting at DP World UAE and oversees the management accounting, treasury and asset management divisions of the company. With his extensive financial expertise Darwish is also the first Emirati to chair the UAE Members Advisory Committee of the ACCA. Hanady Khalife Hanady Khalife is the Director of Operations, Middle East and Africa, of the Institute of Management Accountants (IMA). She is responsible for training providers, business partners, universities, governmental entities, amongst others. Khalife is also an expert consultant specialising in assisting clients develop and implement strategic business plans and build partnerships with key industry stakeholders.

Michael Armstrong Michael Armstrong, FCA is the Regional Director for the Middle East, Africa and South Asia (MEASA) of ICAEW. He is responsible for the ICAEW’s work across the MEASA region, collaborating with key stakeholders, engaging with businesses across the region, supporting ICAEW members and working with both public and private sectors on raising awareness of the relevance of chartered accountancy catalysing

economic growth. Armstrong has extensive experience advising financial institutions and energy and natural resources companies in addition to having held several leadership and advisory positions in business and government.

David Thomasson David Thomasson is the founder and Managing Director of Phoenix Financial Training.

David is a fellow of CIMA and worked in the accountancy industry for many years before moving into training in the 1990s. PHOENIX offers courses leading to Professional Finance Qualifications in ACCA, CIMA and ICAEW in Dubai and India. Offering a range of bespoke financial courses in Financial Awareness Building and Corporate Treasury Phoenix’s student body ranges from independent students to practitioners of private companies and sovereign wealth funds.

Lindsay Degouve de Nuncques Lindsay Degouve de Nuncques is the UAE Head of the Association of Charted Certified Accountants (ACCA). Her role entails spearheading discussions with regulators, business leaders and important stakeholders to strengthen the ACCA’s network and profile in the region. Degouve de Nuncques has spent more than eight years with ACCA in various senior roles.

Geetu Ahuja Geetu Ahuja is the Head of GCC for the Chartered Institute of Management Accountants (CIMA).

Responsible for

developing the growth of operations and positioning the global brand of CIMA across the GCC region, Ajuha establishes strategic partnerships with global and regional entities. She is also responsible for overseeing the launch of various region specific CIMA nationalisation programmes in the GCC. Paul Gyles Paul Gyles is the Regional CFO and Board member for all ISG Group companies – an international construction services company delivering fit out, construction, engineering services and a range of specialist solutions. He is responsible for the finance, HR, IT, admin and legal functions for ISG’s Middle Eastern outfit. A key aspect of the role is project funding and raising external financing by working with both Arab and international banks. Gyles is also the Chairman of the Steering Committee of the MECA CFO Alliance, the largest CFO networking group in the Middle East.

Amer Khansaheb Amer Khansaheb is the president of the CFA Society Emirates. He is the Managing Director of Khansaheb Investments, an investment company with investments in construction, real estate and infrastructure. His expertise includes real estate management, construction management and financial analysis.

Amer graduated from the American university in Beirut with a degree in Civil & Environmental Engineering.

In 2009, he received his MSc in Project Management from the British University in Dubai. He has been a CFA charterholder since 2009.

CONTENTS 8 News The latest local developments in finance.

12 In full swing In an exclusive interview, Jumeirah Golf Estates CFO Faheem Ahmad shares how his role contributes to the success of the luxury brand.

14 Going digital EY MENA Assurance Leader Imran A. Ali explains why CFOs in the region should develop a digital transformation strategy.

16 VAT out the bag We take a look at how the impending implementation of value-added tax in the UAE can impact CFOs and consumer spending.

20 Standard addition Gavin Steel, Partner, PwC, gives insight on the possible effects of the forthcoming enactment of IFRS in Saudi Arabia.

24 Paid dues Find out how the internal audit function can raise its profile across the enterprise.

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28 Empowering knowledge Paresh Khushal, Head of Finance, IP & Science, Legal, and Tax & Accounting, Thomson Reuters, discusses the company’s drive to adapt to the knowledge economy.

30 The rise of Islamic finance Are finance and business professionals ready to harness the growth potentials of the Islamic finance industry?

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Shades of leadership Epicor Software’s most recent survey reveals the diverse working behaviours of CFOs and other finance leaders.

38 To the credit of your business The growing importance of trade credit management.

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38 42 Financial reporting accountability Seasoned CFO Martin Bradley identifies the pitfalls of weak processes surrounding automated financial systems.

Column

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Fintan Somers shares his own professional transformation programme – Finance Function LIFT.

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Geetu Ahuja, Head of GCC, CIMA, sheds light on some of the common managerial mistakes that business and finance leaders commit.

News

The Access Bank UK opens UAE operations The Access Bank UK, a trade finance Nigerian Bank in the United Kingdom, has announced that it will be opening its operations in the UAE. The bank will set up base at the Dubai International Financial Centre (DIFC). The announcement was made at an event which was attended by key executives from the company, including Herbert Wigwe, Chairman and Non-Executive Director; Jamie Simmonds, Chief Executive Officer; Alyson Jeans, Commercial Banking and Asset Management Director and Rola Seifeddine, Head of the office in the UAE. “The economic links between UAE and Africa are already growing and we see this accelerating over the next decade,” said Herbert Wigwe, The Access Bank UK Chairman. “At The Access Bank UK, we are excited to establish our presence in the UAE in order to foster economic and trade ties between the UAE and key African countries including Nigeria.”

The Access Bank UK was established in 2008 and provides business and personal banking services to customers in both the UK and Africa.

5.2%

Egypt’s targeted economic growth by 2016 Source: Reuters

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Retaining top finance employees a big concern for UAE CFOs The latest Professional Hiring Index by Robert Half UAE has found that there is widespread widespread unease in the country around the retention of skilled finance professionals. Around 91 percent of senior finance executives shows executives have anxieties around losing their top financial performers to other job opportunities in the coming year.

The report also highlighted that competition is intensifying for attracting top candidates, with more than half (57 percent) of senior finance executives across the UAE anticipating they will maintain employment levels by filling vacated positions in the remainder of 2015, and more than one in three (36 percent) planning to create new roles.

Unsurprisingly, 94 percent of respondents underlined talent shortages as a primary challenge affecting hiring skilled finance employees today.

Gareth El Mettouri, Associate Director, Robert Half UAE, said, “Senior executives are hiring to fill vacancies from departing employees as well as creating new jobs.

Companies are focusing on hiring entry and mid-level finance professionals to help build their talent pipeline. With the financial skills shortage to continue, it poses significant challenges for UAE businesses as candidates have options, both within the country and abroad.

Now is a good time for companies to focus on nurturing and investing in their employees’ career development; this will help them build a successful succession plan and give visibility to areas where they need to hire.

“Retention concerns will be high on the agenda for the remainder of the year, especially as companies around the globe continue to increase hiring and struggle to find the requisite talent.

Standard Bank appoints new CFO for offshore business Standard Bank has appointed Jonathan Peake as the new CFO for the Finance and Treasury teams across the group’s Jonathan Peake, CFO, Offshore offshore Business, Standard Bank business in Jersey, Isle of Man and Mauritius.

Mark Hucker, CEO, Standard Bank, Offshore Group, said, “Since joining us Jonathan has made a real difference in the risk role and I have no doubt that he is going to add further value in his new position as CFO. His ability to deal with

complex situations in the challenging environments in which we operate will add significant strength to our leadership team.”

Peake joined Standard Bank from Deutsche Bank International where he where he was head of risk management.

Previously he was with KPMG’s London forensic team where he gained experience of investigating fraud and performing regulatory investigations in the financial services sector.

“Having been with the company for the last two years,” said Peake, “I know that I’m going to be heading up a team of dedicated professionals. This is an exciting time for the Bank with its renewed focus on Africa and the tremendous growth potential and challenges of this incredibly dynamic continent.”

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News

DAFZA, International Centre for Islamic Economy sign MoU

Dr. Mohammed Al Zarooni, Director General, DAFZA; and Dr. Abdulrahman Bin Saleh Al-Atram, President, International Centre of Islamic Economy and Secretary General of the International Islamic Foundation.

As part of its commitment to drive the development of the national economy, the Dubai Airport Freezone Authority (DAFZA) recently signed a strategic memorandum of understanding (MoU) with the International Centre of Islamic Economy (ICIE).

