Accountancy Futures_Edition 07_2013

ACCOUNTANCY FUTURESCRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 07 I 2013

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ACCOUNTING FOR THE FUTURE14-18 OCTOBER 2013

GLOBAL, LIVE AND ON-DEMAND ACCA’s annual Accounting for the future conference brings together finance professionals from around the world to discuss the challenges and opportunities facing the accountancy profession now and in the future. Using the latest technology, this global online conference enables experts and opinion leaders to share the latest insights on how businesses and the corporate sector can maximise the value they deliver to their organisations, stakeholders, regulators and the global economy.

Topics to be covered include risk management, corporate culture, reporting for investors, integrated reporting, finance transformation, the role of the CFO, future career paths, technology trends, accountancy futures and supporting SME growth.

The event will be brought to you via live webinars and on-demand sessions. To register, and for further information, visit www.accaglobal.com/accountingforthefuture

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PG99 EDITION 07

ACCOUNTANCY FUTURESACCOUNTANCY FUTURES

PG02 EDITION 07

Editorial boardEditor Chris Quick [email protected] +44 (0)20 7059 5966

Managing editor Lesley Bolton

Sub-editors Dean Gurden, Peter Kernan, Eva Peaty, Vivienne Riddoch Design manager Jackie DollarDesigner Robert MillsProduction manager Anthony Kay

Head of publishing Adam Williams

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ACCA President Barry Cooper FCCA Deputy president Martin Turner FCCA Vice president Anthony Harbinson FCCA Chief executive Helen Brand OBE

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A list of ACCA offices can be found inside the back cover of this journal.

ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 162,000 members and 428,000 students in 173 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of over 89 offices and centres and more than 8,400 Approved Employers worldwide, which provide high standards of employee learning and development.

Accountancy Futures Edition 07 was published in August 2013.

Accountancy Futures® is a registered trademark of ACCA. All views expressed in Accountancy Futures are those of the contributors. The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication. Copyright ACCA 2013 Accountancy Futures. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA. Accountancy Futures is published by Certified Accountants Educational Trust in cooperation with ACCA. ISSN 2042-4566.

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It’s now five years since Lehman Brothers filed for the largest bankruptcy in US history. These and the other collapses that plunged the world into financial crisis might be starting to feel like historical events, but in some ways finance professionals are only now beginning to feel their effects. The results of the post-crisis regulatory reviews are starting to bite, as is new thinking in areas such as corporate reporting, sustainability and audit. All this comes on top of business as usual in a volatile economy in which public scrutiny, for example over tax, is more intense than ever. This edition covers all these areas and includes interviews with senior figures from British Airways, KPMG, Shell and many others. The message that shines through is that there is an opportunity for finance professionals to move up a gear.

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

ACCOUNTANCY FUTURES

PG03 EDITION 07

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

Accountants for Business Global Forum Chair: Richard Moat FCCA CFO, Eircom Group

Global Forum for Governance, Risk and PerformanceChair: Adrian Berendt FCCA Executive director, LCH Clearnet

Global Forum for Business LawChair: Faris Dean ACCA Solicitor, Lyons Davidson

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

Global Forum for the Public SectorChair: Datuk Wan Selamah Wan Sulaiman FCCA Accountant general of Malaysia

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

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

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

Global Forum for TaxationChair: Mukesh Gunamal FCCA Director, global tax quality and risk management, EY

(Top row from left to right) (Bottom row from left to right)

Global forums ACCA’s 10 global forums bring together experts from the public and private sectors, public practice and academia. They aim to further thinking on current and future issues, and look for opportunities for the accountancy profession. www.accaglobal.com/globalforums

FOCUS

PG06 INTRODUCTION

Finance professionals

face more demands and

challenges than ever

PG08 REGULATION

A new global model to

revolutionise standards is vitalPG10 SHELL

As the regulatory deluge

continues, Shell’s vice

president of reporting and

accounting Paul Morshuis

questions the benefits

PG12 BRITISH AIRWAYS

Former CFO Keith

Williams has taken on

the top job

PG14 KPMG

Global chairman Michael

Andrew on doing things

differently after the global

financial crisis

PG16 OBLIQUITY

Economist John Kay

explains why complex

problem-solving is best

achieved indirectly

CORPORATE REPORTING

PG20 INTEGRATED

Businesses are wising

up to the global cultural

shift being driven by

integrated reporting

We are likely to see many progressive private entities seeing the value in a more transparent report PG41

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Shale oil could influence geopolitics as it increases energy

independence for many countries PG95

PG23 EXCHANGES

Stock market regulation

could accelerate

sustainability reporting

PG26 SRI LANKA

Integrated reporting key

for a country undergoing

dramatic transformation

PG30 MATERIALITY

The increasingly complex

concept needs clarification

PG32 FORECOUNTING

Greater emphasis on

future performance

reporting looks

increasingly likely

PG34 SHARIA FINANCE

KPMG’s Samer Hijazi

argues for consistent

governance in the Islamic

finance industry

PG36 HARMONISATION

Harmonise Islamic finance

transactions and IFRS,

advocates MASB chairman

PG38 GLOBAL IFRS

As adoption grows, we

take the pulse of IFRS

around the world

AUDIT AND SOCIETY

PG41 IMPROVED AUDITS

A report on the IAASB’s

moves to make auditor

reporting more informative

for investors

PG44 FORUM OF FIRMS

Audit is under the

spotlight like never before,

says chair Bob Dohrer

FINANCE

TRANSFORMATION

PG46 FINANCE FUNCTION

What are the factors likely

to affect finance talent

management for global

business?

PG48 SKILLS GAP

Demand is growing

for complete finance

professionals with a broad

range of expertise

PG50 CHINA

Shared services in China

are increasing in popularity

PG53 INNOVATION

Hay Group’s Signe M

Spencer points out the

correlation between good

matrix skills and successful

financial innovation

PG56 INDIA

TV Mohandas Pai gives his

views on India’s economy

and its accountancy

professionals

SMALL BUSINESS

PG58 EMPOWERED CFOs

CFOs can bring enormous

value-add to a business,

but sadly it’s often

the CEOs that need

convincing of this fact

PG60 AFRICA

Despite the obstacles they

face, there is a steadily

growing sense of optimism

among Africa’s SMPs

PG62 ENTREPRENEURS

EY’s Maria Pinelli explains

why working with

entrepreneurial businesses

is so exciting

PG64 REPORTING

Relaxed reporting rules

may help SMEs, but what

about the needs of other

stakeholders?

PG67 GOVERNANCE

SMEs in the GCC are

being forced to raise their

game when it comes to

corporate governance

PG04 EDITION 07

Shale oil could influence geopolitics as it increases energy

independence for many countries PG95

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PG70 SUSTAINABILITY

Accountants have a vital

role to play in helping

small businesses embrace

green practices

PG71 GLOBAL TRADING

Many SMEs still have a

great deal to learn when

it comes to managing

foreign exchange risk

PUBLIC VALUE

PG72 PUBLIC TRUST

Professions for Good

chair looks to restore the

damaged reputation of the

professional community

PG74 IESBA CHAIRMAN

Jörgen Holmquist on the

necessity and challenges of

formulating an ethics code

for accountants

PG76 WHISTLEBLOWING

Why uniform international

standards governing

whistleblowing are vital

PG78 TOP MANAGEMENT

Judging the ‘tone at the

top’ is invaluable when

evaluating a company’s

reported performance

PG80 RECRUITMENT

Barriers to talent need

to be broken to ensure

that recruitment into the

finance professions is

socially neutral

PG81 PAKISTAN

How poverty alleviation

programmes are

encountering problems

from a lack of transparency

TAX

PG82 GLOBAL TAX

Can global tax rules be

made fairer, asks ACCA’s

Chas Roy-Chowdhury

PUBLIC SECTOR

PG84 DIVERSITY

Women are still woefully

under-represented in

senior positions in the

public sector, says ACCA’s

Gillian Fawcett

GLOBAL ECONOMY

PG86 POLAND

The country’s growth

rate may be the envy of

Europe, but Polish financial

reporting still has room to

go up a gear

PG88 AUSTRALIA

Proximity to the vigorous

economies of Asia leaves

Australia well positioned

to profit from their

continued growth

PG90 QATAR

How the Gulf emirate is

transforming itself and its

financial systems into a

21st century state

PG92 CANADIAN EX-PM

Former PM Paul Martin on

spreading good financial

and business practice to

those that need it

PG95 FRACKING

The US is on track to

become the world’s largest

oil producer – and gain

extra diplomatic flexibility

in the process

PG98 IN BRIEF

CFO website, draft

framework for integrated

reporting, ACCA’s global

forums, encouraging

women into the top jobs,

and the ESRC agreement

AVAILABLE EVERYWHERE You can now download searchable editions of Accountancy Futures to your iPad or read them online. Go to: www.accaglobal.com/futuresjournal

‘You need good problem-solving skills to add value, to look beyond the obvious and not stop at the first answer, to be able to

see hidden problems and probe all fruitful sources for answers, and then use rigorous logic and methods to solve difficult problems with effective solutions.’This is how Vic Tan FCCA, CFO for Ralph Lauren in Japan, describes the skills required by finance leaders in today’s global economy. On top of this, he lists the ability to handle change, risk and uncertainty; to create vision for teams; to take a ‘helicopter view’ of a business and its future; and to be a relentless and versatile learner.All this might seem daunting, but Tan’s view of what is required from finance professionals in 2013 is not untypical. Around the world, they are increasingly having to step up to the plate, finding their skills more in demand and finding more demands placed on them. This is particularly the case this year as post-financial crisis regulatory reforms, aimed at preventing a repeat of the crisis and improving business ethics and transparency, start to bite. The crisis also sparked fundamental rethinking in critical areas for finance professionals such as corporate reporting, audit and business planning, which are also now starting to bite. The accountancy profession is playing a leading role in these.For those at the coalface, this means dealing simultaneously with many changes and new demands, such as changes to International Financial Reporting Standards, the US Dodd-Frank Act, the UK Bribery Act and a host of other disclosure requirements. Paul Morshuis, vice president of accounting and reporting for Shell, describes the complexity and intensity of this in an interview on page 10.At the same time, finance professionals are dealing with increased scrutiny over tax planning, more demands for non-financial information, new whistleblowing rules and more regulation in the audit market. There is also the new thinking such as integrated reporting and wider audit reporting to explore.Not that life didn’t change dramatically in the immediate aftermath of the financial crisis. Finance professionals were thrust into the heart of efforts by businesses to survive the

sudden change in economic conditions – a challenging task in a world where traditional methods of budgeting, forecasting and planning were rendered meaningless. Although now conditions might be a little less desperate, the global economy is still challenging and volatile.There has been a realisation that things are never going to go back to how they were, and a culture change in business. A narrow focus on short-term profitability has widened, and more attention is being paid to the longer-term financial viability of a business, with greater realisation of the impact, both good and bad, that non-financial factors such as environmental, social and governance issues can have on this. This is reflected by changes in corporate language. Companies now talk about the creation of ‘value’, implying a wider range of objectives.

Moving up a gearWith more regulatory reform, integrated reporting and an evolving investor landscape, 2013 will bring challenges and opportunities for finance professionals

ACCOUNTANCY FUTURES: FOCUS INTRODUCTION

PG06 EDITION 07

‘The reality is that different investors want different information from corporate reporting’

Opposite: Vic Tan of Ralph Lauren in Japan and other CFOs around the world are finding that as finance leaders’ skills are increasingly required they are facing more demands than ever.

The new investor landscape Short-termism was widely held to be one of the causes of the financial crisis, and there has since been pressure on businesses to adopt a longer-term approach. But recent ACCA research highlights how the investor landscape is moving in the opposite direction.An analysis carried out in the UK and Ireland illustrates how the traditional domination of markets by pension funds and insurers has been eroded by greater international ownership of companies, and by the emergence of other players such as hedge funds and private equity firms, with shorter-term investment horizons. In addition, the hugely increasing proportion – estimated by some to be 80% – of trades that take place via computer has left a question mark on who the owners of companies actually are. It has been estimated by the BlackSun reporting consultancy that the average share of FTSE 100 companies is held for 27 seconds.The proliferation of new technologies has led to much more corporate information being available. ACCA’s research will now explore how much is useful, how investors prevent themselves being overwhelmed and how companies can engage meaningfully with investors in this environment.Research so far shows that investors are less trustful of corporate reporting since the financial crisis, with more than two-thirds saying they are more sceptical about the information companies provide; other findings are shown on the right.Ewan Willars, ACCA director of policy, says: ‘This shows there has been a shift in what investors want in terms of financial information since the downturn. The decline in trust in corporate information since the financial crisis suggests there is a bigger role for audit to play in rebuilding confidence in company statements. ‘While it’s easy to lump “investors” under one roof, the reality is that different investors want different information from corporate reporting. Do short-term investors, such as hedge funds, want or need the same information as longer-term investors, such as pension funds? Companies may need to provide a range of financial information that meets the needs of various investment groups, rather than look at the investment community as one.’Understanding investors: the changing landscape and Understanding investors: directions for corporate reporting are available at www.accaglobal.com/investors1

What investors say

69% are more sceptical about company-provided information since the crisis

63% place greater value on non-company information

63% believe management has too much discretion in reports

63% believe the level of company information encourages ‘hyper-investment’

46% want mandatory quarterly reporting abandoned

93% support integrated reporting

ACCOUNTANCY FUTURES: FOCUS INTRODUCTION

PG07 EDITION 07

The investor landscape, however, has moved in the opposite direction, with a greater focus on short-termism, raising difficult questions about corporate reporting – an issue explored in the panel article (left).With all this, along with technological advances and societal upheavals, finance professionals have a lot to grapple with. At an ACCA roundtable in Ireland in 2012, Ryanair finance director Howard Miller FCCA commented: ‘The finance function has to get involved in issues it wouldn’t have before. It’s about rolling up your sleeves, getting your hands dirty.’So the going might be tough, but there are upsides. Raymond Wong, CFO of Standard Chartered Bank Malaysia, comments: ‘The ever-changing environment and increasing complexity and diversity have provided sufficient challenge to keep the job interesting.’All this has had a big impact on the skillsets required from finance professionals. ACCA research in early 2013 highlighted the importance of breadth and depth of knowledge across a broad range of accounting and business areas. In other words, finance leaders are looking for complete finance professionals. This is explored further on page 48. And the wider experience is setting some up well for CEO positions – as evidenced by our British Airways interview on page 12. For those finance professionals who are ready for the challenge, it’s time to move up a gear.