The MoU aims to strengthen their mutual cooperation and make contributions in support of the initiative launched by H.H. Sheikh Mohammed bin Rashid

Al Maktoum, UAE Vice President and Prime Minister and Ruler of Dubai, to make Dubai a capital of the global Islamic economy. Under the agreement, DAFZA will be the headquarters of the ICIE. The move aims to increase joint efforts to develop and promote products and services of the Islamic economy and to help in the development of the international Islamic economy. It is also intended to increase the contribution of the Islamic economy to Dubai’s overall GDP and reflect the ambitious objectives of the ‘Dubai the Capital of Islamic Economy’ initiative.

The partnership was signed at DAFZA by H.E. Dr. Mohammed Al Zarooni, Director General of DAFZA, and His Eminence, Dr. Abdulrahman Bin Saleh Al-Atram, President of the International Centre of Islamic Economy FZE and Secretary General of the International Islamic Foundation for Economics and Finance (IIFEF), in the presence of senior officials and managers from both sides.

Qatar salaries increase despite oil slump The latest report by global management consultancy Hay Group revealed that salaries in Qatar have increased this year despite the steep fall in oil prices.

According to the study salaries across Qatar went up by an average of 4.2 percent in 2015, slightly lower than the 5 percent which was forecast in 2014, before the fall in oil prices.

Inflation rose to 3.5 percent with increases in rent affecting the overall cost of living. As a result, the real growth in employees’ spending power is a negligible 0.7 percent, the report said.

Qatar’s infrastructure development investments in the lead up to 2022 are driving organisations in the banking,

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technology, real estate, construction and FMCG sectors to develop faster than the average of the economy and have awarded above average increases of 4.1 to 4.5 percent. Salaries within some of these sectors tend to be 10 to 20 percent lower than Qatar’s all-industry average.

As such, employees in these sectors are still behind their counterparts in the traditionally higher paying sectors such as oil and gas.

Boeing Capital Corporation appoints new Deputy MD for MEASA region

Ahsen Rajput, Deputy Managing Director for the Middle East, Africa and South Asia region, Boeing Capital Corporation.

Boeing has recently announced the appointment of a new Deputy Managing Director for the Middle East, Africa and South Asia region for Boeing Capital Corporation (BCC), the company’s aircraft financing arm.

Taking on the role is Ahsen Rajput, who will be based in Abu Dhabi and is BCC’s first local hire in the region.

“Boeing has been working closely with the financing sector in the Middle East region for many years to develop increased opportunities for local participation in aircraft financing,” said Jordan Weltman, Vice President and Global Head of Customer Finance, BCC. “Adding Ahsen as our first locallyhired finance director in the Middle East region strengthens our existing relationships and our commitment to the region.”

Rajput has spent seven years working in finance in the Middle East. He was previously the executive director of Aviation and Transport, Export Credit Agency (ECA) and Wholesale Banking at the National Bank of Abu Dhabi.

Prior to that, he was Vice President and Regional Head of the Middle East and North Africa region for Deutsche Bank, London Branch.

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Infographic

WHAT DOES A DIGITALLY TRANSFORMED BUSINESS LOOK LIKE? It’s an organisation, reimagined through digital that is:

TRANSFORMING DIGITAL ENTERPRISE

Engaging talent, organisationwide

Improving process

Driving new business models

MOST EMPLOYEES WANT DIGITAL TRANSFORMATION

91%

BUT ONLY

believe digital technologies have the potential to fundamentally transform the way people in their organisation work.

43%

IT’S NOT JUST MILLENIALS IN THE TECH SECTOR

It crosses age groups

“It is important for me to work for an organisation that is digitally enabled or is a digital leader.”

Respondents who answered “Strongly agree” or “Agree”

85%

And spans all industries

“Digital technologies have the potential to fundamentally transform the way people in our organisation work.”

Respondents who answered “Strongly agree” or “Agree”

100%

83%

are satisfied with their organisation’s current reaction to digital trends.

95% 90% 88% 93% 96% 93% 90% 93% 86% 91% 95%

Telecommunications/communications

80% 81%

79%

Professional Services Manufacturing

76% 72%

IT and Technology Healthcare services Government/Public Sector Financial Services Entertainment, Media and Publishing Energy and Utilities Education

50%

0-21

22 - 27 28-35

36 - 44 45 - 52 53 - 59

Consumer Goods

60+

No sector with fewer than 85%

IT’S NOT JUST MILLENIALS IN THE TECH SECTOR

Respondents rated their organisation on a scale of 1 to 10, based on its degree of digital transformation, defined by: 1) process improvement, 2) talent engagement, and 3) business innovation.

1

Early (1-3)

10

2

3

26%

4

Developing (4-6)

5

6

7

45%

8

Maturing (7-10)

9

10

29%

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Infographic

CHALLENGES VARY DEPENDING ON THE STAGE OF DIGITAL ADOPTION 1 Lack of strategy

1 Too many priorities

1 Too many priorities

2

2

Lack of strategies

2 Security concerns

3

Insufficient tech skills

3 Insufficient tech skills

Too many priorities

of management 3 Lack understanding

Early

Developing

Maturing

AND SO DOES THE LEVEL OF EMPLOYEE SATISFACTION WITH DIGITAL STRATEGY Percentage of respondents satisfied with their company’s reaction to digital trends.

10%

Early

38%

Developing

81%

Maturing

71% of early stage employees are not merely indifferent, they are dissatisfied.

STRATEGY, CULTURE AND LEADERSHIP CAN MAKE DIGITAL TRANSFORMATION HAPPEN STRATEGY Think long term, then work backwards to develop a clear stratgey, focused on transformation.

CULTURE Shift cultural mindsets to increase collaboration and encourage risk-taking.

LEADERSHIP The digital agenda starts from the top, based on possibilities at the intersection of business and technology.

The time is now. Rethink the fundamentals of strategy, culture and leadership to help your organisation transform with digital.

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Interview

Jumeirah Golf Estates

In full swing Jumeirah Golf Estates aims to bring serene sporting luxury to its course members and community residents. However, ensuring things run smoothly requires calculated business decisions from those behind the scenes, including Chief Financial Officer Faheem Ahmad.

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Interview

Murtaza Chevel

“

What excited you about joining Jumeirah Golf Estates, and what is your vision for the firm?

The whole prospect was incredibly exciting. Jumeirah Golf Estates is a high quality development, which is creating vibrant and thriving communities overlooking two golf courses, which play host to the DP World Tour Championship. This shows its level of prestige.

Our aim is to ensure the development is known as the top residential destination in Dubai. Given how successful we’ve been on the real estate side of things plus our strategic location, and with Expo 2020 on the horizon as well as the sound management structure we have here, I believe our success will only continue. We plan to launch more high quality products which will only be a bonus.

How strong is the real estate market today, and are you happy with JGE’s level of occupancies?

In the long-term, our sustainability remains intact. In terms of occupancies, JGE is a growing community. We have more than 700 residences at the moment, and that number is only increasing. Things are going well on the golf side of our business as well. Our courses have 800 members from over 20 countries.

How do you differentiate yourselves in such a competitive space?

As I’ve said, we’re a premium brand with high-quality products. Our communities provide world-class facilities, and are well-located for Al Maktoum International Airport. We’ve recently participated in property shows in London and Kenya, and our portfolio

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was well received in both. Roughly 75 percent of our properties are coursefacing, which is a major selling point.

Amongst our portfolio, we also have 674 affordable apartments and townhouses, which are still equipped with world-class amenities.

Will your focus be always on highend luxury developments? If so, will that focus equal high prices?

Over the last 12 months we’ve seen a greater demand for more affordable homes, so that’s something we’ve begun to cater for. Off the back of that demand we’ve developed 75 three or four bedroom townhouses and 47 five or six bedroom villas.

What is your approach to risk mitigation?

We’re extremely committed to risk mitigation and corporate governance strategies, and for us it’s key in the planning stage. In many senses, planning is especially important in the real estate industry, so effective monitoring allows us to proactively mitigate risk. Our risk mitigation is an entity-wide initiative, so the finance function works closely with our operations teams so we can take collective action on a timely basis. We’ve ensured that our portfolio is diversified so that we have a range of products for the market, which is an important aspect of risk mitigation.

Is the role of the CFO very different in a private company as opposed to a public organisation?

Within the private sector our work is very market-driven, and more about creating added value for business performance. CFOs in the public sector

are expected to be more proactive in terms of policies, procedures and processes.