Chris Quick, editor

For the last year, ACCA has highlighted the need for a longer-term vision for the development of standards and regulation. There needs to be

a mechanism for constant improvement, not just when economic or corporate crises are at the top of political agendas. Businesses need standards that reflect the integrated nature of the reporting process and provide the information that stakeholders, particularly investors, need. This has become increasingly important as we look at some of the recent developments, such as integrated reporting, that cut across many different areas.ACCA has been working with the various stakeholder groups to articulate a more

Cutting across the silosACCA’s Sue Almond describes how a proposed ‘Standards for Business’ model could revolutionise regulatory approaches across the globe

ACCOUNTANCY FUTURES: FOCUS REGULATION

PG08 EDITION 07

integrated ‘Standards for Business’ model that captures input from investors, preparers, standard-setters and regulators to effectively prioritise areas for change and development in the accounting system. We have held events and dialogues that span the various silos to provide balanced input from the different groups into the corporate reporting ‘ecosystem’ that delivers high-quality, reliable financial information.

MIXED RESULTSWe have seen increasing recognition for the need for engagement across the stakeholder groups, with mixed results. The understandable demand for increased reporting on a business’s

Above: At the G8 summit of the leaders of the world’s most industrialised nations, held in Northern Ireland in June 2013, issues brought to the table included the tax payments and status of global businesses – an area likely to affect all areas of regulation and reporting globally.

Kenneth Yap CHIEF EXECUTIVE, ACCOUNTING AND CORPORATE REGULATORY AUTHORITY, SINGAPORE

Linda Devonish-Mills CMADIRECTOR, MARKET ADVOCACY, IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS)‘Globalisation is a key factor for standard-setters and regulators. Historically, these groups focused on developing guidance with the greatest impact on US companies. Fortunately, the Financial Accounting Standards Board and the International Accounting Standards Board have broken that trend. Standard-setters and regulators have also had a long history of focusing on issues that impact on public companies. It is important for them to expand this focus since, in the US, the majority of the workforce is comprised of private, small and medium-sized companies. Constituent input is needed before proposed guidance is finalised.’

‘ACRA envisions a Singapore that is the best and most trusted place for business. At the heart of this is the need to maintain trust and public confidence in the reliability and integrity of financial information in our marketplace. This goal has become an imperative as investors turn increasingly to business and financial hubs with strong, stable and trusted reputations. Audit, while vital, is no substitute for the trustworthiness and reliability of financial information, which is predicated on the joint and interdependent efforts of all members in the financial reporting ecosystem. These include the preparers, audit committees, other directors, auditors and investors. This diversity of roles will be a source of success if all players play their part.’

ACCOUNTANCY FUTURES: FOCUS REGULATION

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of understanding with the IASB; there is also early-stage interaction with the IAASB, which is likely to be critical to long-term credibility. The critical focus is on providing the broader picture to investors in a digestible manner. As the pilot project progresses, feedback from investors will be fundamental to future developments. ACCA has been tracking integrated reporting developments in South Africa, which has early-adopted, and has commissioned research to establish the investor perspective.

TAX IN FOCUSThe next ‘big thing’ for business and the accountancy profession could well be the tax payments and status of global businesses – a topic that figured highly at the recent G8 summit. This is likely to cut across all areas of regulation and reporting globally, and an open and constructive approach will be needed if solutions and tax systems are to be developed in a way that balances the underlying legal and ethical challenges with the competitive global market and the need to encourage growth. This is shaping up to be a year when finance professionals from all sectors will be called on to take a big-picture view – a Standards for Business approach that reflects the broad remit and provides the information that investors and other stakeholders need to make informed and mature decisions.

ability to continue as a going concern is a great illustration of a public interest area where many standard-setters are active. The European Commission and the International Audit and Assurance Standards Board (IAASB) are both progressing proposals for auditor reporting, but these are in fact largely dependent on the financial reporting framework and management’s responsibility to assess the going concern status – which fall under the remit of the International Accounting Standards Board (IASB), local accounting standard-setters such as the Financial Accounting Standards Board in the US, and local regulators. Meanwhile, investor feedback is that ‘boilerplate’ statements will be of little value. There have been some constructive dialogues with a view to a more streamlined and consistent global outcome, but there is still a danger of different solutions in different jurisdictions. This is unlikely to be good for business if investors and other users of financial statements do not appreciate the subtle differences.

INTEGRATED APPROACHIntegrated reporting is an area that almost by definition requires investor focus and a more integrated approach to standard-setting. The International Integrated Reporting Council has made great efforts to engage with different groups, including formalising a memorandum

There needs to be a mechanism for constant improvement, not just when economic or corporate crises top political agendas

Sue Almond is ACCA’s technical director. Her role is to influence debate on technical issues affecting business and accountancy around the world. She spent over 20 years with Grant Thornton UK as national assurance services partner.

ACCOUNTANCY FUTURES: FOCUS INTERVIEW

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The 2008 financial crisis changed the world, and especially the world of business, in myriad ways. Without doubt, its most significant legacy is

the explosion in the demand for corporate information. We might have seen this coming, the argument goes, if we had more information. So governments have responded, layering on the legal requirements, while the modern world of instantly available information has also played its part.With any change there is always someone at the coalface, dealing with the practical implications on a daily basis. In the post-financial crisis world of unprecedented corporate transparency, finance professionals have felt the effects more than anyone.Paul Morshuis, vice president of accounting and reporting for the Dutch oil multinational Shell, knows better than most the true impact on finance functions of the drive for transparency. Shell is a complex, massive corporation operating in more than 70 jurisdictions and generating revenues of over US$450bn a year. The finance function employs about 10,000 people, over half of them in five shared services centres (based in Glasgow, Krakow, Chennai, Kuala Lumpur and Manila) that centrally manage key global processes: data management; expenditure; record-to-report activities; revenue; and management information and strategic analysis. A similar number of finance professionals are embedded in the business or work in specialist areas such as tax and treasury. ‘This is a unique time in terms of the many things coming at us and happening around us,’ says Morshuis from his office in The Hague. ‘As a professional accountant I see more and more coming at me, and I’m concerned that in our eagerness to improve transparency we sometimes forget there are side effects.’Morshuis estimates that he currently spends half of his time dealing with regulatory changes – either those newly in place or planning for more to come. For a company such as Shell, which operates in a highly regulated environment, just keeping on top of the various reporting and disclosure requirements is a full-time job. The group is listed in London, Amsterdam and New York, which means it is subject to International Financial

Reporting Standards (IFRS), UK, Dutch and European Union (EU) pronouncements and US Securities and Exchange Commission rules, as well as the local requirements in each country in which it operates. The result is an enormous volume of disclosure and compliance information. Shell’s 2012 annual report ran to 192 pages, including around 35 pages of notes to the financial statements. Its sustainability report made up a further 44 pages, ‘and that is just a fraction of the information that we must produce for internal and external consumption’.

TRACKING REQUIREMENTSThe nature of the extractive industry adds further complications. One of the requirements of the US Dodd-Frank Act, for example, is that companies must actively track the source of minerals, including gold and the constituent minerals used in the production of tin and tungsten, that are mined in the Democratic Republic of Congo and adjoining countries. As with many of the newer transparency requirements, the aim of the ‘conflict minerals’ guidance is admirable but achieving it in practice is by no means straightforward.Morshuis also points to the EU’s plans to introduce a requirement, already enshrined in the US Dodd-Frank Act, for companies in the extractive sector to report on a project basis the amount of payments of more than €100,000 made to governments of countries in which they operate, including tax and royalty payments. ‘That’s very detailed information,’ he says, ‘and a challenge for someone who’s

Paul Morshuis began his career at the treasury department of Philips Electronics. He joined Shell in 1988, undertaking a variety of finance management roles; since 2008 he has been vice president of accounting and reporting. He is also vice chairman of the Shell pension fund in The Netherlands and chair of the financial reporting committee of Dutch employers association VNO-NCW.

Information overload?With layer upon layer of international regulation changing the face of the finance professional’s role, Shell’s Paul Morshuis questions the benefits


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in charge of accounting and reporting because you need to think about how you do that.’ He adds that the way that a group structures its activities or reports internally makes gathering the information demanded by legislation difficult. Shell, for instance, organises its activities into upstream (broadly, exploration and production), downstream (refining, marketing and trading) and corporate (non-operational) streams. ‘Not every activity in every country is ring-fenced,’ he says. ‘The focus in general is on consolidated tax accounting on a country level on accrual basis and not on a cash basis per detailed project. Building in the changes to the systems in order to provide some of this information involves a lot of systems changes. I’m talking about millions of dollars in systems changes, information analysis and staff training.’

WORK TO RULESAn additional complication is that rules across jurisdictions differ, while local rules might conflict with the requirements of the major regulatory bodies. ‘We adhere to our business principles, which are to comply with the local rules of the country in which we’re operating,’ Morshuis says. ‘Some countries don’t allow royalty payment information to be shared, which means in this case that you have to choose between adhering to the rules of the local country or the rules of the EU or US.’Shell has argued strongly that there may be a better way of achieving the objective of transparency and was a founding member of the Extractive Industries Transparency Initiative. The EITI’s approach is for companies and governments to disclose royalty and tax payments and receipts to an independent third party, the verified results of which are then published on a country basis. This would meet transparency ambitions as well as creating a level playing field between listed companies governed by EU and US rules and their state-run and other competitors, who are not currently required to disclose such information. So far, European and US legislators have not wavered, though recent legal development in the US forces the SEC to rethink some aspects of the rules.In the meantime, finance functions must adapt. Morshuis says that ‘there’s no doubt’ that Shell’s finance function would be much smaller if it were not for the multiple regulatory and disclosure requirements. ‘Policymakers often have no idea of the complexities involved in trying to produce this data,’ he says, adding that the end result is often too complicated to fully understand, or is ignored altogether; Shell already voluntarily discloses the taxes it

‘There is a widespread belief that more information and more data will solve everything, but reality is much more complex than that’

pays in different countries, for example, but this almost always passes without comment.While he has sympathy with policymakers and their objectives, Morshuis feels that finance professionals have to get across the complexities and challenges involved in meeting disclosure requirements, as well as questioning the real value of the vast volume of data that is being produced: ‘Providing more information is often not simple or cheap to produce, and I really have to wonder whether in cost-impact analysis terms the balance is right. There is a widespread belief that more information and more data will solve everything, but reality is much more complex than that.’

Liz Fisher, journalist

There are few better places to earn your wings as a CEO than in finance. A recent survey by recruitment business Robert Half UK shows that

just over half of FTSE-100 chief executives have come from a finance background, with 12% having been promoted into their current role directly from a CFO position. In January 2011, Keith Williams was promoted from CFO of British Airways to chief executive. At the same time, BA merged with Iberia to form International Airlines Group, a Spanish-registered company headquartered near Heathrow, with its shares listed in both London and Madrid. (Williams’s predecessor CEO, Willie Walsh, was promoted to the role of CEO of the newly combined group.) Until then, Williams had spent his entire career in finance, with a particular specialisation in tax and treasury. That step up from finance to the CEO’s role must have been one of the biggest in his career. ‘The difference, in many ways, is one of scale,’ Williams says. As head of finance, he had around 3,000 people working under him, including procurement, property and IT. Heading up the whole of BA, he now leads around 37,000 employees – from marketing people to mechanics, baggage handlers to cockpit crew. ‘To me,’ he says, ‘that brings about one very distinct change: when you’re leading a broader set of functions, the single biggest difference is from being a master of one discipline to being responsible for several disciplines. Therefore you become more reliant than ever on the team of people that you have around you. The CEO’s is a much wider role than the one that existed in finance,’ he says. ‘And that has a natural consequence: you become much more reliant on the team. In many ways, you’re orchestrating the team and setting direction.‘I see my role as CEO as leading and giving direction. I can’t do everything myself and so you’ve got to let the team do the running of their function. It’s a much more hands-off role than when you’re a CFO.’ One of the potential dangers for CFOs moving up into a CEO role is that they might retain too great an interest in what’s happening in their old patch. The challenge is to let go and focus

instead on the other areas of responsibility, not least those that are furthest outside a newly-appointed CEO’s comfort zone. Williams admits to a predilection for ‘more data’ when grappling with a problem, but otherwise, he says, ‘the one thing I was very conscious of when I became CEO was that I didn’t take my old role with me. Because you feel comfortable with the CFO role that you’ve just done, there’s a great tendency that you try to continue in that role. ‘Finance is obviously still critically important; we’ve got a large aircraft acquisition programme and we have to generate the finances to cover it. But I have somebody to do that. I recruited somebody into a financial role and I need to let go of that and let them do the job in their way,’ Williams says. (That ‘somebody’ is Nick Swift, named in late-2010 as Williams’s successor as CFO. Swift joined from bus and rail operator Go-Ahead, but the Touche Ross-trained accountant had previously worked as a finance manager at Air New Zealand.)

A MATTER OF TRUSTMoreover, while a CFO-turned-CEO may have to fight the urge not to meddle in the finance patch, the same is true of the other functions, too. ‘There can be a tendency,’ Williams says, ‘to look at things the way you would do them – but when you’ve got a good team of people, you’ve got to let them get on with running their different functions. I’ve given them the responsibility, I’ve given them the trust, I need to let them run with it. Even though I might have done it differently, you’ve got to have that absolute trust in the team as CEO and let people get on with their jobs.’Williams adds that, as CEO, it also becomes very quickly apparent that you are not only talking to all the employees in the business, but also, in a very real sense, to all the customers who fly British Airways. Customers are absolutely what it’s all about for the CEO. Williams even spends a lot of time reading letters and emails from dissatisfied customers (and a few satisfied ones, as well). ‘If you constantly pick up the same comment there’s obviously something to address,’ he says. ‘We learn from that.’

Keith Williams trained as a professional accountant at Arthur Andersen in the early 1980s, then joined Apple Europe in 1991. In 1996 he joined consumer goods group Reckitt & Colman as head of tax. He joined British Airways in 1998 as head of tax, taking on the treasury role in 2000. He became CFO in 2006 and, when BA merged with Iberia to form International Airlines Group in 2011, he was appointed CEO of BA.

Ready for take-offWhen Keith Williams moved from CFO to CEO of British Airways, he realised it was vital to leave his old role behind – as well as entrust other functions with responsibility


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Williams resurrected the old ‘To fly. To serve’ motto in 2011 to help rebuild the brand and get the customer service message across – within the group and beyond. One spur for that was that the airline had suffered a series of bruising cabin crew strikes over the previous couple of years, so the customers had to be put back right at the centre of the corporate strategy. ‘To me, that motto summed up what we’re about: everything should be aimed towards the customer and that ultimately is our goal: To fly. To serve.’In terms of his own role in this, Williams says: ‘People have to see me aligned to that goal because if I’m not, why should they align themselves to it? I think the fact that I show interest in that then percolates its way

down the company. We have people at BA who are here because they have that desire for customer service.’It’s tempting to wonder what the relevance of the finance pedigree is to a CEO in such a customer-oriented business. ‘Most things come through finance,’ he says. ‘If you look at most projects that the company is going to do, if you look at the business plan and everything else, a lot of that comes through finance. So in finance you are really in a unique position of seeing a lot of aspects of the business. Finance is a broad role; it does tend to look at everything. It just looks at it in a slightly different way.’