Do you think the role of CFO is very different today from what it was ten years ago?

It’s often said, but the CFO is now tasked with being a business partner to the CEO as well as a catalyst for the process of change for the organisation as a whole, and not just being an accountant or bookkeeper. This encompasses having exceptional knowledge of the business, as well as strong analytical skills on top of traditional duties.

How does a CFO create value?

The CFO is extremely influential in strategic planning, and knows a company holistically. In some way or another, all other business unit heads are tied up with their own dealings.

Both the CFO and the CEO’s work transcends operations, and both have to fully grasp entity-wide processes, and provide important guidance to them.

As part of this mandate of being in-tune with the business, it’s important to align all areas of the business. The CFO creates value by focusing on business performance monitoring on a timely basis. It’s all an information gathering process, where finance becomes a hub for business data.

What’s the biggest challenge you face in your role?

Financial and accounting knowledge is obviously not straightforward.

Understanding all aspects of a business is not easy, nor is working with senior management figures to deliver connective action. CFOs are expected to be a jack of all trades.

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Special FEATURE

EY

Going digital

Imran A Ali, MENA Assurance Leader, EY, explains why CFOs in MENA should take notice and develop a digital transformation strategy.

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D

igital is fundamentally changing how companies do business in the Middle East. Enabled by data and technology, digital is a continuous form of disruption to business models, products, services and experiences. It has radically changed the way people in the region consume content, communicate and access products and services.

New companies are popping up overnight even as existing companies work to gain the agility to compete in today’s increasingly complex market landscape.

Today’s survivors and tomorrow’s winners understand the opportunities and the risks that digital creates.

They are exploiting the opportunities and managing the risks by making their organisations essentially digital.

No executive should be more concerned about the opportunities and risks digital represents for their business than the CFO. Digital technologies are fertile grounds for innovation, which lead to new products and services, new channels to market, greater efficiency and more effective, measurable marketing spend. As a result, digital is already reshaping many industries, giving the early adopters a clear competitive advantage that can disrupt the industry as a whole, and forcing other players to either follow behind or lose their ability to compete.

Market leaders in industries at the fore of the digital revolution, such as media and entertainment and technology, have learned that digital is not something they needed to adopt at a point in time. It is a continuous reinvention of how they link with customers, consumers and employees to create different ways of working.

Other industries are still on the cusp of their digital transformation. For example, the healthcare and pharmaceutical industry is starting to use digital technology to shift its focus from selling medication, to selling health outcomes.

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In a few years’ time, wrist watches may stream data about blood pressure and other vital health measures to the cloud.

Digital can also disrupt the competitive landscape by levelling playing fields, giving small start-up companies or nontraditional competitors the same level of market access as an established company.

Organisations that were once on the periphery of your industry can suddenly become a real threat to the core of your business, thanks to innovative use of digital technology.

Digital is not a technology or marketing issue and therefore cannot be thought of in isolation. It is changing how business is done, and will be one of the defining characteristics of this era.

For CFOs, it presents massive opportunities to create shareholder value and grow the business as well as new and unforeseen risks that can put a company’s finances, brand and reputation in harm’s way.

We have seen the CFO’s role expanded from its core focus on controls, budgeting and reporting to a broad leadership role responsible for charting the company’s growth agenda while protecting the organisation from risk. In fulfilling this role, CFOs will increasingly need to understand the power of digital to support them, while also understanding the associated risks.

Take digital out of the silos For many CFOs in the Middle East, the term digital evokes technology channels and tools such as social media, cloud and mobility. But leading CFOs understand that digital represents an ever-broadening field.

Areas where digital is already having a major impact in many industries include business strategy and operating models, product and service innovation, supply chain efficiency and flexibility, tax and legal compliance, and customer targeting and experience. For example, in the luxury

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industry, the customer has historically derived brand value from the service they receive when they enter a shop or showroom. The ability to purchase or share high-end goods online alters this brand experience.

When embraced at the heart of a business, digital can redefine the entire value chain. It serves as a powerful tool for achieving a company’s strategy and influences what that strategy should be.

Get the balance between innovation and risk management To seize the potential of digital, CFOs need to work closely with functions across the enterprise. Collaborating with others will help CFOs understand how the technological landscape is evolving and what the functional needs are so that they can make the right investments to encourage and enable innovation and support the business’ growth.

One of the greatest risks associated with digital is being surpassed by the competition through a lack of innovation or inaction. But there are other risks associated with digital that CFOs need to manage proactively – such as reputational risks associated with data usage and cybersecurity, or tax obligations relating to e-commerce.

CFOs need to implement the right governance framework and safeguards to manage these risks and sustain business continuity.

Tap into expertise of “digital natives” To embrace digital’s potential for the business, CFOs need to consider that they may have skill and knowledge gaps to address. The key to bridging this gap will be to work closely with the Chief Information Officer (CIO) and the Chief Marketing Officer (CMO), who are likely to be closer to both market trends and technological innovations.

CFOs should also be rethinking what

skills are lacking within their finance function, as well as those gaps that will emerge as digital becomes more pervasive.

CFOs need to look across the organisation and recruit digital natives, those who know how to use and apply technology and data to solve problems quickly.

CIOs and CMOs historically have had digital natives on their teams, but the finance function has not. As demand for these skills grows across all industries, and all parts of the business, a war for digital talent is now on.

Much of the innovation and growth is being driven by those who didn’t grow up in legacy companies, but who have grown up in a digital world.

Finding the right talent to meet your business needs a strategic plan that maps your workforce against your business strategy.

In five years’ time, digital will be a standard way of doing business. CFOs need to prepare today’s finance function to meet the business needs of tomorrow.

Take a holistic view Whether they have chosen to embrace it or not, no company today is untouched by digital, perhaps only because their employees and customers are talking about them on social media. But in most companies that have stayed at the periphery of digital change, the CFO will likely find that there is digital spend happening in pockets across the organisation.

Companies are diverting more money to digital advertising, IT development or consulting with third parties on social media. The CFO should have both a clear view of exactly what is being spent on digital, and the value that is being generated. They often have neither.

For many companies, digital is already a standard way of doing business. In less than five years, it will be every business’ standard.

And nobody wants to fall behind.

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FEATURE

VAT

VAT out the bag The vast drop in the oil price has convinced the GCC’s leaders of the need for value-added tax. The UAE, one of the Middle East’s main hubs, looks certain to welcome VAT in 2016, but how will CFOs and consumer spending be affected?

F

or the shopping aficionados among us, it couldn’t last forever. The introduction of value-added and new corporate taxes across the GCC were arguably inevitable, and promise a degree of change for the region’s finances.

Although the two are not totally entwined, the collapse of the oil price to less than $50 per barrel has been undeniably influential in the suggested introduction of VAT. GCC countries, encouraged by the International Monetary Fund (IMF) and motivated by their own long-term national interests to diversify their economies, have been reliant on oil for decades.

With over 130 countries having implemented VAT or goods and services tax laws, the systems are some of the most widely-used indirect tax systems in existence. The drop in oil prices has made VAT an attractive solution for the UAE, with its implementation arguably overdue. The six countries comprising the GCC have studied the introduction of VAT for years, but have always failed to reach agreement on details, halting progress. However, at least in the UAE, the tax now looks certain to be introduced. The country is facing its first budget deficit – the IMF forecasted a 2.3 percent shortfall for 2015 – since 2009, and change is in vogue. Time is on the region’s side, with an 18-month adjustment period on the cards once laws are officially announced.

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FEATURE

VAT

On the back of these upcoming changes, the GCC’s Chief Financial Officers will be keeping a watchful eye on how their organisations will be impacted. Although consumer spending may not take a direct hit, the impact will be felt in other areas.

One challenge that will certainly require creative solutions on behalf of CFOs is sourcing of the right talent to solve VAT issues. With the region facing a relative shortfall in terms of finance resources, finding personnel with the relevant levels of expertise in tackling VAT processes and compliance will be key. Further, the CFO will have to oversee these processes. While finance leaders of international banks and oil and gas firms will be all too aware of corporate taxes that already exist on such organisations, these could also soon impact other sectors as a knock-on effect of VAT. Nilesh Ashar, Partner and Head of Tax, KPMG UAE, acknowledges that although certain measures may be premature as legislation has not yet been introduced, it is nonetheless prudent to consider potential outcomes. “It is difficult to suggest that anyone should make radical changes to their systems and business models in response to an unpublished law,” he says.