Andrew Sawers, journalist


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‘I see my role as leading and giving direction. I can’t do everything myself and so you’ve got to let the team do the running of their function. It’s a much more hands-off role than CFO’

The accountancy profession has become much more heavily regulated since the global financial crisis. One challenge for the largest global firms

is to look back at the experience, learn the right lessons and adapt their business model to the new environment and public perception.Michael Andrew, the Hong Kong-based global chairman of KPMG, says: ‘Are there things in our model we should be doing differently going forward? We have a lot of ideas. You have to sit back and ask, “what do the markets want today?”’Andrew is the first global chairman of a Big Four firm to be based in Asia. He took over the post in 2011, in time to lead the firm through a wave of regulatory reform that is sweeping established and emerging economies. And there are a lot of areas of concern both for the public and regulators, areas like audit quality, taxation and corporate governance. The Big Four firms are at the heart of these global discussions that will determine both their future and the future of the profession. But while honest discussions leading to forward-looking reforms would be a silver lining to the global financial crisis, it can be hard for politicians and regulators to avoid simplistic approaches to reform.

THINKING REFORM THROUGHOne example, says Andrew, is requiring companies to change their auditors every so often. With only so many accountancy firms having the capacity to effectively audit a global business, such a policy might be neither easy to implement nor create much in the way of positive outcomes.‘My point is that this is one of probably 20 options that you have. What about the other 19?’ Andrew asks. ‘In some instances there is too much emphasis given to short-term and potentially counterproductive measures, and not enough thought to the long-term model we need to put in place to reassure investors. Every potential reform needs to be tested against its likely impact on audit quality.’An alternative approach to reform might be to identify best practices around the world and replicate them around the world. ‘It’s not necessarily the US that has best practice. The UK might be slightly ahead in

some respects. Canada has really good best practice. Australia has good best practice. Hong Kong has good best practice. Everyone does some things well,’ he says. One such practice is the UK requirement to audit the gains from synergies after a merger or takeover, as opposed to allowing companies to claim any old number. Another is Germany’s insistence on auditors providing opinions on the quality of risk management at banks. Auditing firms are uniquely positioned to offer solutions and their role has evolved over time so that they have become important sources of opinion and information. ‘The Big Four saw the European sovereign debt issue coming,’ says Andrew. ‘We are the ones that went to the central banks and said, “there is a huge issue here – we are going to have to start writing off these debts and to 70% of their face value”. Do you realise what that means for bank capital in most of those countries?’

ANTIQUE TAX SYSTEMS Another important issue that is generating global discussion is tax reform. ‘In Europe, if you are having to sacrifice your entire way of life, you are asking what is going on. There is public outrage,’ Andrew says. ‘The reality is that the tax system has become very antiquated over time, and struggles to cope with the age of global and digital business.’Later this year, the Organisation for Economic Cooperation and Development (OECD) will bring out a treaty that aims to provide a new model for what is currently an antiquated and complex global tax system.

New order of the dayAdapting their business model to what markets want today is key for the largest international firms, says KPMG’s global chairman Michael Andrew


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KPMG in figures 156 One of the Big Four global accountancy firms, KPMG operates in 156 countries through member firms that employ 152,000 people and provide audit, tax and advisory services.

US$23.03bn For the fiscal year to September 2012, KPMG International reported revenues of US$23.03bn, up 4.4% on 2011. The Americas reported the strongest revenue growth, up 7% for the year, compared with 1.1% in the Asia Pacific region. Revenues in Europe, the Middle East and Africa rose 4%.

9,000 In China, KPMG has a total of 9,000 partners and staff.

82% KPMG services 82% of the Global Fortune 500 companies in one capacity or another.

Michael Andrew A golfer and avid horse breeder, Michael Andrew is the chairman of KPMG International. Born in 1956 in the Australian coastal city of Maryborough, he studied law and commerce at Melbourne University. He is a qualified barrister and solicitor of the Supreme Court of Victoria and a professional accountant. After working at ICI for six years, in 1984 he faced the prospect of a move to Papua New Guinea with his young family and instead joined Peat Marwick, the firm that would become part of KPMG. He became a partner in 1988.In 1992, he was named partner in charge of the KPMG international tax centre and an executive of the global tax steering group and was responsible for opening offices in Eastern Europe.In 1995, he became Asia Pacific tax chairman and in 1997 managing partner of KPMG Australia’s tax practice. From 2001 to 2007 he was deputy chair of KPMG Australia and then took over as chairman until 2011. He was elected chairman of KPMG International in May 2011. In Australia, he was a member of the Business Council of Australia, chairman of the Dowd Foundation and the Business Working with Education Foundation, a council member of the Australia Business Arts Foundation, and a committe member of the Olivia Newton John Cancer Centre Appeal and the Prostate Cancer Foundation.


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‘Everyone is waiting for this model treaty,’ says Andrew. For now, he adds, countries are just ‘fixing the reporting model and the disclosure model’. The new order of the day may mean finding ways to ensure all businesses pay tax – but only once. On the one hand, loopholes created by double taxation agreements must be closed; on the other, agreements need to be in place to avoid double taxation.

‘We are doing a lot of work with boards around governance,’ says Andrew. ‘It is actually benefiting our tax practice immensely this whole discussion about tax morality.’The discussions are ongoing but, warns Andrew, simplistic solutions won’t work. ‘First, you have to design the system right. Then you have to change the existing model.’

Alfred Romann, journalist based in Hong Kong

ACCOUNTANCY FUTURES: FOCUS PROBLEM SOLVING

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The practice of obliquity

The value of obliquity – the principle

that complex goals are best achieved

indirectly – is demonstrated by the

fact that the most profit-oriented

companies are not usually the most

profitable, says economist John Kay

There is a story – perhaps apocryphal – of a professor of decision sciences at a prestigious business school who received an attractive offer from

another highly rated institution. He sought the advice of a colleague. ‘You, of all people, are surely well equipped to make such a decision,’ said his friend. ‘Don’t be silly,’ replied the professor, ‘this is serious.’ The success of the physical sciences has encouraged us to believe there might be a science of decision-making. All kinds of problems in our business and our financial lives, in the political sphere and in the personal, could then be managed objectively. Such a scientific procedure would, if done carefully enough, lead every conscientious person to the same answer. As a result, both political and personal disputes could be resolved by the collection of evidence and the pursuit of rational discourse. The distinction of the great business leader, the measure of financial acumen, would rest only on the ability to arrive at the right answer faster and more reliably than other people.There is not, and will not be, such a science. Our objectives are typically imprecise and multifaceted, and change as we work towards them, and properly so. Our decisions depend on the responses of others and on what we anticipate those responses will be. The world is complex, imperfectly known, and our knowledge of it is incomplete, and these things will remain true however much we learn and however much we analyse it.We do not solve problems in the way the concept of decision science implies because we can’t. The achievement of the great statesman is not to reach the best decision fastest but to mediate effectively between competing views and values. The achievement of the successful business leader is not to foresee the future accurately but to continuously match the capabilities of the firm to the changing market environment. The test of financial acumen, understood well by men like Buffett and Soros – who, unlike their less gifted rivals, know what they do not know – is to navigate successfully through irresolvable uncertainties.Mostly, we actually solve problems obliquely. Our approaches are iterative and adaptive. We make our choices from a limited range of options. Our knowledge of the relevant information, and of what information is relevant, is imperfect. Different people will form different judgments in the same situation, not just because they have different objectives but because they observe different options, select different information and assess that information differently: and even with hindsight

it will often not be possible to say who was right and who was wrong. In a necessarily uncertain world, a good decision doesn’t necessarily lead to a good outcome, and a good outcome doesn’t necessarily imply a good decision or a capable decision-maker. The notion of a best solution may itself be misconceived.The skill of problem solving frequently lies in the interpretation and reinterpretation of high-level objectives. The Japanese approach to Singapore from the landward side was both direct and oblique, but the attack was direct once you began from an unaccustomed perspective. The oblique,

unaccustomed approach was how Brunelleschi built the presumed unbuildable dome of Santa Maria del Fiore and discovered how to represent perspective in a two-dimensional frame. Many great achievements are of this kind. Alexander Graham Bell’s invention of the telephone, like Akio Morita’s creation of the Sony Walkman and Steve Jobs’s reinterpretation of Morita’s idea in the iPod, was a solution to a problem people did not know they had.It is hard to overstate the damage done in the recent past by people who thought they knew more about the world than they really did. The managers and financiers who destroyed great businesses in the unsuccessful pursuit of shareholder value. The architects and planners who believed that buildings could be designed from first principles, that vibrant cities could be drawn on a blank sheet of paper, and that expressways should be driven through the hearts of communities. The politicians who believed they could improve public services by the imposition of multiple targets. Acknowledging the complexity of the systems for which they were responsible and the multiple needs of the individuals who operated these systems would have avoided these errors.


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The skill of problem solving frequently lies in the interpretation and reinterpretation of high-level objectives

This article is an extract from John Kay’s book Obliquity – Why Our Goals Are Best Achieved Indirectly, which is available to purchase at www.johnkay.com/books or through Amazon.

Such acknowledgement might also have avoided the gravest cases of bad public decision-making of the past decade – the Iraq war and the credit expansion of 2003–7. Both these developments were predicated on a knowledge of the world that the decision-makers did not in reality possess. Republican ideologues believed that Iraqis shared the fundamental values and expectations of Americans. Bank executives believed that their risk control systems, which they mostly did not understand, enabled them to monitor transactions they also did not understand but believed to be hugely profitable.Isaiah Berlin famously distinguished hedgehogs, who know one big thing, from foxes, who know many little things. George W Bush and his colleagues were hedgehogs. Their overriding world view dictated not only their actions but their interpretations. The bankers, blinded by greed and trapped by the greed of others, placed private and public reliance on superficial explanations of the profitability and utility of their activities. Neither group saw any reason to ask questions to which they did not wish to hear the answers, and they did not.The occupants of the Bush White House, and the men who played senior roles in great banks, not only believed they knew more about the world than they did, but supposed they had more influence on the environment in which they operated than they did. They imagined they could reconstruct the Middle East on the basis of an American model of lightly regulated capitalism and liberal democracy. They supposed they were in control of large financial institutions, when in reality the floors beneath them were occupied by a rabble of self-interested individuals determined to evade any controls on their own activities.We learn a great deal about the limits of pseudo rationality by understanding the greatest failure of modernist thought – the attempt to reform cities and buildings by re-engineering from first principles. ‘A house is a machine for living in,’ said the great modernist architect Le Corbusier. But a home is not. The alternative to rebuilding Paris to Le Corbusier’s crazed design – which would have razed most of its centre to make way for tower blocks – was not to rebuild Paris according to some other grand design, but rather to grasp that Paris would develop, as it has for centuries, through a process of constant adaptation. Most construction survives at most a few generations, but Notre Dame, two centuries in the building, remains magnificent 700 years later. The Eiffel Tower, intended as a temporary structure, has been the city’s most distinctive landmark for over a century. The

Gare d’Orsay regains relevance in an entirely different function as the Musée d’Orsay. Paris grew by muddling through, Brasilia by design; Paris is a great city, Brasilia is not.The direct approach to problem solving requires us to know the method of solution before we start. In obliquity we learn about the structure of a problem by the process of solving it. Iteration and experience lead us to the best principles of analysis. While it seems to make sense to plan everything before you start, mostly you can’t: objectives are not clearly enough defined, the nature of the problem keeps shifting, it is too complex, and you lack sufficient information. The direct approach is simply impossible. Good decision-making is pragmatic and eclectic. Oblique approaches rely on a toolkit of models and narratives rather than any simple or single account. To fit the world into a single model or narrative fails to acknowledge the universality of uncertainty and complexity.The reputation of financial economics has never recovered from the blow of the virtual collapse of Long-Term Capital Management, and the involvement of two Nobel Prize winners, Robert C Merton and Myron Scholes. The fund built huge positions on the basis of estimated mispricings, relying on its models to control its exposures. When the Asian financial crisis blew up in 1997, the fund managers extended their positions. They believed their own models. Their failure was a precursor of the much larger failures that would follow a decade or so later.At the banks, as in Iraq, the reality was that the evidence and models were used to confirm what was already asserted to be true rather than to challenge the validity of prior assumptions. And in both cases, a superficial appearance of considered rationality concealed the crude directness of what was really being done.Obliquity doesn’t mean that we should stop thinking about objectives, fail to examine options or omit to seek information and understand as best we can the complex systems that we deal with. Far from it: we should start and continue. The alternative to a ‘rational’ process of defining objectives, evaluating options and modelling consequences is an approach that is oblique, but truly based on reason and evidence.If you are clear about your high-level goals and knowledgeable enough about the systems their achievement depends on, then you can solve problems in a direct way. But goals are often vague, interactions unpredictable, complexity extensive, problem descriptions incomplete, the environment uncertain. That is where obliquity comes into play.


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John Kay chaired the UK government’s review of UK equity markets and long-term decision-making, which reported in July 2012. He is visiting professor of economics at the London School of Economics, and a fellow of St John’s College, Oxford. He is also a fellow of the British Academy and the Royal Society of Edinburgh, and a director of several public companies. He contributes a weekly column to the Financial Times, and is the author of many books, including The Truth About Markets (2003) and The Long and the Short of It: finance and investment for normally intelligent people who are not in the industry (2009). Obliquity is his latest book, published by Profile Books in March 2010.

‘Only an arrogant man would believe he could plan a city, only an unimaginative man would want to,’ wrote Jane Jacobs, whose brilliant book The Death and Life of Great American Cities was central to the revolt against modernist town planning. The men who launched the Iraq

war and the bankers who were responsible for the credit crunch were arrogant and unimaginative. Clever, and more imaginative, people sometimes find direct solutions, but that is because they understand the problems to which direct solutions may apply.Obliquity is the best approach whenever complex systems evolve in an uncertain environment and whenever the effect of our actions depends on the ways in which others respond to them. There is a role for carrots and sticks, but to rely on carrots and sticks alone is effective only when we employ donkeys and we are sure exactly what we want the donkeys to do. Directness is appropriate when the environment is stable, and objectives are one-dimensional and transparent, and it is then possible to determine when and whether goals have been achieved. And only then.


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In obliquity we learn about the structure of a problem by the process of solving it. Iteration and experience lead us to the best principles of analysis

There is a cultural shift spreading around the world. The intense focus on the financials as the prime way of explaining the progress of

companies is easing. Other factors are gaining traction and the move will change the way that companies and other organisations’ results are perceived. The inexorable rise of non-financial reporting and of integrated reporting is changing the balance all around the world.Integrated reporting has been described by International Integrated Reporting Council (IIRC) chairman Mervyn King as an idea whose time has come. Guy Battle, lead partner with Deloitte’s sustainability services, says: ‘It gives a better reflection of how businesses are being run and the value of that business to society’. The old order is changing. And it is being driven much more by companies, the corporate sector and the market in which they operate than by regulation or legislation. In the aftermath of the financial crisis the world feels a need to understand more about what companies are doing, where their value lies and what their strategy is as they move forward into the future. ‘By 2020 the reality will be that markets will be demanding integrated reporting,’ says Battle, ‘and by then hopefully the regulators will have caught up.’

‘GOLDEN AGE’Integrated reporting has built up a head of steam. Its model of bringing together information in a connected way and showing how an organisation’s strategy, governance,

performance and prospects lead to the creation of value over the short, medium and long term has caught the imagination. It is what will bring about cultural change around the world. ‘Non-financial reporting is entering a golden age. The brave new world of integrated reporting puts the investor, arguably the key stakeholder, at the centre,’ said ACCA chief executive Helen Brand as she opened the 2013 Non-Financial Reporting Conference. The conference was organised by Global Reporting Initiative (GRI) training partner Lodestar working with Deloitte and ACCA. Lodestar director Julie Fitzsimmons adds: ‘Integrated reporting is the strategic approach that corporate reporting has been waiting for. But the key to its success is making the links with widely used reporting frameworks like the GRI so that companies can develop a seamless approach.’The global movement towards these goals was also reflected at the Amsterdam conference of the GRI in May 2013, with the unveiling of new guidelines. ‘It is about creating better companies, a better market, a better world with more social justice and business managed in a responsible way,’ said GRI chairman Herman Mulder. It also ties in with the aims of the Group of Friends of Paragraph 47 – the key section of the United Nations’ Rio+20 summit in 2012 which called for sustainability to be at the heart of corporate reporting – while a recent ACCA report on progress stressed the importance of collaboration and the integration of sustainability into core business strategy. But it is likely to be integrated reporting that will free up existing systems and bring about cultural change. ‘Financial statements no longer hold the master key to the value of a company today,’ said Jonathan Labrey, communications director at the IIRC, at the Non-Financial Reporting Conference. ‘Integrated reporting is breaking down the silos,’ says Sallie Pilot, director of research and strategy at global reporting consultancy Black Sun. ‘People are concentrating on the

Brave new worldBy focusing on its long-term value for organisations and society, integrated reporting will bring global cultural change, and business is starting to catch on

ACCOUNTANCY FUTURES: CORPORATE REPORTING INTEGRATED REPORTING

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‘In South Africa and in the pilot programmes integrated reporting is already broadening out the finance functions’

Neil StevensonEXECUTIVE DIRECTOR – BRAND, ACCA‘As a pilot programme member, ACCA has seen benefits in producing an integrated report. Features such as stakeholder engagement, materiality and the use of a range of capitals in our business model are helping to articulate our value creation process and to report on our strategic performance. Integrated reporting can improve corporate transparency and support the alignment of people and processes to offer executive teams a rounded view of their organisations. We encourage more companies to become involved in the pilot.’

Right: the 2013 World Economic Forum on Africa took place in Cape Town, South Africa. The country’s businesses are already enjoying the strategic benefits of integrated reporting.

business issues. Companies are defining what their purpose is in society and the integrated reporting model lends itself to expressing that. We are moving towards a stakeholder model rather than just a shareholder model and it is concerned with demonstrating a right to operate. Integrated reporting is a better way of explaining these things.’There will be two consequences of this in the years ahead: the nature and business of the finance function in companies will change, and investors will have to up their game. ‘The role of the finance function is going to shift inevitably,’ says Battle. ‘I think integrated reporting will replace the front half of the annual report,’ says Richard Martin, ACCA’s head of corporate reporting.

THE NEXT STEPBut not everyone agrees quite what happens next. ‘The finance function becomes ever more important,’ says Pilot. ‘Companies will still need the rigour of the way in which it operates.’ But they will have to change their activities. ‘People will ask the question: “If we increase customer retention, what will be the likely financial effect?”. It will become more important to evaluate these things,’ she says. This will extend the remit of finance functions – an effect already seen where forms of integrated reporting are further down the line.


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Guy Battle LEAD PARTNER, SUSTAINABILITY SERVICES, DELOITTE‘Companies need to find a better balance between their financial and non-financial reporting and for too long the financial reporting side of the business has dominated. As our world becomes more interconnected, it is becoming clearer that we now need to connect reporting. It seems quite likely that by 2020 markets will be demanding integrated reporting as it gives them a much better reflection of not only how businesses are being run, but also the business strategy that sits behind. In this new world, it is likely that both the finance and corporate reporting teams will need to develop new skills and in response to this we have created the Sustainability Leadership Academy. ‘It seems clear that the sustainability community doesn’t understand business well enough and needs to learn the language of finance. Likewise, it is also clear that many within finance still do not see the business relevance of sustainability. The academy is a place where finance meets sustainability with the goal of developing a single business-relevant language that will support companies in their performance, risk management and plans for growth.’

Chris Bin IIRC RELATIONSHIP MANAGER AND ANALYST FOR THE SOUTH KOREAN GOVERNMENT‘Non-financial reporting and integrated reporting continue to gain momentum in Asia, as many see the potential that integrated reporting can bring toward achieving financial stability and a focus on long-term investment. It will take time, but Asian companies are preparing for it and keen to see the results of adoption in other regions.’

ACCA annual reportACCA has published its second annual report built on integrated reporting principles. Read it at annualreport.accaglobal.com

Capitals exploredThe application of capitals in integrated reporting is explored in a report for the IIRC by a group led by ACCA and the Netherlands Institute of Chartered Accountants (NBA). Read it at www.accaglobal.com/capitalsir

‘In South Africa and in the integrated reporting pilot programmes it is already broadening out the finance functions,’ says Labrey. ‘They become more strategic, more about the business as a whole.’ They will also need to change their skills and attitudes. ‘The accounting profession needs to build skills,’ says David Allen, FD of Crossrail. ‘And as people become more accustomed to using integrated reporting there will be more data to base decisions upon.’This brings new consequences to other areas of accountancy. ‘We are going to see auditors getting a much better idea of how non-financial measures add value,’ says Battle. ‘Auditors don’t yet understand what really lies ahead. They will have to learn to value the non-quantitative, non-financial data. No one has quite worked out how to do that yet.’The other great change ahead is in the way that investors fit into the new order. A feature of the


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David Allen FD, CROSSRAIL‘Eventually, integrated reporting will change the way business operates. If companies have to report on their impacts on society and on nature, customers will form views and make decisions using this new information. Financial reporting is only part of the journey. The really valuable changes will only happen when decisions have to be made on an integrated basis. There is a lot of work to be done in upskilling finance professionals. The modelling and reporting of forecast information is already complex. Bring in non-traditional, non-financial information and you add more complexity. As organisations begin to make more decisions on an integrated basis, they will find it harder than ever to be certain and to quantify that they are doing the right thing.’

Jeffrey C Thomson CMAPRESIDENT AND CEO, IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) ‘Integrated reporting is an important, transformational business initiative with implications for CFO teams, organisations and society at large. I believe that we must have serious debate to advance this initiative. ‘IMA doesn’t believe that a single integrated report is the correct end result. What’s needed are external disclosures that are more relevant, concise, actionable, balanced and future-oriented to better inform investors as to an organisation’s sustainable value creation capability and capacity. Integrated reporting, based on market evidence, may be a key enabler to that end state. CFO teams will play an important role in assessing the key non-financial performance measures from a reporting, analysis, forecasting and internal controls perspective.’

the Non-Financial Reporting Conference was the frequent comment about how little pension fund investors, for example, knew about or delved into the longer-term trends which issues like sustainability highlight. ‘There is a conspiracy of silence around investors,’ says Battle. ‘They need a conversation around the language of what a company is worth. They need to develop that narrative and the numbers around it. At the moment they probably can’t even put it into the models they use.’ ‘Companies don’t find they are asked about it by their investors,’ adds Jennifer Harrison, head of external reporting at communications giant BT. But this will change in the years ahead. ‘The Asian perspective is that there is a five-to-10-year timeline towards the change,’ says Chris Bin, secretariat relationship manager at the IIRC and an analyst for the South Korean government. ‘Emerging markets will be the ones that lead in Asia.’ ‘There is lots of momentum in South East Asia,’ adds Pilot. ‘They don’t have the long culture of financial reporting and so could drive change quicker.’What the future really holds will be a better way of corporate reporting. ‘I think there has been a stepchange,’ says Harrison, ‘A really dramatic shift towards companies communicating that they are responsible companies.’

Robert Bruce, journalist and accountancy commentator

Paragraph 47: international perspectivesone year on can be found at www.accaglobal.com/accountability

Demonstrators protest outside last year’s Rio+20 summit in Brazil.

Momentum behind sustainability reporting is building. Last year saw Paragraph 47 of the United Nations Rio+20 Earth Summit’s

outcome document giving explicit support for the concept of sustainability reporting by listed and large companies. Various governments then formed the Group of Friends of Paragraph 47 to keep the ambition alive. Major investors and other bodies, including ACCA, are also keeping up the pressure through the Corporate Sustainability Reporting Coalition (CSRC), lobbying governments to develop national regulations mandating the integration of material sustainability issues in companies’ annual reports and accounts. Intervention by policymakers does appear necessary, as voluntary sustainability reporting by companies has so far been relatively limited. According to a 2012 report by Corporate Knights Capital and commissioned by Aviva Investors, Trends in Sustainable Disclosure: Benchmarking the World’s Composite Stock Exchanges, the breadth of sustainability reporting in 2010 was below that of 2008. Only 52 companies out of 4,001 mid, large and mega caps around the world engaged in ‘complete’ disclosure of first-generation sustainability indicators on topics such as pay, energy, water and greenhouse gas emissions. If some form of regulatory action is required, many favour stock exchanges as the optimal channel. ‘Stock exchanges and their requirements can move faster than governments introducing legislation,’ says Rachel Jackson, ACCA’s head of sustainability. ‘If we want to improve and enhance transparency, we should be looking to stock exchanges to require greater sustainability reporting via their listing rules. They can also get right to some of the largest companies in any country.’

MIXED RESPONSEBut are stock exchanges getting the message? Back in 2009 the Sustainable Stock Exchanges (SSE) initiative was launched by the UN as a forum to explore ways to enhance corporate transparency on environmental, social and governance (ESG) issues and encourage sustainable investment.

Exchanges that sign up as partners commit to promoting sustainable investment and improved ESG disclosure among companies listed on their exchange. So far, few have done so, and almost all are in emerging markets. Signatories include Bombay, the Brazilian BM&F BOVESPA, Istanbul, Johannesburg (JSE), the Egyptian Exchange and MCX (Multi Commodity Exchange of India). Of exchanges in developed markets, until recently only Nasdaq had signed up; however, on 24 July this year, the New York Stock Exchange also became a partner, suggesting growing support in North America. Nasdaq is also supporting work by the Investor Network on Climate Risk and others to develop a common sustainability disclosure listing standard that all stock exchanges could adopt.

The exchange expressCould stock market regulations prove to be a quicker route to implementing sustainability practices across businesses than action by governments?

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Three of the best: exchanges leading the way * Johannesburg: sustainability reporting mandatory for

listed companies

* Bombay: listing requirement for constituents of the BSE 100 to report on a range of sustainability measures

* BM&F BOVESPA, Brazil: comply-or-explain policy, whereby non-compliant companies explain why they do not do so

Above: A worker cleans solar cells on a newly constructed solar housing complex in Calcutta, India. Energy is one of the key indicators for sustainability reporting.

Sustainability and disclosure standards for ESG reporting may subsequently be featured at the annual meeting of trade body the World Federation of Exchanges in October.The issue of sustainability and integrated reporting is also on the agenda of the International Organization of Securities Commissions, a previous sponsor of SSE initiative conferences. In June 2013 IOSCO’s board decided to study integrated reporting to gain a better understanding of the issues and consider next steps.

‘COMMON STANDARD’Such action is widely welcomed. ‘Put yourselves in the shoes of CFOs of global companies with probably multiple listings. They won’t want a different requirement for New York, London and Hong Kong,’ says Jon Williams, PwC sustainability and climate change partner. ‘One common standard that could be applied as a minimum requirement across all the exchanges is a must.’Williams believes that the best way to get listed companies to disclose sustainability information is to make this a stock exchange listing requirement. ‘The only reason companies produce such detailed listing documents is because the market requires it,’ he says. ‘There are some shining examples of stock exchanges that have embraced this, such as Brazil and South Africa. But largely the developed world stock exchanges haven’t. It’s seen as a “nice to do”.’Steve Waygood, head of sustainability research and engagement at Aviva Investors, a driving force behind the CSRC, is ‘hugely frustrated’ with the response from many large exchanges. He identifies some ‘honourable exceptions’, such as Toronto, the Deutsche Börse, New York and Nasdaq, all of which feel they need to take action. ‘We wouldn’t be advocating this if we didn’t feel the additional requirements were well worth the money,’ he says. However, as highlighted by the ACCA report, The Business Benefits of Sustainability Reporting in Singapore, views are split on the role that should be played by stock exchanges and whether sustainability reporting should be mandatory for listed companies. The report noted that mandatory reporting ‘may attract a certain kind of capital and a certain kind of company, but may also discourage some companies from listing’. Waygood feels such concerns are ‘misplaced’, but Paul Holland, a director in the Sustainability Advisory Services team at KPMG in the UK, has some sympathy. He says: ‘There is a risk of companies moving their listing if there is a significant difference in obligations of


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mandatory reporting. The good sustainability reporting is done for reasons other than meeting the requirements of a listing obligation. Leading companies are doing it to meet the needs of a varied group of stakeholders and to drive business performance.’Nevertheless, stock exchanges interested in promoting sustainability reporting have increasing resources to draw upon. The United Nations Conference on Trade and Development (UNCTAD), which helped to launch the SSE initiative, is drafting guidance to act as a technical aid for stock exchanges and regulators seeking to implement or strengthen initiatives to promote corporate sustainability reporting. The idea is to identify

Top: ZCB, Hong Kong’s first zero-carbon building. The three-storey building comprises an indoor exhibition and education space, a showcase eco-home, eco-offices and a multipurpose hall, as well as the first native urban woodland in Hong Kong.

off-the-shelf practices already tested in some jurisdictions that stock exchanges elsewhere can implement.Many could learn from the experience of the Johannesburg Stock Exchange. ‘We believe the strongest impact we can have is through a hybrid approach that combines basic regulation with our influencing power,’ says Corli le Roux, head of the JSE’s Socially Responsible Investment (SRI) Index. This evolving index consists of companies that meet certain criteria related to their ESG policies, management practices and reporting. ‘Our approach to regulation and listing requirements has always been to try to enable the minimum investor protection and to


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Pietro BertazziSENIOR MANAGER, POLICY AND GOVERNMENT AFFAIRS, GLOBAL REPORTING INITIATIVE

Doug Morrow MANAGING DIRECTOR, CORPORATE KNIGHTS CAPITAL

Rodney Ndamba ACCACEO, INSTITUTE FOR SUSTAINABILITY AFRICA

Anthony MillerCSR FOCAL POINT, INVESTMENT & ENTERPRISE DIVISION, UNCTAD AND CO-COORDINATOR, SUSTAINABLE STOCK EXCHANGES

‘Stock exchanges have become important actors on the sustainability reporting scene, and I see no barriers to the further development of their support for sustainability reporting. In the past the GRI has done a lot of work with governments around sustainability reporting, and is currently strengthening engagement with market regulators, including stock exchanges. We are developing a strategy in this area, and intend to be more proactive.’