“However, CFOs could start to assess the impact on their pricing models and cost base using a

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hypothetical scenario of a VAT levy at or around 5 percent, the rate suggested by IMF. Moreover, the cost of implementing systems to comply with tax reporting and filings will result in overall increase in the cost base for UAE businesses.”

Sherif El-Kilany, MENA Tax Leader, EY, does not anticipate a huge impact on bottom lines, but is mindful of contractual issues that could cause problems for CFOs. “The tax cost impact to most trading operating companies is likely to be minimal,” he says.

“However, CFOs need to understand the likely impact of VAT on the company’s contractual trading terms relating to both sales and expenses, and take appropriate action for VAT tax laws and compliance requirements.” El-Kilany goes on to add that potential procedural issues will also need to be taken into account.

“The company’s financial systems and processes will also need to be adapted to ensure efficient, timely and accurate VAT compliance. Businesses should not underestimate the costs of implementing IT process to deal with VAT billing and accounting, and also the initial VAT training and compliance costs.”

Although it may not have been a pressing need for GCC countries, many will say that the introduction of VAT until late 2015 is belated. Although its effects will not be earth-shattering, those adopting VAT policies will be forced to adapt to the changes, which may cause temporary operational disruption for businesses.

“There is a school of thought that VAT should have already been introduced on a gradual basis - at lower rates and higher thresholds - even if the government did not need or seek to rely on tax-related revenues,” Ashar says. “This is so they could have set up tax administration, and ensure that businesses and individuals were accustomed to VAT laws, so that

the coverage could be expanded and rates increased if required based on the economic demands of the country.”

El-Kilany meanwhile, believes that a desire to avoid fuelling the fires of political and economic instability served as an inhibitor for change. “In reality, markets in the GCC have been faced with challenges arising from the global financial crisis and the Arab Spring,” he says. “They prompted governments to delay measures that could have been perceived as adding to inflationary pressures in the region.”

However, it is widely felt that for VAT to be introduced, policies will have to be introduced across the GCC to sustain competition between economies. The region holds many unique advantages that should ensure consumer spending is not too heavily affected, the UAE an especially attractive prospect. Its free trade zones, political stability and status as a hub for the Middle East should ensure that VAT will be relatively covert, and Ashar is confident there will be minimal disruption. “In the current business environment, companies are looking for a lot more than tax-free status,” he says. “As long as tax rates are competitive, the tax rules and the audit process is transparent and fair, and key sectors and essential goods and services are provided complete or with partial relief through tax incentives, the UAE will continue to attract businesses and end customers. Keeping these zones exempt from VAT would be a good way of ensuring that interest in the business community in the UAE stays high.”

This optimistic outlook is shared

by El-Kilany. “VAT is likely to make a substantial contribution to UAE’s revenue base, with significant tax collections reducing the country’s dependence on revenues from petroleum exports,” he says. “Overall, it will strengthen the country’s economy and financial stability.”

opinion

PWC

Standard

addition With SOCPA’s deadline of 2017 looming, companies are starting to realise the implications of adopting the requirements of International Financial Reporting Standards (IFRS). Many are actually finding the effects to be broad-ranging and significant in practice whilst others indicate that they think it will have less of an impact.

B

Gavin Steel, Partner, Capital Markets and Accounting Advisory Services - ME

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road-ranging impact The impact of IFRS on the structure of the balance sheet and reported results have a direct impact on credit ratings, analysts assessments, borrowing costs and dividend payment policies. All of these affect the performance of shares on the exchange. It is considered that the application of IFRS has a more far-reaching reaching impact than just affecting the accounting entries, which requires careful management of stakeholders. IFRS affects financial results and changes the shape of the balance sheet. It can affect key performance indicators against which the management are assessed and can change liquidity ratios, impacting the cost of debt for entities. Anticipating these changes in advance of the adoption date allows entities to manage the impact of IFRS and potentially make changes in advance to negate any detrimental effects.

Valuation opportunities Omar Al Sagga, Deputy Country Leader, PwC Saudi Arabia, confirms that IFRS poses a significant challenge to companies but adoption and transition rules also present significant opportunities. “The adoption of IFRS in Saudi Arabia is presenting listed entities with an opportunity to give a more accurate value to property and other assets from the adoption date,” he says. “Previously, under SOCPA, companies had to recognise such assets at their historic cost. The adoption of IFRS allows entities to demonstrate a more current financial position and potentially create distributable reserves that otherwise would not exist.” PwC is seeing entities engage with its valuation experts as a result. Companies are taking advantage of the adoption rules to create additional value in the

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balance sheet that was not previously recognised.

Streamlining and saving costs In addition to valuation opportunities, streamlined processes and reporting can also be introduced, saving costs and improving the accuracy and speed of the financial reporting processes, giving management better information for decisionmaking purposes. Al Sagga indicates that entities are seeing that the adoption of IFRS enables complex groups to standardise both policies and procedures across operations, including those of internationally located subsidiaries where IFRS is often an allowed reporting framework. IFRS is being seen as a conduit for not only improving the quality of financial reporting but also as a tool for saving costs and improving performance.

Challenges However, it’s not all roses in the garden. IFRS is also placing a heavy burden on entities in terms of the required amendments to systems and processes. Al Sagga indicates that organisations are finding themselves having to re-engineer reporting systems to capture and report the data required by IFRS for disclosure purposes. IFRS also contains distinct rules on what costs can be recognised in the balance sheet when constructing assets or raising finance and which have to be expensed. IFRS requires that general overheads should be expensed and only certain direct costs of raising finance can be carried forward in the balance sheet. Entities are finding that not only do allocation processes need to be changed - which can be

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“A well-timed and thoroughly executed conversion programme that addresses the broader issues of adopting IFRS is essential; it can help a company identify the issues and mitigating solutions in advance, ensuring management can focus on what they do best - running the business.” both costly and time consuming but also IFRS is forcing costs to be recognised in the income statement, placing downward pressure on reported results in some situations.

Gavin Steel, Partner and Head of Coversion Services, PwC Middle East indicates that “a well-timed and thoroughly executed conversion programme that addresses the broader issues of adopting IFRS is essential; it can help a company identify the issues and mitigating solutions in advance, ensuring management can focus on what they do best - running the business. As companies get closer to the official adoption date of 1st January 2016, further attention is expected on the implications of IFRS across reported results, systems, people and stakeholders. It is becoming a key focus of the finance community in Saudi Arabia. The changes to reported results might affect Zakat tax and we expect that a number of companies will need to engage directly with the authorities and their advisers to understand the implications on amounts due, and how they will be recorded and disclosed in financial statements”.

Steel also indicates that some companies may take relief from the fact that the changes to revenue recognition are being

delayed to 2018. However, companies that strictly follow the applicable standards as issued by the regulators will then have to implement changes in 2017 and immediately amend policies in 2018 when the requirements of both IFRS 15 and IFRS 9 are applicable. Steel feels that companies will need to consider these standards carefully to assess whether they may want to adopt these standards earlier as they may bring improved financial reporting whilst also avoiding a second wave of change in 2018.

Adopting these new standards in 2017 may save effort in the longer term, but their implementation can be a significant exercise as they often affect systems and processes.

Consequently, Consequently, fully complying to the requirements of these standards in 2017 may actually be a challenge, and the strategy adopted by companies will result in a balancing act between the available time to implement and the effort required to do so.

Companies will be reporting their first IFRS-compliant balance sheet as of 31st December this year. It is yet to be seen what the expected results of the transition to IFRS will be, but PwC indicated that they believe the outcome of the adoption will be surprising for a lot of entities.

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FEATURE

internal auditing

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Paid dues How can the internal audit function raise its profile across the enterprise?

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A

lthough a vitally important function for any business, the role of internal audit is often not paid its fair dues by senior management figures. An eye for risk and an eagerness for efficient compliance are hard to put a price on, yet, for many, they consider the role as one that can be easily outsourced and not given as much emphasis.

Much like the role of the CFO, the purpose served by internal audit has evolved, and now encompasses a broader scope of work. Against this backdrop, it is essential for businesses to have a clear idea of exactly what they need from the function. “Modern internal audit has moved beyond auditing only finance and a box-ticking approach,�

Abdulqader Obaid Ali, President, UAE Internal Auditors Association, says. “Anything that a corporation does can be audited. Internal audit needs to provide assurances that key risks are being appropriately managed.

This includes strategic, technology, financial reporting, operations and compliance risks. In addition to this assurance role, internal auditing can be used to promote positive change through consulting activities such as facilitating risk assessments, promoting control self-assessments, reviewing key policies, supporting change programmes or system implementation, or giving training to management on governance, risk

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FEATURE

internal auditing

“Anything that a corporation does can be audited. Internal audit needs to provide assurances that key risks are being appropriately managed. This includes strategic, technology, financial reporting, operations and compliance risks.”

Abdulqader Obaid Ali, President, UAE Internal Auditors Association

management and internal control related topics.”

While the role of internal audit has changed, that is not to say it has been negated. Although lines of reporting may have evolved, the function still has the ability to retain vital holistic and critical perspectives on an organisation. “The genesis of IA function was to support CFO in ensuring compliance with organisational policies, procedures and delegation of authority,” says Avinash Totade, Senior Vice President, Internal Audit, Emirates Global Aluminum.

“However, that was a century ago. The function and the concepts of corporate governance moved on. Today, the IA function reports to the audit and risk committee and not to CFO or CEO. IA has a global view of the organisation.

It is staffed with expertise ranging from finance to IT and operations to engineering. The CFO should take a lead role amongst other executives to realise the true potential of the IA function.”

Internal auditors will rightly argue that their role is crucial to an organisation, but many senior management teams may not deem the function as business-critical. Ali feels the role of internal audit is necessary,

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but requires organisations to make key decisions. “Having an internal audit function is a sign of corporate maturity,” he says. “Internal audit is not a luxury for any corporation; it is as necessary as operations, finance, HR or any other core business function. In the UAE, you very rarely find a major corporation, whether private or public, that does not have an internal audit function. The real question directors need to ask themselves is ‘do we need an in-house internal audit team or do we need to outsource it?’”

So, what can be done to ensure the function gains greater appreciation?

As with any department, product or service, justifying worth is always easier with quantifiable results. In the case of internal audit, it is a case of ‘policing the police’, and Ali believes that relevant assessments are needed to ensure internal audit meets its KPIs and gets the exposure it deserves. “The best approach - which is a requirement in complying with international internal audit standards - is to have an independent party conduct an external quality assessment,” he says.

“In such an assessment, the qualified assessor will analyse the mandate of the department, its independence, methodology, the department’s

working papers and the qualifications of the team to determine whether the function adds value and complies with international standards. The UAE Internal Auditors Association has conducted numerous external quality assessments across the country.”

One potential solution in boosting the role of internal audit is to give the function a position in the boardroom.

Although one could argue that a range of sub-divisions would subsequently also demand a seat at the top table, Totade believes the move would add increasing legitimacy to the division and help to reduce the reputation of IA. “In order to guarantee IA’s independence, it does not have any management responsibility,” he says.

“This independence is construed by some CEOs and CFOs that the function does not add value to the entity. This may be the reason why some organisations do not see the importance of this function. The audit and risk committee must ensure that the chief audit executive (CAE) is positioned in the executive grade of the organisation. They should be given an appropriate title - CAE , senior vice president or chief internal auditor.”

The CFO’s collaboration with internal auditors is pivotal in a number of key decisions. Internal auditors need to act as key advisers, who meet frequently with the CFO to offer impartial advice, and be able to share concerns regarding any risks, and particularly those surrounding topics such as hedging and treasury management.

These discussions should also reflect on an organisation’s effectiveness and potential at combatting these risks.

Independent reviews of investment and credit policies are needed between the CFO and internal auditor, so as to ensure things are as shored up as possible before being approved by executive management teams.

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Interview Interview

Paresh Khushal

Empowering knowledge The CFO ME caught up with Paresh Khushal, Head of Finance, IP & Science, Legal, and Tax and Accounting, Thomson Reuters, to discuss his professional journey and how the company aims to help organisations in the region adapt to the knowledge economy.

W

hat attracted you to the finance industry?

It started with a desire to gain strong business qualifications and experience. I figured that a chartered accountant qualification would help me achieve this. So, I underwent an ICAEW (Institute of Chartered Accountants in England & Wales) training with Ernst & Young which laid the foundations I was looking for.

Later in my career, I undertook further training, including an advanced management course at IE Business School in Madrid. The course was targeted at post-MBA and more senior professionals.

Interestingly, the course content - corporate finance and analysis reminded me of what I studied for the ACA qualification. So, I believe that my training under ICAEW has really primed me in becoming a more capable business and finance professional.

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Can you give us an overview of your career?

I started my career at EY as an auditor in the UK in 1993. After four years, I wanted to exchange the professional world for a role in industry. Having had mainly media clients in audit, this led me to work with Disney.

I joined the Disney home entertainment division at an interesting point in its European business, when VHS was about to be replaced by DVD. I was involved in planning for the European rollout of the DVD format, quite a big - and ultimately lucrative - change for the company at the time.

After three years of working with Disney, I took some time off to travel.

My next career venture upon my return was still in the media industry.

I worked with Universal Music as a senior finance controller for two years before moving on to work with Liberty Global, a telecommunications

and cable television company, as a senior finance manager.

Whilst at Liberty Global, I relocated with the company to Madrid to take a Deputy CFO role at the content division there. My first experience as an expat was interesting as you definitely need to be proficient in Spanish to get by there, in the office and in life. I already spoke some as as result of my travels in Latin America, but the learning curve still made for an interesting challenge.

After three-and-a-half years with Liberty Global in Spain, I came to Dubai and took on the role of head of finance here at Thomson Reuters, where I handle the IP and Science, Legal, and Tax and Accounting divisions.

I am pleased with the overall progression of my career, as I was able to start at the foundational level of ‘nuts & bolts’ accounting positions in the beginning to then evolve into more strategic and commercial roles later on.

For most of your career you have worked in the UK and Spain. In your opinion how is the financial landscape in the UAE different from these countries?

The financial infrastructure and working culture in the UAE are somewhat similar with that of the UK. At least for me, in a multinational company, the pace and demands of work in the financial landscape in these two countries are very alike.

In my experience, I found the office culture in the UAE to be more progressive than what I encountered in Spain. There is a very definite willingness to learn, to develop,

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and to try to do things better. In contrast, I met with more resistance to change in Spain.

What was the biggest highlight of your career?

The biggest highlight of my career was working in corporate development at Liberty Global, overseeing two key M&A deals in the content division. I led the due diligence team, and project managed a complex technical integration. It is no coincidence that the biggest learning curves are where you grow the most and, ultimately, find the most rewarding.

Can you tell us more about the divisions you head at Thomson Reuters, and the role you play in operations?

Thomson Reuters is in the business of selling knowhow, tools and solutions to support professionals in the knowledge economy.

Our aim is to help other professionals do their jobs better.

This region’s governments are hoping to develop a nascent knowledge economy to help their countries, people strive for a better life and this is something Thomson Reuters can help with. Particularly in the Gulf region, and in light of low oil prices, it is an even greater imperative to help governments to diversify and turn their attention from ‘black gold’ (oil) to ‘grey matter’ (knowledge). If executed successfully, this should

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lead to stronger, more sustainable economies. We can arm governments and the wider economy with the appropriate data, tools and solutions to reach this goal.

As for my role in the company, I am the finance lead for three divisions operating in this region, which are IP and Science, Legal, and Tax & Accounting. As the Head of Finance, I am effectively the right-hand commercial man to the managing directors of these segments, whilst maintaining my responsibilities to safeguard assets, stay compliant to procedures, and to report to the Thomson Reuters head office in the US. Being in the business of selling know-how, what are challenges that you face?

The recent downturn in oil prices imposes a real challenge for several economies in the region.

Another challenge is competition – compared to just a few years ago, it has greatly increased in the region.

What is your professional philosophy?

Focus on strong collaboration and communication. Gone are the days when the finance guys were locked in a room, buried in balance sheets and calculators. Modern day finance professionals are now business partners. These days, they need to interact more with customers, employees, and other key stakeholders to be able to do their job properly.

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FEATURE

Islamic finance

The rise of Islamic finance As the UAE advances in its initiative to becoming the global capital for Islamic finance, are finance and business professionals ready to progress their business growth through harnessing the potentials of this budding industry?