‘The general trend globally is towards more and better sustainability reporting, and this is clearly playing out at stock exchanges although it’s too much to say that substantive mechanisms to encourage sustainability reporting are commonplace. Like other institutions, stock exchanges are reviewing their own interests and thinking about how this intersects with the growing demand for and supply of sustainability data. I believe sustainability reporting will be a business-as-usual concept in the next 20 years.’

‘In Zimbabwe, the stock exchange listing requirements are under consideration and sustainability reporting could be mandatory for listed companies. Across the region the momentum behind sustainability reporting is growing. If the southern African region could develop a common listing requirement, including sustainability reporting in the requirement will be a beneficial strategy for sustainable development.’ Member of ACCA’s Global Forum for Sustainability

‘If we look at CSR activities over the last 20 years, most focus has been on what investors and companies could do. Stock exchanges were on the sidelines, seen like utility companies – as the wires through which capital was transmitted. But now more and more stock exchanges feel they have a role to play. Lack of awareness used to be a barrier to action, but that barrier has been falling fast. It’s like a big ice wall on a summer day – it’s coming down.’

ensure this is in place,’ she says. ‘Beyond that we aim to facilitate and enable further action by companies by creating things like the SRI Index, which is essentially a tool for investors to see what companies are doing.’ ACCA’s Jackson offers a final message to stock exchanges not yet requiring sustainability reporting of their listed companies. ‘Do it and be brave,’ she says. ‘Don’t hide behind excuses that it might not be competitive. Take a look at what’s going on in the major companies and exchanges around the world, and the stakeholder push for reporting changes. Guidance exists; get on and play your part!’

Sarah Perrin, journalist

Above: A polyethylene sculpture at Botafogo beach in Rio de Janeiro, Brazil, marked the 2012 UN Conference on Sustainable Development (Rio+20). Paragraph 47 of the summit’s outcome document supports sustainability reporting by listed and large companies.

ACCOUNTANCY FUTURES: CORPORATE REPORTING SRI LANKA

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A worker fixes bulbs in a ‘little Buddha’ sculpture at a store in Colombo, Sri Lanka in preparation for Wesak, the most important of the Buddhist festivals.

Shining a lightAs Sri Lanka undergoes sociopolitical and economic change on a huge scale, Professor Samanthi Senaratne examines the role that integrated reporting can play


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The corporate reporting landscape has undergone a dramatic transformation over the years, broadening to encompass businesses’ responsibility

towards the environmental and social impact of organisational activities. This has extended the boundaries of corporate reporting to include companies’ social and environmental performance, in addition to their financial position. This dimension of corporate reporting, commonly known as ‘sustainability reporting’, is closely linked with sustainable development, defined by the 1987 Brundtland Report as ‘development that meets the needs of the present without compromising the ability of the future generation to meet their own needs’. Though the term ‘sustainability’ is a global development at government level, corporate entities are in the control of the majority of the resources of the world. Thus, they are geared to consider how their operations affect the environment and society, and how they report on their sustainable performance. However, in spite of these developments, it is often questioned whether the current corporate reporting model is sufficient to meet the needs of the 21st century owing to lack of connectivity between the different pieces of information presented. This has become an issue of great importance today owing to the recent global corporate scandals that have caused much social and economic turmoil and highlighted limitations in corporate reporting. Thus, there is a need for a new reporting model to collate all the relevant information about an organisation’s strategy, risks and opportunities, risk management, environmental and societal impacts and financial results. This need has given rise to the development of integrated reporting. The International Integrated Reporting Committee (IIRC) states that ‘integrated reporting brings together the material information about an organisation’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates’. Thus, it integrates different strands of reporting (financial, management commentary, governance and remuneration, and sustainability) into a coherent report that explains an organisation’s ability to create and sustain value.

THE SRI LANKAN CONTEXTHere, I address the relevance of integrated reporting to Sri Lanka – a country that is undergoing a significant sociopolitical and economic transformation after a 30-

year civil war, creating many opportunities and challenges to the country’s corporate entities. Hence, connectivity is required in companies’ presentation of information on present and future performance – including financial, management, governance and sustainability information, which are currently reported separately.Sri Lanka has achieved significant developments in relation to corporate financial reporting. With the convergence to international financial reporting standards (IFRS), there is increased comparability of Sri Lankan companies’ financial information for global capital markets. Though not mandatory, there is a tendency towards sustainability reporting in these companies, with some companies even complying with the Global Reporting Initiative (GRI) Guidelines. ACCA’s annual Sustainability Reporting Awards and recognition of best disclosures on sustainability in the Institute of Chartered Accountants of Sri Lanka’s Annual Reports Competition have also provided an impetus for these companies to engage in sustainability reporting. While these developments have contributed to enhance the quality and credibility of corporate reporting, there is a need to present the story of a company comprehensively to understand clearly its long-term health. In this context, Sri Lankan companies need to move towards integrated reporting, in order to help their stakeholders and the wider society to see how different pieces of information presented in corporate reports are linked with each other, thereby obtaining a holistic view of how companies create and sustain value over time through their business models.

THE WAY FORWARDIt is too early, however, to predict when integrated reporting will be in widespread use in Sri Lanka. Nevertheless, there is a general consensus that the present corporate reporting model needs a transformation. This would require stimulating a debate on integrated reporting, addressing issues such as whether the companies really know what is missing in their present reporting model, how integrated reporting could fill this void, what an integrated report would look like and what other factors would impact this transformation. Hence, successful implementation of the model in the country depends on addressing these concerns. In this respect, accountancy professionals, academics and regulators need to work together to create an awareness and a broad discussion among the relevant stakeholders, transforming them from ‘silo thinking’ to


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‘integrated thinking’, where connectivity and interdependencies between factors that contribute to value creation in an organisation are considered. The issues discussed above show that the application of an integrated reporting model in Sri Lanka would help corporate entities to provide a complete picture of their activities through the integration of financial, sustainability, and governance reporting.

Professor Samanthi Senaratne is head of Department of Accounting at the University of Sri Jayewardenepura, Sri Lanka. She has published widely in the areas of corporate governance, corporate social responsibility reporting and accounting education.

Dirk Pereira CEO, UNION ASSURANCE

Lucy TanGROUP CFO, DIALOG AXIATA

Iresha Somarathna HEAD, ENVIRONMENT AND ENERGY MANAGEMENT, BRANDIX LANKA

‘Business leaders are mindful of the need to balance stakeholder demands for increased transparency and accountability while navigating ever-evolving challenges and opportunities. The integrated reporting framework enables organisations to communicate the value they have created to all stakeholders, allowing them to make an informed and objective assessment of the future of the company. It also enables the reader to look beyond short-term results.’Commended (medium scale), ACCA Sri Lanka Sustainability Reporting Awards

‘There are a multitude of factors that determine the value of a company. We are all familiar with the financial and tangible aspects, but factors such as natural resource depletion and energy security are only dealt with in an isolated sustainability report. Integrated reporting better reflects the broad and longer-term consequences of the decisions organisations make, the resources they draw on and the relationships they utilise, to create and preserve value in the long term.’Runner up (large scale), ACCA Sri Lanka Sustainability Reporting Awards

‘The principal benefit of integrated reporting is a more disciplined and holistic approach across organisational silos, allowing companies to improve their management, ensuring a sustainable strategy that creates long-term value for shareholders and society. Brandix was the first private sector entity in Sri Lanka to launch a sustainability report.’ Winner (large scale), First Time Report, ACCA Sri Lanka Sustainability Reporting Awards

Petrol is decanted into bottles at a Colombo fuel station. Sri Lanka is undergoing an economic transformation following the end of the country’s 30-year civil war.

There is a need to present the story of a company comprehensively to understand clearly its long-term health


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While there is much talk – and even growing understanding – of the new world of corporate reporting and assurance,

the concept of materiality in this emerging paradigm remains in need of clarification. Materiality is a term understood, if not easily explained, by the auditors of financial statements, and either misunderstood or ignored by users. In terms of newer forms of reporting – such as integrated reporting and sustainability reporting, with their different purposes and audiences – the concept of materiality can be seen as a key driver. David York, head of auditing practice at ACCA, says: ‘These days materiality is actually what is driving the newer reporting. The whole concept is becoming a question of what are the boundaries on which you are reporting.’

He suggests that if a company is reporting on sustainability, users are not interested in the traditional idea of just reporting on the assets and liabilities legally owned. ‘Users are interested in the influence a company has on its supply chain,’ he says. ‘They don’t care about ownership.’ Materiality means relevance as much as it does value. Sustainability reporting lacks the clear primary user group of financial reporting, so deciding what is included and what is not is problematic.Carol Adams, the Australian-based founding director of Integrated Horizons, says that attention does need to be paid to materiality in this context. Adams, a member of ACCA’s Global Forum on Sustainability, says: ‘Materiality is important. While an integrated report might only include what is material to providers of finance, it is important that organisations report on and are accountable for material impacts on a broader range of stakeholders – either in an integrated report, on the website or in a publicly available special purpose report. Not to do so exposes the organisation to risk.

‘The accountant of the future will need an understanding of how all capitals impact on risk and ability to meet strategy. The outcome of an integrated and a sustainability report depends on a robust materiality process. This will present a challenge for assurance providers.’

RISE TO THE CHALLENGEAssurance providers could argue that the track record suggests that they are more than capable of rising to these challenges. But how far will they have to move? Richard Martin, head of corporate reporting at ACCA, suggests that maybe not that much needs to alter. ‘The issue needs to be thought through as a result of widening reporting, but people have to make a decision about what they include and what they don’t. In accounting and corporate reporting there is a clear audience of investor/shareholders and analysts. But it is still understood that what is material to one group may not be material to another,’ he says.It has always been accepted that materiality is not just about the monetary size or value of the item. Martin says that this is a starting point but the definition is more focused on items whose inclusion or omission would alter the view of the user. Materiality has the power to tip a message one way or another. Integrated reporting accepts that some things that are important will not be easy to quantify through numerical indicators. (Want to put a value on employee skills and attitudes?)Then there is the further challenge of comparing very different forms and sources of capital through the medium of money. Even when a figure can be produced, it is difficult to communicate the assumptions that need to be understood to put the quantification in context.

LONG-TERM THINKINGAdams is in no doubt of the challenges facing the assurance profession. She says: ‘The key issues for accountants are that integrated reporting aims to get us thinking longer term: thinking about creating value in terms of people, the natural environment, relationships – the ‘capitals’ – as well as increasing financial wealth and thinking about the business model in broader terms. With core skills in systems, processes, measurement

Material concernsWhile the widening scope of corporate reporting and assurance is making the concept of materiality more important, it is also becoming more complex

ACCOUNTANCY FUTURES: CORPORATE REPORTING MATERIALITY

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‘It is still understood that what is material to one group may not be material to another’

and reporting, accountants will need to work with other functions to devise new ways of describing and measuring flows between the various capitals and thinking about how they are impacted upon.‘Working out what it is about your people, relationships and environmental measures that add value to your business is important for long-term success,’ she adds. ‘Understanding how environmental impacts can affect reputation and financial risk, for example, makes good business sense. Accountants will need to think more broadly about what causes risk.’Assurance and reporting have to meet those key challenges of providing the data stakeholders require, while still being able to show what is important to driving the success of the organisation. Materiality is central to determining whether those challenges are met.

It is worth recalling that materiality has always caused headaches for auditors. Dr Ian Dennis, a senior lecturer in accounting and finance at Oxford Brookes University Business School, is currently working on a project funded by ACCA that considers professional judgment in auditing. One of the preliminary conclusions of his work is that ‘auditors need to engage in further debate about what they want from the development of a concept of materiality before progress can be made in agreeing on the concept’. Dennis notes that given its importance in auditing, it is strange how materiality has been described as a black box and auditing’s ‘best-kept secret’. The new forms of corporate reporting and assurance may help to unlock that secret.

Peter Williams, accountant and journalist

ACCOUNTANCY FUTURES: CORPORATE REPORTING MATERIALITY

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Several years ago, an article entitled From accounting to ‘forecounting’ (Cormier and Magnan, 2005) claimed that accounting would rely

increasingly on forecasting future cashflow. Even though this article was very insightful, many questioned its premise. But after close observation of the standards developed by the International Accounting Standards Board (IASB) in recent years, particularly International Financial Reporting Standards (IFRS) related to financial instruments and revenue recognition, I firmly believe that accounting is transforming to ‘forecounting’.The major forces driving this transformation can be analysed from three perspectives: conceptual framework, income determination and accounting measurement. From the perspective of a conceptual framework, the definitions of asset and liability require accountants to focus more and more on future cashflows. According to the existing definitions of elements of financial statements,

the ability to generate future cash inflows is the most important characteristic of an asset, either individually or in combination with other assets. Similarly, the main characteristic of liability is that it will result in cash outflow. Therefore, future cash inflow and outflow are the touchstone for asset and liability recognition.