T

he UAE is aiming to become a global hub for the Islamic economy by 2020. In fact, a new report by Thomson Reuters and Dubai authorities point out that the country already has the second most developed Islamic economy ecosystem following Malaysia.

Moreover, conclusions of the recently held Global Islamic Economy Summit held in Dubai, underlined that the Islamic finance industry is heading to an upward trajectory, with projections of the market size reaching $3.25 trillion by 2020.

Given the statistics, it is becoming clear that the emirate is moving in the right direction with this initiative. With all the great potential of the Islamic finance industry, what exactly does this mean for the business landscape?

“We believe that Islamic finance can continue to scale up rapidly even in tough economic climates,” says Muzammil Kasbati, Director, Global Islamic Banking Centre of Excellence, EY. “According to EY’s World Islamic Banking Competitive Report 2014-15, the global profit pool of Islamic banks is set to triple over the next five years and for the first time, the combined profit of the

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FEATURE

Islamic finance

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$3.23

trillion

Islamic banks crossed the $10 billion mark in 2013. By 2019, it is expected that collective profits will touch $37 billion as the industry continues its double-digit annual growth.”

According to the World Bank, the swelling Islamic finance industry is driven by the fast-expanding Muslim population and growing wealth in Muslim-populated regions has spearheaded the sharia-compliant products and services. In addition, the expenditure of Muslim consumers on such industries and services was worth $1.62 trillion in 2012 and this is expected to increase to $2.47 trillion by 2018.

Speaking at the MECA Strategy Summit, Mutjaba Naseem, Deputy CEO and CFO, aafaq, highlighted that the sharia discipline is gaining an extensive reach in various markets such as the GCC, Asia-Pacific and Africa. “This sector has come a long way since the financial downturn and last year it has shown tremendous growth. We see Islamic finance positively impacting sectors such as banking and finance, food and beverage, travel, pharmaceuticals, real estate and other professional services sectors,” says Naseem.

As with any other growing financial discipline, the Islamic finance industry faces a number of challenges.

Naseem shares that bottlenecks within the industry differ from one market to another. “Since the industry is currently facing unprecedented growth and is expected to progress more in the next five years, the biggest challenge could be on how we can mitigate or standardise practices,” he added.

projected market size for the Islamic finance industry

Source: Thomson Reuters

Meanwhile, Kasbati highlights that some of the hurdles that the industry face are because of the misconceptions surrounding it. The most common misconception being that it is for people with Islamic faith, another is that it is often viewed as a replica of conventional banking, and lastly, people misconstrue Islamic finance as being based on primitive methods of banking and financing.

For businesses, individuals and financial institutions, operating based on Islamic finance virtues can be beneficial. Adopting business practices following this discipline can help organisations harness stakeholder partnerships that follow ethical and fair activities.

This then can result in business relationships that are built on mutual interest, trust and cooperation, which can ensure ethical profit creation and investments.

With collaborative efforts from government entities, financial institutions, and other organisations, awareness regarding the potentials of Islamic finance for businesses has increased.

According to Kasbati, the widespread cognizance about the discipline has definitely driven the

increase in the number of practitioners involved in Islamic finance. However, the progression in Islamic finance has outpaced the tantamount growth in the workforce leading to several imminent challenges which need to be addressed.

“These challenges include building the capacity and knowledge of finance professionals in the industry,” he says.

“Investing in the future of developing talent and expertise will be the deciding factor in building an effective, resilient and competitive Islamic finance industry.

“Another is designing innovative financial products for flexibility,” Kasbati says. “Senior leadership teams should take the onus to exert substantial energy in the exploration and design of new, more innovative financial products and transactions that enable the disaggregation and repackaging of risks related to Islamic finance. Sharia advisers should work more closely with bankers and legal and accounting practitioners to understand the permissibility of a given product. To facilitate sustained growth, CFOs and finance leaders should invest significant efforts in bringing together scholars with an objective to alleviate the differences on interpretation of sharia principles amongst different schools of thought, keeping in view the current advancement and future needs of the sector.”

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Survey

Epicor

Shades of leadership

New research commissioned by Epicor Software unveils the working behaviour of CFOs.

A

lthough cost management denotes the need to plan and control the financial lifecycle of a firm, and while it may sometimes even involve cost reduction, this is not its only purpose. Cost management can also be functional in strategically advancing the position of an organisation in the market.

CFOs take different approaches in order to cope with the today’s disruptive digital environment. To understand these working styles in an attempt to establish the most profitable approach, Epicor Software, in conjunction with Redshift Research, commissioned research that questioned around 1,500

34

financial decision makers about how they make decisions.

The research revealed six prevalent CFO working styles and, in a world where CFOs often have ownership of IT decisions, business systems and processes, it also revealed how these different styles can affect broader business functions, as well as business performance. Today’s financial decision-makers have been categorised as politicians (27 percent), revolutionaries (20 percent), carers (18 percent), conductors (17 percent), traditionalists (9 percent) and visionaries (9 percent), based on their answers to a series of questions.

The traditionalist CFOs are stereotypically strict in their approach and are often resistant to change. They are rigid in terms of processes - whether that be IT investment, financial procedures or business systems. This naturally affects the organisation as a whole, particularly its ability to be agile and responsive. Perhaps due to their rigidity, the traditionalist CFOs showed lower profit growth.

Conversely, it was the revolutionaries that were most likely to experience a profit increase. Unlike traditionalists, these CFOs are happy to think ‘outside the box’ and will consider changing corporate culture to improve business processes.

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Dr. Dimitrios Tsivrikos, Division of Psychology and Language Sciences, University College London, commented on the research, “Psychological research has previously linked the personality traits and leadership style of business leaders to business growth, profit and change. Therefore, it is vital that we understand the different styles of leadership that CFOs exhibit, in order to provide insight into how they can alter their behaviour, so that they can increase business growth and innovative change.”

This brief delves into the six different CFO working styles in more detail. The research analyses the way they deal with decision-making and technology in order to assess what these CFOs bring to their respective businesses.

Contrary to common opinion, today, the traditional stereotype of a strict, number-crunching, methodical CFO could be detrimental for profit growth.

It is imperative that CFOs embrace change and uncertainty and ensure that governance and compliance is not restricting their business from being agile and competitive.

The traditionalist These CFOs prefer to work within existing systems and prefer not to be influenced by reputation and personalities when making decisions. It is difficult to build strong inter-personal relationships with them. Traditionalists are more likely to think objectively and ignore politics and personalities.

They are strong when working within existing agreed systems and processes but can be bureaucratic and resistant to change. They can grasp opportunities and drive agendas forward energetically when they need to but they are often efficient administrators rather than reforming strategists.

The traditionalist is less likely to experience profit increases than their

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Traditionalist experiences of profit growth

peers (56 percent versus the average of 64 percent).

During research, these CFOs were less likely to use management accounting techniques than their peers, 28 percent use these techniques to a fair extent versus 39 percent of their peers. This could demonstrate a lower level of strategic influence in the business, compared with other CFOs. Despite being less likely than any of their peers to believe that their IT systems allow them to do a lot more than before (9 percent versus 23 percent of their peers), they are also the least likely to acknowledge any need to change their IT systems (only 14 percent believe their systems should be updated, compared to the average of 32 percent).

Dr. Tsivrikos says of the traditionalist working style, “Previous studies have related this traditional leadership style to personality traits such as a high need to achieve and a high need for compliance. This desire for control leads to a top-down decision-making process, in which the leaders initiate all

decisions before passing them down the hierarchy to be implemented by other employees. This has implications for business change and innovation; new ideas that are suggested by employees are not likely to be taken on board in top-down decision-making.”

He continues, “The preference for traditional CFOs to work within existing systems and disregard the need for change stems from a lack of flexibility. One study has shown that flexibility, defined as the ‘ability to change and adapt to a challenging environment’, plays a major role in the innovation process. Taking on new perspectives and being open to novel ways of doing things, allows a person to find optimal and creative solutions to problems, which it turn fosters innovation.”

The revolutionary The opposite of the traditionalist in terms of working style, revolutionaries are charismatic by nature and not afraid to think outside the box – they are happy to consider changing

35

Survey

Epicor

inadequate. Individuals who take on this style of leadership are forward-thinking and hence keen to explore new systems that will help them to achieve their goals.

Ultimately, this less rigid approach leads to business success, as can be seen by the fact that revolutionary leaders are more likely to experience profit growth, when compared to their peers.”

corporate culture and structures if the need arises. They take a less structured approach and often work outside of formal systems and processes, taking risks where necessary.

A revolutionary CFO gets things done and drives the agenda forward and they like to set tough and challenging goals.

They will not let things drift or suffer undue delay and are not afraid to take difficult decisions.

The revolutionary is the most likely to experience a profit increase than their peers (72 percent versus 64 percent average).

A risk taker by nature, they sometimes get things wrong. One in two revolutionaries are likely to take decisions based on instinct and experience to compensate for a lack of empirical data (58 percent versus 46 percent on average), so they can sometimes miss details.

The survey reveals that they are demanding – they are more critical of the IT that supports finance than any others – 48 per cent think the IT support they get is inadequate – a sentiment shared by only 36 percent of their peers.

They may be very demanding and sometimes fail to consult colleagues and build a consensus for their

36

decisions. Their instinct to act alone (only 15 percent prioritise “working across departments and functions within the business” compared to 22 percent on average), causes them to deprioritise such issues as cross functional dialogue and collaboration.

Dr. Tsivrikos says of the revolutionary working style, “This form of leadership, in which individuals exhibit a high willingness to adapt to change and adopt new systems, has been characterised by psychologists as a form of ‘transformational leadership’.

Transformational leadership is made up of behavioural components such as inspirational motivation, in which the leader articulates visions and goals, and intellectual stimulation, in which creativity and innovation is encouraged.

This form of leadership, embraced by revolutionaries, has been found to promote organisation innovation and employee empowerment.”

He explains, “As a result of their tendency to set high targets, revolutionary CFOs are likely to be critical of any current systems or processes that hinder their path to success. This accounts for the finding that almost half of the revolutionary leaders believe the current IT support they receive is

The politician The politician is the most popular CFO working style – with over a quarter (27 percent) of CFOs falling into this category. The politician is a more cautious leader with a methodical, team- based approach. They like to consult widely with staff on important decisions and are more inclined to delay a decision than risk mistakes.

They are skilled at consensus building and ensuring staff are “on-board” with important decisions. Their natural caution means that their plans are usually well thought through.

They are more likely than average to believe that collaboration is a key challenge that needs addressing (27 percent compared to 22 percent overall).

Their consensus-building approach and attention to detail could lead to delays in decision-making processes, or in the worst cases result in no decision being made. Hesitating or avoiding key decisions due to a lack of consensus or because of missing facts could lead to missed opportunity and almost certainly reduce a business’s ability to change quickly.

Dr. Tsivrikos says, “Research has found that a participative leadership style, in which the leader consults their team before making key decisions, is related to team reflection.

Through involving other staff in their decision making process, leaders who use a team-based approach were found to have a high capability for communication.”

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FEATURE

Trade credit management

To the credit of your business Gregory Le Henand, Country Manager, GCC Countries, Coface, discusses the growing importance of trade credit management.

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T

he accounts receivable of an organisation is one of the primary assets of any business. This provides the necessary cash flow to keep the blood of the business flowing.

In every transaction, there is a chance that the account may not be paid on time. This is true for companies that are in the B2B segment; especially those who are in the exporting business. A lot of factors can contribute to a company incurring a loss from a bad debt. An example of which is delayed payments, because the longer a debt remains outstanding, the likelihood of it never being paid increases.

In the ever-changing and aggressive business environment, providing credit

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to customers provides a more attractive proposition than demanding advance payment, however, doing so presents business risks as well. In fact, the Organisation for Economic Cooperation and Development (OECD) cited that around 25 percent of its member businesses head towards failure as a result of payment defaults by customers.

For firms that would like to minimise and even remove the possibility of this happening to their business, setting up a quality finance and credit management methods for your business is key. Having a good trade credit management in place can be instrumental to maintaining and improving your cash flow. If planned and executed properly, it can also support

and enhance business profitability as it can reduce the occurrence of overdue accounts and bad debts.

According to the International Credit Insurance and Surety Association (ICISA), there is no exact denotation as to what credit management procedures should entail. However, the practice is often characterised as assuring that buyers pay on time, credit costs are kept low, and poor debts are managed while ensuring that good internal procedures, quality documentation and swift, decisive action are taken. It should also safeguard the relationship between the organisation and the customer.

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FEATURE

Trade credit management

EXPERT SPEAK

Companies often struggle to obtain financial information from their customers or potential customers directly. Consequently, choosing new trading partners, while expanding to new territories, becomes a risky challenge.

In this context, associating with a trade credit information specialist has become essential.

Businesses get significant benefits from having access to quality market information, through which they can get a chance to screen their prospects, adjust customer credit lines and focus their sales on reliable prospects. This can help businesses achieve a sustainable growth, and accelerate their pace of development.

Credit management solutions are quickly becoming a necessary ingredient in long-term business development. This is because it can improve the turnaround times of customers’ purchase orders, and enable companies to offer credit payment terms that can build strong competitive advantages.

Choose a fitting credit management solutions provider For businesses who does not have their own internal credit management policies, securing services from organisations’ trade credit insurance companies is practical. Partnering with the right firm to handle your credit management has a number of benefits for your business; the ultimate goal is building a profitable customer base. To ensure a healthy and sustainable business, companies need to ensure that they have a strong portfolio of customers with whom they foresee growth and development opportunities. To build this, companies need to know their trading partners well, and access information

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“Credit management solutions are quickly becoming a necessary ingredient in longterm business development. This is because they can improve the turnaround times of customers’ purchase orders, and enable companies to offer credit payment terms that can build strong competitive advantages.”

Gregory Le Henand, Country Manager, GCC Countries, Coface

on their buyers to assess risk being taken on them.

Looking for a provider who has an in-depth knowledge of local markets and debtors, and the resources to closely monitor their development and act swiftly when incidents materialise is important.

One of the major challenges of small businesses in the region is access to finance. Surveys conducted by free zones and specifically the one by DMCC in 2013 found that 45 percent of companies need funding for additional growth. However, in the global financial crisis era, as the availability of credit remains tight, companies are resorting to insuring trade deals to secure funding.

More risk-averse banks are less willing to lend to traders if credit guarantees are not in place.

A World Bank/Union Arab Banks study, which examined the levels of bank lending to businesses in the Middle East, found that the share of loans being granted to small businesses are just at two percent in the GCC, with the positive exception of the UAE which is at four percent. This is well far from the level of lending in the MENA region which is 7.6 percent and substantially much lower than the level in non-GCC countries in MENA region which report a level of 13 percent.

Companies, therefore, may benefit if backed by credit insurance solutions which lower borrowing costs by up to 20 percent of trade finance facilities obtained from commercial banks.

Avoiding devastating losses - lastly, companies can be protected from customer payment default by using trade credit management solutions.

Credit management agencies can provide consultancies and other systems of prevention, which can assist businesses prevent future losses due to buyer default.

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opinion

Martin Bradley

Financial reporting: Just who is accountable?

Seasoned Chief Financial Officer Martin Bradley discusses the pitfalls of weak processes surrounding automated financial systems.

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T

he changing face of the financial system has allowed businesses to streamline their financial departments, achieve greater reporting accuracy and have online information at the touch of a button. However, these benefits come at a cost - the dumbing down of the accountant.

Financial systems such as Oracle and SAP are powerful tools. Their internal automation ensures that less time is required to think about inputs, as long as standard operating procedures are put in place. The results are lower staff levels, faster transaction recording and output, clear definition of roles and responsibilities, and fewer roles which require true accountancy skills, since jobs are more data entry-oriented.

Historical systems relied upon the use of the five key ledgers: the cash book, purchase ledger, general ledger, sales ledger and inventory ledger. Each one required a large team to operate, was entirely manual in process and required knowledgeable accountants as well as data entry clerks.

At the core of each of these systems is the principal that every debit must have an equal and opposite credit. While the historical manual system has this explicitly showing in its ledgers, the modern system has an intricate web of entries which can range in complexity from entry to entry. The users of the modern system are often oblivious to this principal, and this creates risk.

Accountants have a responsibility in the modern system to ensure that entries are validated, ensuring that correct values go to the correct place. They must then analyse data and produce reports, and to do this

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correctly, they need to understand how systems work.