CHANGE OF EMPHASISFrom the perspective of income determination, the shift from an income-statement to balance-sheet approach also calls for accountants to place more emphasis on future cashflows. Unlike the income-statement approach, the balance-sheet approach focuses on debit accounts (asset and liability) instead of credit accounts (revenue and expense). Asset and liability measurement becomes the key. For instance, the new revenue recognition standard, as proposed by the IASB, intends to create a model for revenue recognition that is built on a contract-basis and balance-sheet approach that downplays the importance of

The move towards forecountingProfessor Huang Shizhong discusses the evolution of accounting and its implications for professional judgment and accountancy education

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Professor Huang Shizhong is vice president of Xiamen National Accounting Institute and professor in accounting at Xiamen University. Among other roles he is a member of the Ministry of Finance’s Accounting Standards Committee, a member of the Chinese Institute of CPAs’ Auditing Standards Committee, and a member of the IFRS Advisory Council.

realisation and matching principles. Revenue will be recognised when a contract asset increases or a contract liability decreases at the probability-weighted amount of consideration that an entity expects to receive from the customer. More importantly, under the proposed model the customer’s expected credit risk will be deducted directly from the revenue. This clearly demonstrates that revenue recognition depends on measurement of accounts

receivable. The precondition for revenue recognition is that an entity shall be able to measure the expected value of accounts receivable, which represents the realisable future cashflow after taking into account the expected credit risk and time value of money.From the perspective of accounting measurement, wide use of fair value for asset and liability measurement also forces accountants to focus on the forecasting of future cashflow. Implementation of fair-value-related standards (such as financial instruments, impairment of financial assets, revenue recognition, leases, share-based payment, employee benefits, intangible assets and business combination) relies heavily on the forecasting of future cashflow. It is not difficult to find that more and more IFRSs and exposure drafts published by the IASB require substantial estimation of future cashflow. Take IFRS 9, Financial Instruments, as an example: even unquoted equity investment will be measured at fair value according to this standard. This means that accountants will have to devote a lot of resources to predict the future cashflow of the investee companies. Impairment of financial assets is another example that requires significant effort to predict future cashflow. To alleviate the procyclicality of fair-value accounting, the incurred loss model (ILM) for recognising impairment of financial assets will be replaced by the expected loss model (ELM). This involves significant judgment in forecasting the amount, timing and uncertainty of future cashflows of financial assets.

THREE-STAGE APPROACHAccording to the three-stage approach to the impairment of financial assets, 12-month expected credit losses would be recognised as soon as a financial asset is originated or purchased (stage 1); full lifetime expected

credit losses would be recognised when the credit quality of a financial asset deteriorates significantly and the resulting credit is below investment grade (stage 2); and full lifetime expected credit losses would be recognised and interest revenue would be calculated based on the net amortised cost-carrying amount when the credit quality of a financial asset deteriorates to the point that credit losses are incurred or the asset is credit-impaired (stage 3).Under this approach, determination of credit quality is crucial and the credit quality is dependent on the expected cashflow from financial assets. This requires not only past experience and historical data but also calls for the entity to assess the impact of future economic developments. In summary, the ELM overturns the doctrine that accounting reflects only the past but not the future, and will become a milestone in the transformation of accounting to forecounting.The evolution of accounting characterised by increasingly relying on forecasting future cashflow has significant implications for professional judgment and accountancy education. Traditionally, professional judgment refers to accountants making choices in the context of generally accepted accounting principles based on their professional experiences and accounting knowledge. It can be seen that it is largely based on accounting experience and knowledge; the exercise of professional judgment requires little or no expertise from other disciplines. The meaning of professional judgment has changed as accounting is transforming to forecounting. The content and subject matter of professional judgment are no longer limited to accounting, and the time dimension of professional judgment is no longer confined to the past and present. Professional judgment now requires not only accountancy experience and knowledge but also expertise in the fields of economics, finance, business, laws, statistics and so on. In other words, modern professional judgment relies heavily on expert opinions and knowledge supports from disciplines other than accounting.The transformation of accounting to forecounting calls for more integration of accountancy with other disciplines such as economics, business, finance, statistics and risk management. Quantitative courses relating to statistical analysis and financial engineering should be incorporated into the curriculum and continuing professional development programmes so as to equip accountants with the necessary analytical skills to forecast future cashflow in an increasingly complex and uncertain economic environment.

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‘The transformation of accounting to forecounting calls for more integration with other disciplines’

Islamic financial products and services are distinguished from their conventional counterparts by their compliance with Sharia precepts and

principles. Sharia compliance risk to an Islamic financial institution (IFI) is the risk that a financial service or product is not or will not be in compliance with established Sharia principles and standards as interpreted by the Sharia advisers to the IFI. The consequences of non-compliance can be significant and pervasive: worst-case scenario, it could lead to depositors withdrawing their funds; loss of income; voiding of contracts; litigation; and ultimately a diminished reputation and long-term damage to the IFI’s business franchise.The risk of Sharia non-compliance is present in all stages of the development and launch of an Islamic product, including the conceptualisation and structuring of Islamic instruments; legal documentation; contract terms governing default and late payment charges; sale and market conduct; execution and implementation; and accounting and disclosure. In order to be able to address these risks, an IFI should establish a rigorous and comprehensive Sharia governance system. In this article, we take a look at some of the governance models in place around the world based on a survey of reporting practices of IFIs in the UK, the Middle East and Malaysia. Typically, these comprise internal and/or external assurance arrangements.

INTERNAL ASSURANCE ARRANGEMENTSInternal assurance arrangements are clearly the most prevalent governance model in place. An IFI’s internal assurance framework will usually consist of a Sharia supervisory board (SSB), often supported by the IFI’s internal audit function and, sometimes, by an internal Sharia review unit. However, other hybrid arrangements are also common.The SSB is responsible for ensuring that an IFI has complied in all its activities with Sharia, as well as for directing, supervising and reviewing its activities. The SSB consists of scholars, and industry best practice is for the members of the SSB to be elected by the shareholders of the IFI in order to establish their independence from management. However, we noted some inconsistencies in the application of this model. Firstly, while industry standards around Sharia governance have been developed and issued by the likes of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board, these are mandatory in only a few jurisdictions and barely referred to as best practice in others. As such, some SSBs comprise several recognised scholars while others only include one or two. How they oversee IFI activities also varies; some choose to directly sample transactions themselves on a periodic basis, while others make use of the services of the internal audit function. A handful of IFIs also employ their own internal Sharia review unit

Samer Hijazi FCCA is a director in KPMG’s financial services audit practice. He studied economics at the London School of Economics and is associate member of the Association of Corporate Treasurers (AMCT) and a member of the Chartered Institute for Securities and Investment (MSI). He is also a Certified Islamic Professional Accountant (CIPA) with the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

A principled approachKPMG’s Samer Hijazi outlines the importance of Islamic financial institutions establishing a rigorous and comprehensive Sharia governance system

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consisting of more junior scholars who perform compliance testing directly for the SSB.To make matters even more confusing, we noted that the nature and scope of the assurance opinions issued also differs. Most issue Sharia compliance opinions on activities for the year then ended based on the transactions sampling they would have carried out over the period. Most of these opinions give positive assurance on the IFI’s compliance. However, some SSBs state that they have reviewed all transactions and activities, while a minority issue negative assurance opinions. This is also compounded by the fact that there appears to be no industry-accepted definition of the experience and qualifications needed to work as a scholar. This is less of an issue when it comes to the big industry names like Sheikh Nizam Yaquby, Dr Mohamed Elgari and so on. However, arguably, this is potentially a barrier to entry for the next generation of leading scholars.This leads us on to the next challenge – many IFIs are advised by the same scholars. Some commentators respond that this is no different to the Big Four accountancy firms being auditors to 99% of the FTSE 100. However, the Big Four are subject to independent oversight; with a few exceptions, there is little independent regulation of Sharia scholars currently in place.

EXTERNAL ASSURANCE ARRANGEMENTSAs noted, some jurisdictions (especially those that follow AAOIFI standards) require some form of external assurance. This is typically the responsibility of the IFI’s external auditor. An external audit may entail not only a statutory financial audit but also an audit of Sharia compliance. Since IFIs are required to adhere to Sharia principles in all their business activities, external auditors in some

jurisdictions express an opinion as to whether all transactions and products entered into during the financial year are in compliance with the Sharia rules and principles, and fulfil the specific directives, rulings and guidelines issued by the SSB of the entity. In addition, some jurisdictions, such as Malaysia, Pakistan, Dubai, Oman and Nigeria, have set up a centralised Sharia board (CSB). This brings consistency to financial products and services offered by IFIs but can also inhibit the SSB’s ability to provide relevant solutions and innovations. Further to this, an IFI operating across different jurisdictions may find it difficult to adhere to guidelines set by different CSBs. Nevertheless, it seems that a CSB can complement the SSB function by providing clarification at a regional level over Islamic investment and accounting issues.

CONCLUSIONThere does not seem to be a single accepted model of achieving and demonstrating ‘Sharia compliance’ to the market and the stakeholders of the IFI. The current structures and processes established within IFIs for monitoring and evaluating compliance consist of internal and, in some cases, external features. One of the defining lessons of the recent financial crisis has been around the need for better and more transparent corporate governance. We believe this should also apply to developing more consistent and rigorous Sharia governance models across the Islamic finance industry around the world.


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Key reporting issues and recommendations A joint report by ACCA and KPMG calls for greater consistency in the way Islamic finance is reported financially, writes Aziz Tayebbi, ACCA’s head of international development. Read the report Global alignment at www.accaglobal.com/reporting

The Malaysian Accounting Standards Board (MASB) is calling for the harmonisation of Islamic finance reporting standards with International

Financial Reporting Standards (IFRS).The board’s chairman Mohammad Faiz Azmi says: ‘If we want to comply with IFRS, then the question is how we do that. What do we need to do to accommodate Islamic finance transactions? We think that IFRS should apply to all transactions, not just conventional ones, and we have spent the last few years exploring the issues of why, what and how to do so in Islamic finance.’ Having done its homework, MASB was one of the bodies that lobbied the International Accounting Standards Board (IASB) to proactively examine the issues in Islamic finance reporting. The fact that the first IASB meeting on Islamic finance transactions in mid-2013 was held in Kuala Lumpur in Malaysia was ‘very gratifying’ for the MASB.

‘It was a good indication of the IASB’s inclusiveness. It was willing to stop, listen and examine a new series of financial transactions in the global marketplace,’ Faiz says. But there are difficulties for harmonisation ahead. One of the most obvious is the divergence between IFRS-compliant standards for Islamic finance and those issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Although the largest Islamic finance markets – Saudi Arabia, the United Arab Emirates, Malaysia and Kuwait – all require Islamic finance institutions (IFIs) to report under IFRS, IFIs in jurisdictions such as Bahrain and Qatar rely on the AAOIFI standards. The existence of two different sets of standards raises the risk of arbitrage and abuse, and hampers comparability.Some of the key differences between IFRS and AAOIFI relate to the time value of money, substance over form and the recognition of probable economic benefits rather than enforceable rights and obligations. Faiz says: ‘We’ve consulted the Sharia (Islamic law) councils of our own regulators here and also ISRA (the International Shari’ah Research Academy for Islamic Finance). We are told those concepts can be accommodated within IFRS. It’s a bit like putting a round peg in a square hole: if the hole is big enough or the peg small enough, it will fit, although it may not be a perfect fit.’

THE KEY PRINCIPLESDiscussion with the IASB has established that recognition and measurement are key to Islamic finance reporting harmonisation; disclosure is a lesser issue. ‘We can continue to use the Islamic terminology – eg musyarakah (partnership) and mudharabah (profit and loss-sharing). We don’t have to use the conventional terminology if it doesn’t make sense to stakeholders.’Faiz says: ‘What we’ve confirmed after research and consulting with the IASB is that we can apply IFRS generally to Islamic finance transactions. Where it doesn’t quite make sense we need to encourage more and better disclosure of the nature of the contract and the nature of the risks, etc.’He says it is a matter of pragmatism: ‘We’re

Islamic peg in the IFRS holeMASB chairman Mohammad Faiz Azmi says International Financial Reporting Standards need to accommodate Islamic finance transactions


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Malaysia’s IFRS transitionImproving IFRS compliance continues to headline the agenda for the Malaysian Accounting Standards Board (MASB).Faiz says: ‘Our first objective is to get Malaysia across the line in terms of IFRS adoption. We have got most PLCs across the line as of 1 January 2012 but there are two industries where we are waiting for the IASB’s response – real estate and agriculture.’ The MASB deadline for IFRS convergence for non-private entities was 1 January 2012. By 2014 the application of the Malaysian Financial Reporting Standards (MFRS) Framework (which is identical with IFRS) will be mandatory for transitional entities that fall within the scope of MFRS 141, Agriculture, and IC Interpretation 15, Agreements for Construction of Real Estate. Faiz anticipates that the upcoming new IFRS on revenue will address concerns about revenue recognition. ‘We’re waiting for that to be issued so the industry can early-adopt it and be IFRS-compliant.’On agriculture, Faiz notes: ‘The IASB just issued an exposure draft which talks about one of our proposals to scope out bearer biological assets, which will enable us to hold at cost as opposed to fair-valuing it. That is in progress, but it is just at the exposure draft stage so it will take some time to resolve. We hope that the revenue issue will be resolved this year and that the agriculture issue will be resolved next year. Once those two issues have been solved we can bring the rest of the companies across the line.’ Over the next few months, the MASB also plans to roll out IFRS for SMEs for application by 2016. ‘It’s one thing to get 1,000 PLCs across the line, quite another to deal with a few hundred thousand SMEs,’ says Faiz. ‘We want to be sure the market is ready for the change.’

not trying to force other people to do it. We’re trying to solve our own problem. My KPI (key performance indicator) really was could auditors auditing the financial institutions doing Islamic transactions actually assert that these FIs were IFRS-compliant?’ Standard-setters have to actively advocate their stakeholders’ interests, says Faiz. ‘It has to be a two-way dialogue,’ he adds. Standard-setters should effectively communicate local concerns to the IASB at a much earlier stage of standard development to protect stakeholder interests. This is especially pertinent if the issues under scrutiny – agriculture and Islamic finance, for example – are not deemed as important to the major economies which traditionally hold sway in accounting circles.

‘I can’t say for sure if our views will be accepted,’ says Faiz. ‘At least we will have brought up the issue and made the case to make sure it is part of the IASB’s deliberations. What matters is that we have made every attempt to get our views heard.’ Nazatul Izma Abdullah, journalist


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Mohammad Faiz Azmi is in his second and final term as chairman of the Malaysian Accounting Standards Board (MASB). In his day job, he is executive chairman at PwC Malaysia. He was called to the bar at Lincoln’s Inn and trained as a professional accountant with Touche Ross in London before beginning his career with PwC Malaysia in 1993. He has over 27 years’ experience in the audit and business advisory services of financial institutions both in the UK and Malaysia.