In practice, manual entries – used in the minority of transactions are created and processed by an accountant. Other entries, which constitute around 99 percent of transactions, are automated. They can be checked post-fact by the accountant, but often aren’t, unless a concern is raised from a reported output or analytical review.

Accountants have an expectation that automation and reporting excellences mean less work and therefore less thinking. The financial system is expected to produce everything that could conceivably be required. But this assumption is wrong.

When the accountant is sent away - with their tail between their legs to complete the picture of what has happened and why, they interrogate the system to obtain a more detailed analysis. This involves an in-depth search through general ledger accounts and possibly purchase or inventory sub-ledgers to obtain source entries. This may sound complicated, but is arguably no more so than the historical manual system. In fact, the retrieval of such information, since it is computer indexed, should be swifter.

Again, however, as the accountant has restricted involvement in the systems transactions at the entry stage, there is a poor understanding on where transactions are. Gathering the information required for analysis can be difficult and very often error-prone. Moreover, gaining an understanding of why events have happened can come down to guesswork and assumption.

I encountered these problems during

an annual budgeting exercise. I had recently joined a company and the five-strong senior accounting staff, who had all been at the company for 3-7 years. One of my objectives was to look at what costs the company incurred and why they incurred them.

Each of the accountants were given a selection of general ledger accounts and all tasked with providing an analysis of what constituted each cost. There were daily meetings with the team to check their output and ensure that the information gathering was adequate for the task. However it quickly became apparent that very few of the team really understood what to do. The main area for the lack of understanding was with the cost accounts, debits and credits.

After undertaking a refresher course on the subject and their knowledge of the financial system, it became clear that few of them understood the transactions.

The solution to all of this lies in having qualified accountants in the key positions where exposure to such information requires technical expertise. In order to identify these positions, a department must conduct a risk assessment to highlight weaknesses. Accountants must be given thorough training and possess expert knowledge in the financial system across all areas which it touches, to ensure that the full implications are understood.

Lastly comes a key change management task, which is to provide a clear and concise job description, showing responsibility and accountability to each member of staff.

The role of the accountant in the workplace is absolutely essential, and we must strive to promote and strengthen it.

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column

SomersConsult

No technology magic bullet

International CFO Fintan Somers discusses the importance of effective technology implementation in business transformation.

L

ike many business leaders, I have read lots of books, articles and slide decks, been presented to, seen online videos and undergone training on the subject of organisation and function transformation. It is not my intention to regurgitate a synopsis of this learning in this series.

Instead I want to present the approach I have developed over the last 20 years as a CFO. I call my operating model “Finance Function LIFT” to communicate the concept of LIFT-ing performance.

Now, I have seen many examples of people putting the proverbial “cart before the horse” in attempting to transform functions, whether finance or other functions. What do I mean by this? There are many variations on this theme. But the single common theme is to try and lead with a technology ‘magic bullet’.

This often happens when senior leaders make the decision to spend significant amounts of money on a transformational programme. “Well, I’ve given you the budget... what more do you want from me?”

Well, leadership, actually. Spending money is easy. What is more difficult is to design and execute a transformational programme that aligns the whole organisation around new objectives, new organisational design, new processes and new ways of working - with technology being a component enabler to the programme.

Executing change is hard. Finance Function LIFT is a transformation programme that comprises three interlinked action programmes:

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• Function effectiveness: an action programme based on a topdown evaluation of function output, competency and organisation design.

• Team effectiveness: an action programme based on an interactive process that engages and empowers the whole team to fix effectiveness issues.

• Technology effectiveness: an action programme to realise short-term and longer term improvement in productivity and MI. In later articles I will go into more details on the components, the design and the inter-linkage between each programme and provide some guidance on successful execution. An IT professional I was speaking to recently said: “This is the traditional people, process, technology approach” I you know he was really saying, “So what’s the big deal?”. I make no apologies for repackaging tradition: after all there are not many truly original ‘new’ ideas in the field of managing a business. It’s all packaging.

But the real big deal is: if people understand all of this theory, why do you repeatedly see the technology part of a transformation programme taking over and becoming the point of the programme rather than a subsidiary enabler and the programme failing or under-delivering? Why does this happen?

I’ll discuss in more detail some reasons why this happens in the next article. But, for now, a story I have seen played out several times is as follows: 1. Everybody agrees that change needs to happen;

2. Business leadership fails to take ownership in defining what needs to happen; 3. External spend is budgeted and is ‘in the programme’, so IT fills the leadership gap; 4. The programme is badly defined and resourced, focused too much on managing external spend; 5. IT manages to implement the technology but changes required of users are insufficiently defined or implemented; and, 6. The benefits are not realised - the technology remains under-used or not used at all.

What is all-important for the success of change programmes is adequacy of programme definition followed by alignment of resources and actions to implement it. Finance Function LIFT places accountability for leading, defining and executing the programme clearly and unambiguously in the hands of the finance team with a lot of focus on getting the team itself to define and execute the changes required to be more effective around the three dimensions I mentioned earlier. Technology investment is programmed to deliver quick wins without compromising longer term objectives. In other words, the technology is a component - rather than the point - of the programme.

But, perhaps the single most important aspect of Finance Function LIFT is the incorporation of change management and constant change into the DNA of the finance team. This acknowledges that the path to greatness is a journey rather than a destination.

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CIMA

Managerial myopia and accountability

Geetu Ahuja, Head of GCC, CIMA

M

anagers continuously make decisions that affect their organisation’s future cost, revenues or profits. For example, they decide on investment projects and estimate how the current investment cash-out flows will be paid back by future cash-in flows. Managers may also engage in a cost-cutting operation, with the aim to enhance the future margins they earn. Or they may engage in expensive marketing campaigns, estimating that the return on marketing will eventually be positive and that the overall value of their firm is optimised.

The core feature of such judgments concern the trade-off managers need to make between today’s investments and tomorrow’s returns. Making such balanced choices are difficult, but they essentially mean comparing relatively certain decision consequences with relatively uncertain decision consequences.

Unfortunately, in practice, managers often fail in making this comparison and show behaviours that run against the organisational goals. Managers may cut quality assurance costs of their operations to increase their margins, but may neglect the future negative consequences on product quality and revenue.

In all such cases, managers could be said to suffer from a ‘managerial myopia’. Myopia is a term in optometry that denotes people’s lack of ability to see at a distance. In management accounting, myopia denotes a

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managers’ tendency to optimise the present, at a cost to the future.

One of the challenges of management accounting is to help managers to optimise both the immediate and distant future of their organisations. However, some management accounting tools may even aggravate, rather than alleviate, managers’ myopic tendencies. Budgets, and other yearly performance contracts, may force managers to cut costs, which enables them to meet their present targets but comes at a cost to their future performance.

A recent joint investigative study by Rotterdam School of Management, Erasmus University, The Netherlands and the University of Ljubljana, Slovenia, addressed fundamental drivers of managerial behaviour and decision-making. In particular, it shed light on how imposing accountability on managers may affect their myopic tendencies.

The research included analysis of brain activity during task performance to identify the cognitive processes that affect decision-making under different forms of accountability.

The experimental study involved 30 experienced financial managers who underwent tests that checked their ability to maintain focused attention, effectively process information and inhibit responses to conflicting irrelevant and emotionally salient stimuli.

Key research findings showed that accountability affects cognitive and emotional control, which are both

potential moderators of short-sighted decision making. Accountability enhanced the ability to resist emotional distractors and automatic responses, enabling better control of impulsivity and emotional interference, which are important precursors of managerial myopia. Accountability provoked emotional and cognitive responses in the brain which affect cognitive performance in dependence of the type of task, type of accountability and individual’s tendency towards myopic decision-making.

Accountability, however, did not affect basic perceptual and attentional abilities.

A manager’s task performance was associated with risk and time discounting, which are two direct measures of myopia. More myopic individuals were more stimulated to improve performance by monetary incentive, while for less myopic individuals social pressure was more effective. Interestingly, different accountability types trigger different cognitive and emotional mechanisms, suggesting that curing myopia may indeed require a deeper intervention than imposing a set of new measures like has been done before.

Scientific and psychological research today show us that our knowledge of human decision making is less analytic and rational than our economic models and theories. Decisions are heavily influenced by biases that are driven by emotions and cognitive flaws rather than reason, this is also true of managerial myopia.

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