It is 11 years since the European Union agreed to adopt International Financial Reporting Standards (IFRS) for the consolidated accounts of listed

companies. In that short space of time, the number of jurisdictions using IFRS has risen to more than 100. As International Accounting Standards Board chairman Hans Hoogervorst told ACCA’s last International Assembly, the IASB ‘is well along the path to becoming the global standard-setter’.According to Deloitte, which collects comprehensive information on convergence through its IASplus website, 128 jurisdictions now permit or require IFRS for domestic-listed companies and there are just 25 jurisdictions where IFRSs is not permitted. The IFRS Foundation recently completed the first phase of its own project to assess the global adoption of IFRS and found that of the G20 nations plus a further 46 jurisdictions, 95% had made a public commitment supporting IFRS as the single set of financial reporting standards suitable for global adoption. The IASB’s ultimate aim is to develop a single set of high-quality standards for use by constituents around the world, regardless of the size of their capital market. For emerging economies in particular, the standards are seen as critical. ‘Many of these rapidly growing economies have the ambition of developing their own global financial centres,’ Hoogervorst told the ACCA Assembly, ‘and the use of IFRS is increasingly seen as a prerequisite for such financial centres to exist.’As such, the IASB has taken specific steps to make sure that the needs of economies beyond the largest ones are fed into the standard-setting process. The IASB itself now includes several representatives from the BRIC (Brazil, Russia, India and China) and similar nations, including the Brazilian Amaro Luiz de Oliveira Gomes, Chung Woo Suh from South Korea and Wei-Guo Zhang, former chief accountant at the China Securities Regulatory Commission. A similarly broad range of stakeholders is represented on the trustees and advisory groups, while the Emerging Economies Group (EEG) provides a forum for the issues that such economies face in applying the standards.

In terms of the major markets that are on the rise, Brazil has adopted IFRS and Russia is committed to full transition for all companies by 2018 (it already requires IFRS for the consolidated statements of public interest entities). China introduced its Accounting Standards for Business Enterprises (ASBEs), which are substantially converged with IFRS, in 2007, and the country is continuing to work towards further convergence. India, along with Pakistan and Thailand, has adopted selected IFRSs, but significant differences remain between some IFRSs and national standards.

COMPLICATED PICTUREThis raises the most important point – that while the momentum for a global accounting language seems to be gathering pace, ‘convergence’ comes in many forms. Full IFRS adoption is the simplest option for countries that have no (or insubstantial) national GAAP of their own, but for developed countries with an established GAAP, IFRS convergence is

Global momentum While a large and growing number of jurisdictions have adopted International Financial Reporting Standards, others – notably the US – still require persuading

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Case study: Indonesia Indonesia has been converging with IFRS since 2008. Indonesian GAAP is very close to IFRS and we aim to continue working toward full IFRS adoption, although a decision on the target year has not been made. As more Asian countries have decided to adopt, or converge with, IFRS, implementation challenges will increase. Asia is more fragmented than Europe, with a different level of maturity in its accountancy profession and capital markets, as well as different socioeconomic characteristics, legal framework and business culture. In Indonesia, the main challenge is the multi interpretations to the principles-based standards among accounting practitioners. The Indonesian Financial Accounting Standards Board (IFASB), as a member of the Asian-Oceanian Standard-Setters Group (AOSSG) and EEG Working Group, has been very active in discussing country-specific accounting issues with the IFRS interpretations committee (IFRIC). With the current mechanism, however, it is very difficult for national standard-setters (NSS) to seek IFRIC resolution as the deliberations can be time consuming. Accounting for land rights and telecoms towers are two examples of Indonesian issues raised by IFASB recently. We need a formal mechanism between IASB/IFRIC and NSS, which allows NSS to develop its own interpretation should a country-specific issue genuinely emerge. Rosita Uli Sinaga is chairperson of the IFASB, senior partner at Deloitte in Indonesia and accounting lecturer at the University of Indonesia. Ersa Tri Wahyuni is technical adviser at IFASB and PhD researcher at Manchester Business School


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more complicated. In some jurisdictions IFRSs are adopted wholesale, while in others national standards apply but these are converged with IFRS to varying degrees. There remain sticking points, most notably in the adoption of the agriculture standard IAS 41 in areas of South East Asia where industries such as palm oil production are dominant. Malaysia excluded two standards (IAS 39 and IAS 41) from its convergence programme, but has since relented and is fully converged since 2012. ‘The best option would be for countries to adopt IFRS as produced by the IASB,’ says Richard Martin, ACCA’s head of financial reporting, ‘but there have been problems in a number of countries. But on the whole, a commitment to move to IFRS in due course is not a bad answer.’Hoogervorst told the Assembly that ‘modifications and changes seem to be the exception rather than the rule,’ but has consistently warned against major divergences. As he told an international seminar hosted by the Indonesian Institute of Accountants (IAI) and the ASEAN Federation of Accountants (AFA)in Indonesia in March 2013: ‘The full benefits of using the IFRS brand can only be enjoyed

if you adopt it fully. For foreign investors it is very difficult for investors to discern small differences from big ones.’Martin believes that market pressure is the key. ‘The interesting thing is whether there is a feeling that a lack of full convergence is perceived as a significantly negative factor by a country’s entities or its stock market,’ he says. ‘That could bring about pressure to make compromises in order to get truly global standards. That certainly happened in Malaysia; domestic companies were finding that they had to explain the differences between IFRS and their accounts, and that created pressure for the country to complete its convergence.’Hoogervorst agrees. ‘Most jurisdictions have concluded that the credibility bonus of full adoption of IFRS outweighs the temptation to tinker with the standards to address local problems,’ he told the IAI-AFA seminar.

THE US QUESTIONA major hurdle to overcome in the path to a global accounting language, though, is the US, where only foreign registrants are currently permitted to file IFRS accounts. The

Above: an oil palm plantation near the Malaysian capital, Kuala Lumpur. While Malaysia was slow to adopt IAS 41 because of its implications for the palm oil industry, the country became fully converged in 2012.

the same time, the Securities and Exchange Commission (SEC) published its long-awaited staff report on the future of IFRS in the US, which had been prepared in order to help SEC commissioners decide whether (and how) IFRS should be applied in the US.The report said that IFRS was ‘generally perceived to be high quality by the global financial reporting community’, but there were gaps in the IFRS literature, to a greater extent than in US GAAP. The report concluded that adopting IFRS as authoritative guidance in the US would not be supported by the majority of participants in US capital markets, but added that there was substantial support for exploring other methods of incorporating IFRS, such as considered endorsement on a standard-by-standard basis by FASB.An analysis by the IASB acknowledged that many barriers remained but concluded that there were ‘no insurmountable obstacles’ for adoption of IFRS by the US. A recent ACCA survey of US investors revealed that most saw the eventual adoption of IFRS by the US as inevitable. Hoogervorst told the Assembly that while the transition would not be easy, ‘many of the challenges that would be faced have been faced by other jurisdictions, including jurisdictions with far fewer resources’.‘The US convergence question has been rumbling on for 15 years or more,’ says Martin. ‘But take-up has spread despite the uncertainty. Take-up of IFRS will continue with or without the US, although perhaps more slowly than if the US had signed up.’



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Evgeny Buben FCCACFO, GAZPROM NIGERIA

Wallace Siakachoma FCCAGROUP FINANCE EXECUTIVE, ABC HOLDINGS, SOUTH AFRICA

‘Although proper accounting is important for developing and emerging economies, obstacles remain. There’s a lack of political will to start the process of harmonisation and control implementation; a lack of professionals capable of performing proper implementation; resistance from local accounting bodies and other local influential groups; and resistance of local accountants and auditors to changes. Accounting trends are like thermodynamics; there is a tendency for all matter and energy in the universe to evolve towards a state of inert uniformity. We can predict that all countries will be using IFRS – or some other agreed uniform standards – in the future, but we do not know when that will happen. Definitely not during our lifetime.’

‘Southern Africa’s multinationals and investors welcome the overall improvements resulting from IFRS during the last decade, including greater disclosure, standardisation across financial statements and relevance to non-traditional investors worldwide. Current challenges include training and software costs for smaller organisations. Many capital markets also need development; more listings increase public accountability and facilitate establishment of fair values. Greater integration of IFRS and other reporting, such as to regulators, would save time and costs.’Member of ACCA’s Global Forum for Corporate Reporting

IASB chairman Hans Hoogervorst told delegates at ACCA’s International Assembly that IRFS adoption is vital for rapidly growing economies.

IASB has been working closely with the US Financial Accounting Standards Board (FASB) for a decade in order to eliminate the most significant differences between IFRS and US GAAP. Relations between the two boards hit a low in the summer of 2012 when they failed to reach a converged solution on accounting for impairment of financial instruments, something Hoogervorst called ‘deeply embarrassing’ after three years of intense discussions. At around

China benefits from IFRS Research commissioned by ACCA has found that convergence to IFRS has benefited the Chinese economy. It examined all Chinese companies listed on the Shanghai and Shenzhen stock exchanges between 2003 and 2009, and looked for changes to the value-relevance of earnings – the degree to which changes in reported earnings affect share prices. This increased following IFRS convergence in 2007, almost certainly the result of convergence.Does IFRS Convergence Affect Financial Reporting Quality in China? is available at www.accaglobal.com/reporting

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The audit report of the futureACCA’s Sue Almond reports on current moves to make auditor reporting more informative, relevant and transparent for investors

The June 2013 meeting of the International Auditing and Assurance Standards Board (IAASB) was almost entirely devoted to the finalisation

of the exposure draft package on auditor reporting. This critical consultation is the latest stage in the IAASB’s response to the global financial crisis and specifically to requests from investors for more informative audit reports. Given the many regulators that are also examining auditor reporting, it is vital that the IAASB exerts leadership in this area to maintain global comparability of reports – one of the key investor objectives.The exposure draft draws on the work undertaken in the 2012 invitation to comment, and the extensive feedback and outreach. It is fair to say that there were mixed views expressed

on some of the proposals – especially in the area of auditor commentary, where there was a real concern from business that auditors should not be providing original information about the company within the auditor report. This latest stage looks to reconcile some of the views expressed and really moves into ‘operationalising’ the concepts. The concept of commentary by the auditor, one of the key user requests, remains, but is rebadged ‘key audit matters’ to emphasise that the areas discussed relate to the audit (ie firmly within the remit of the auditor), rather than the broader business (where management will provide commentary). This does not mean that the new section of the report will be simply ‘auditor-speak’ – far from it. The areas of the audit that are judged to be of

ACCA debate on audit changesSajjad Karim, member of the European Parliament for North West England and rapporteur for the JURI (legal affairs) committee on the European Union (EU) audit proposals, was in New York in April on a fact-finding visit to understand more about the US and the global audit market, to consider the broader impact of the proposals. ACCA hosted a roundtable during this visit, which attracted a wide range of attendees. Not surprisingly, much of the debate focused on critical EU proposals such as mandatory auditor rotation, tendering and non-audit services. There was very strong disagreement with mandatory audit rotation across almost all sectors. In fact, the day before the roundtable the Audit Integrity and Job Protection Act, which would prohibit any proposed rules on this, was introduced in the US Congress making this a most topical debate for all involved. The practical impacts on global businesses of potentially different mandatory rotation requirements in different jurisdictions was also highlighted. The roundtable participants expressed strong support for the adoption of global standards where they exist, such as ISAs (International Standards on Auditing) and the International Ethics Standards Board for Accountants (IESBA) Code of Ethics.MEP Karim published his final proposed amendments for the EU Audit proposals for vote just after the roundtable. These are very much in line with the position ACCA took on the original proposals almost two years ago, supporting the adoption of global standards and strengthening the role of the audit committee on the appointment of auditors and approval of non-audit services, as well as recognising the critical role of professional bodies in maintaining audit quality, particularly in the unlisted arena.

most significance are quite likely to be the risk or judgmental areas where users have been asking for more information.

DEVELOPING A ‘FILTER’One of the big challenges when developing the rules on key audit matters has been the ‘filtering’ process – how to really highlight the key matters without overburdening the report with detail or boilerplate language. It is easy in concept to refer to ‘risk areas’, but there may be many where in fact both the company and the auditor’s processes have adequately covered these off. Is a ‘shopping list’ of risks really what users want – and how can the auditor then avoid something that is really significant getting lost?It is likely that the examples of key audit matters in the exposure draft will draw much attention and comment. They have been deliberately drafted to illustrate some of the different potential approaches, so the feedback on the relative value will be helpful. It will also be interesting to see the outcome of any pilot activity, whether public, as in the case of Vodafone’s new UK-style auditor’s report, or private, as envisaged in IAASB’s planned pilot project.

CONCERN ABOUT GOING CONCERNAnother area where more reporting is proposed is going concern. There was much criticism

of the lack of going concern reporting in the financial crisis, and the IAASB has looked to be more transparent in this area. What is interesting, though, is that to a large extent, auditors are limited in what they can actually say because of the way that accounting standards are drafted. The going concern basis of accounting would only not be used where management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. This is a high bar – sometimes described as ‘the liquidator is already in the taxi’. And it is really management that should identify and disclose any material uncertainties over the business’s future, rather than this being initiated in the auditors’ report.The going concern discussion also raises an issue that is not within the IAASB’s remit – the question of liability. In many countries there is a natural tension between the more subjective, forward-looking information and the auditor liability regime. This is something that respondents will need to bear in mind when considering what will really be achievable.This is a great step forward for the auditing profession. The 2012 invitation to comment drew broad feedback, and this exposure draft will need similar input from a broad range of stakeholders if it is to progress to a package of standards that result in auditors providing more transparent and relevant information.


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Paul LeeDIRECTOR, HERMES EQUITY OWNERSHIP SERVICES

Brendan Murtagh FCCAIAASB BOARD MEMBER AND ACCA PAST PRESIDENT

Arnold SchilderCHAIRMAN, IAASB

‘Investors welcome the prospect of audit reports that are actually worth reading – reports that deliver something of substance more than simply a tick or cross. But in order for the new proposals actually to deliver, the profession needs to rise to the challenge; they need to produce reporting that is not boilerplate but which reflects the specific circumstances of the audited company and the issues in delivering an effective audit of that specific entity. Investors look forward to seeing the profession rising to this challenge.’

‘While it was some of the very high-profile failures that prompted the initial questions around auditor reporting, this development will enhance auditor reporting for all businesses. In my view, we are likely to see many progressive private entities seeing the value in a more transparent report – so while the key audit matters disclosure is only mandated for listed entities, it is likely that in some sectors it will gain traction. The real practical challenge in all cases will be concise and relevant discussion of what are often very complex areas.’

‘The IAASB has taken a leadership role in developing the auditor reporting proposals, and now everyone has a role to play in making the changes to auditor reporting a reality. We have listened to the feedback from the previous consultation and believe that we have a proposal that is responsive to user needs, while taking account of some of the very real challenges. We will be talking about auditor reporting everywhere, and seeking as much feedback as possible to allow us to finalise these proposals as soon as possible.’

Sue Almond is ACCA’s technical director (see page 09). She acts as technical adviser to IAASB board member Brendan Murtagh (below).


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In many countries there is a natural tension between more subjective, forward-looking information and the auditor liability regime

Bob Dohrer was this year re-elected chairman of the Forum of Firms, an organisation that brings together nearly two dozen of the world’s

leading international accountancy networks. An American, but based in RSM’s executive office in London, Dohrer now has three more years to promote consistent, high-quality financial audits worldwide, and tackle the challenges of transnational audits in the future.It will be a key time for the organisation that was borne out of the accounting scandals of more than a decade ago. But although the profession is unlikely to witness such events this time around, audit is under the spotlight like never before. ‘If you think back to the early 2000s, it was quite a turbulent time,’ Dohrer explains. ‘In the global markets we had the Enron and WorldCom scandals, which then led to the issuance of Sarbanes-Oxley and the creation of the Public Company Accounting Oversight Board (PCAOB). It was becoming quite evident that in particular countries there were movements taking place to strengthen regulation. The International Federation of Accountants (IFAC) realised there were some key large accountancy networks that carried out a significant proportion of transnational audit work, and it would be important to have that group coalesce around some basic objectives, first and foremost of which was audit quality. At that time, the convergence of any international standards was not very advanced, either on the auditing or accounting fronts.This picture has been changed by the hard work of the International Accounting Standards Board (IASB), whose rules and principles are now applied in more than 100 countries, and by the International Auditing and Assurance Standards Board (IAASB), which has quietly been getting on with the task of converging and clarifying a set of audit standards to be implemented worldwide.And it is the Forum’s membership, which stretches from the Big Four firms to smaller, more regionalised, international networks, that is at the forefront of this process. ‘The Forum was formed to bring the profession together around the primary objectives of enhancing

audit quality and consistency around the world, supporting the quality of financial reporting,’ Dohrer says. ‘We have undertaken to make it into a place where practice issues and audit issues can be discussed; and because of our association with IFAC, we have the ability to liaise with different professional accountancy organisations and standard-setters around the world.’

TRANSNATIONAL ASPIRATIONSTo become a member, a network or firm must first carry out, or have an interest in carrying out, transnational audit work. They should promote a consistent application of high-quality audit practices and standards worldwide, support the convergence of national audit standards with international standards on auditing, adhere to IESBA ethical codes and conduct regular globally coordinated internal quality reviews.‘For a global network, one of the difficulties is the need to deal with inconsistent regulation, and what we find so often is that while we all use the same auditing standards, the way that those standards and requirements are interpreted and enforced in different countries can vary greatly. So when a network has to put this together in a global methodology it becomes challenging. If you want to use it worldwide you have to design your policy and procedures to meet the most rigorous level,’ says Dohrer.The Forum can bring issues to the attention of influential bodies both within and outside the profession. It can also help accelerate the maturity of the profession in jurisdictions where auditing is less developed as a skill. ‘The Forum can act as a catalyst to help the profession itself to move forward,’ Dohrer says.Looking forward, Dohrer is keen to highlight the importance of auditor reporting and transparency. In some ways, he is critical of attempts at a European level to introduce legislation that would change how and why auditors report on work. Instead, Dohrer, and the Forum, argue that what is needed is improved auditor reporting through standard-setting, not legislation. ‘We have been vocal in that regard,’ he says.

Forum of the futureAs chairman of the Forum of Firms, an association that represents international accountancy networks, RSM’s Bob Dohrer talks about audit’s changing role

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The Forum of Firms is an association of international networks of accountancy firms that perform transnational audits. It works with IFAC to support the work of independent standard-setting boards and promote adoption of international standards. The 23 members are committed to adhering to and promoting high-quality audit practices worldwide.

The IAASB is working on an auditor-reporting model that Dohrer describes as critical to the future of the audit profession. ‘Whether you want to tie it to the financial crisis or other trigger events, the fact is that consumers of our services are certainly and definitively asking for more information,’ he says, ‘and that is coming through loud and clear.’Dohrer is concerned that if, as a profession, auditors do not respond to this demand, and if they do not find a way of getting around concerns of liability and litigation, then a void could be created between what users want and what auditors are able to provide. ‘There’s a very real risk to our profession that someone else will fill the void,’ he argues.

CHAMPIONING VALUEDohrer sees the Forum as being able to talk about the value that is created during the audit process. ‘Although litigation risk does not allow an auditor to detail publicly all the

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adjustments that were made during the audit process before the final financial statements are published, people need to understand that that process adds value to financial reporting and the Forum can be a voice to articulate that value.’Company audit committees have a key role to play in this debate, and a great deal depends on the relative maturity of this aspect of corporate governance. But Dohrer is determined to make the Forum a clear advocate for the profession. In his own words: ‘We need to speak out and to educate people about the value of our profession.’

Philip Smith, journalist

‘For a global network, one of the difficulties is the need to deal with inconsistent regulation’

As well as being chairman of the Forum of Firms, Bob Dohrer is RSM International global leader for quality and risk, and has 23 years’ experience with McGladrey & Pullen, a US member of RSM, including serving as its international assurance services practice leader.

As the responsibilities of CFOs widen and global finance functions shake up the way they operate, the traditional career path up through

the finance function is becoming less clear and less linear. This presents challenges for CFOs planning future talent strategies that will be successful for their organisations, and for ambitious finance professionals considering how to move on in their careers.We have talked to a number of finance professionals at organisations such as Accenture, IBM, Deloitte and Pearson to put together a report looking at these issues – The future of finance talent – which we summarise here.The report suggests a number of trends that could affect finance talent management in the future, and focuses particularly on the implications of further growth in shared services, outsourcing, the rise of global business services and their relationships with the retained finance organisation. We hope to stimulate the debate on the future of talent management in global finance functions.

‘SUPER DELIVERY’ HUBSThere is a well-established country destination map for shared services and outsourcing (SSO), but we expect that organisations looking to set up finance shared service centres, or tap into business process outsourcing operations, will increasingly concentrate demand in a few cities where such operations will aggregate. These cities could become innovation hubs for finance operations and, through their association with large organisations’ brands, will represent low-risk, desirable choices for finance departments.

TALENT NOT COST TO DRIVE LOCATIONAccess to talent may take precedence over cost as a driver in places where finance operations through SSO are based, particularly as labour arbitrage continues to diminish. Organisations will look closely at the capability profiles in certain locations, matching skills to work, and source and invest in senior talent in locations that they view as key talent pools. As a result, the finance career proposition may become location-sensitive.

ENABLING TECHNOLOGIESWith the increasing cost of infrastructure and wage inflation for finance operations in the usual offshore locations, labour-intensive models are becoming less attractive. While the last 10 years have seen increasing automation of transactional activities, there remains a question as to whether levels of adoption will change the game. If they do, impacts may range from the need to move the provision and control back to an ‘onshore’ environment through to decisions to move control from the finance function to internal customers. This effective elimination of the finance function’s control of finance transaction processes could perhaps even remove the need for SSO. In the retained finance organisation, with the growing digitisation of business, there will be a greater need to extrapolate, forecast and correlate ever-increasing rich customer data sets, extending the boundaries of traditional ‘business partnering’ activities. Is the finance function the natural source of talent to supply people into this important area in the future?

GLOBAL BUSINESS SERVICESFinance career paths could be profoundly affected by global business services (GBS) implementation, with its trend towards aggregating the design and control of the business model across the enterprise. The cross-functional leadership required not only needs additional, and different, management capabilities, but also creates greater opportunities for broader enterprise leadership for finance professionals who aspire to positions beyond the finance function.

‘HOLLOWING OUT’ THE WORKFORCEThe shift towards adoption of finance SSO models has changed the nature of the finance workforce, disrupted traditional career hierarchies and pathways, and ‘hollowed out’ careers in the retained finance organisation, causing a wide range of career development structural implications that businesses and finance functions must address.

INCREASING PERFORMANCE EXPECTATIONS Finance leadership will have to rethink

Future finance functionsHow will tomorrow’s finance function look and how will this affect talent strategies for global business, ask Deborah Kops and Jamie Lyon

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Jamie Lyon FCCA is ACCA’s head of corporate sector and leads its global research and insights programme on finance transformation.

Deborah Kops is the founder of SSO consultancy Sourcing Change. She was also a founding partner of a global business processing outsourcing (BPO) unit, the CMO of a leading offshore BPO, managing director of FleetBoston (now Bank of America) Services Group and managing director of Global Sourcing Transformation for Deutsche Bank.

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‘As the role of the finance function continues to evolve, I see a number of challenges we must meet in developing talent. A strong technical understanding is essential; however, increasingly it must be completed by a broader range of business and management capabilities: strong communication skills, influencing skills and, of course, commercial acumen in certain roles. ‘There are other challenges too; the advent of finance shared service models and offshoring of core finance activities raises significant questions on how talent in global finance functions can be best nurtured between the service organisation and the rest of the finance function. The nature of finance leadership itself is evolving also, calling into play much broader leadership qualities.’ Member of the ACCA/IMA Accountants for Business Global Forum

Teuta Bakalli FCCACFO, PEPPER EUROPE

its talent imperative aggressively, looking carefully at capabilities and at the finance function’s relationship with the business in order to help the business create value and growth. As a result, there may be a push to move even more ‘higher-value’ finance activities out into an SSO environment, freeing up the retained finance function to intensify its focus on providing insight.

GLOBAL WORKFORCE PLANNINGIncreasingly, viewing finance talent only through the lens of the finance function will be a suboptimal approach, running counter to the reality of today’s more matrixed, complex and virtual business structures, particularly with the introduction of shared service and global business service operations.

The future of finance talent is available at www.accaglobal.com/transformation

Bridging the skills gapCFOs need complete finance professionals with knowledge across a broad range of areas, says ACCA chief executive Helen Brand

Finance functions are now required to be excellent in a wide range of capabilities. They need to support businesses, manage risk, develop

strategies for growth, drive financial insight and continue to maintain appropriate levels of control as well as ensure statutory and regulatory responsibilities are met.It is against this background that in early 2013 ACCA surveyed nearly 500 CFOs in the UK, Malaysia, Russia, China and the UAE, asking them what is important when it comes to appointing newly qualified accountants. We asked them what gives them confidence in their new hires, and what skills enable them to grow their business, particularly since the financial crisis. The vast majority said they believe it is important for each potential employee to have both a breadth and depth of finance expertise and capabilities. Over 80% said that it was critical to have a complete understanding of the finance value chain – from budgeting to reporting to external auditing principles – and how it all fits together. Drivers explored in our report, The complete finance professional 2013, include the expanding remit of the finance function and the ascent of a more balanced form of financial leadership that aims to achieve sustainable growth. CFOs recognise that long-term value cannot be created or sustained unless the business is appropriately controlled, its risks managed, its funds protected and maximised, and its core fiduciary responsibilities met.In addition, finance transformation remains a priority for many businesses, including delivering transactional mastery in shared services, specialist expertise in areas such as tax and corporate finance, and undertaking business partnership activities to drive more effective financial insight into the retained finance organisation.Then there are the ambitions of the younger generation to take into account. Many seek wider business careers, while some continue to want to pursue ‘classic’ finance careers. The finance team has to meet the challenges posed by a post-crisis global economy which is increasingly volatile, complex and competitive – and given the breadth of financial activities that finance leaders are now engaged in, it

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Helen Brand became chief executive of ACCA in 2008, having joined in 1996 as head of international development. She is also a member of the International Integrated Reporting Council and a member of its governance committee. She was awarded an OBE in 2011.

is hardly surprising that they are looking to recruit employees with a broad range of skills and understanding.Broad-based qualifications such as ACCA help to deliver this, and to keep career doors open to pursue a wide range of finance and business careers.

The complete finance professional 2013 is at www.accaglobal.com/complete

HOW ESSENTIAL IS IT THAT NEWLY QUALIFIED FINANCE PROFESSIONALS HAVE A GOOD WORKING KNOWLEDGE OF DIFFERENT FINANCE AREAS?

96% Financial management

94% Professionalism/ethics

93% Corporate reporting

87% Sustainable management accounting

86% Governance/risk control

86% Strategy and innovation

83% Leadership and management

80% Audit and assurance

78% Law and taxation

68% Stakeholder relationship management

Source: The complete finance professional 2013

AB Corporate special editionA special edition of ACCA’s magazine Accounting and Business explores the skills and attributes needed by today’s finance professionals. Read it at www.accaglobal.com/abcorporate

Competency framework onlineAn interactive version of the competency framework shown on the right has been produced by ACCA and is available online. It shows how the ACCA Qualification comprehensively covers these abilities and behaviours, through its exams, practical experience requirement and the ethics module. Find out more at competencyframework.accaglobal.com

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The 10 key competenciesBased on a comprehensive competency framework, the ACCA Qualification addresses all the key knowledge areas required of finance professionals

Governance, risk and control

Ensuring effective and

appropriate governance; evaluating,

monitoring and implementing

appropriate risk identification

procedures; designing and

implementing appropriate and

effective internal audit and

control systems.

Sustainable management accountingAssessing, evaluating and

implementing management

accounting and performance

management systems for planning,

measuring, controlling and

monitoring business performance

to ensure sustainable value

creation.

Financial managementImplementing effective

investment and financing decisions

within the business environment in

areas such as investment appraisal,

business reorganisations, tax and risk

management, treasury and working

capital management to ensure

value creation.

Professionalism and ethics

Understanding and behaving

in accordance with fundamental

principles of ethical behaviour

and personal ethics; ensuring

implementation of appropriate

corporate ethical

frameworks.

Corporate reporting Preparing high-quality

business reports to support

stakeholder understanding

and decision making.

Audit and assurance Providing high-quality

external audits; evaluating

information systems and internal

controls; gathering evidence and

performing procedures to meet

the objectives of audit and

assurance engagements.

TaxationComplying with tax regulation

and systems, communicating with

relevant authorities to establish and

ethically manage tax liabilities for

individuals and companies, using

appropriate tax computation

and planning techniques.

Stakeholder relationship management

Managing stakeholder

expectations and needs;

aligning the organisation to

their requirements; engaging

stakeholders effectively and

communicating relevant

information.

Strategy and innovation

Assessing and evaluating strategic

position and identifying imaginative

options to improve performance and

position; implementing strategies to

ensure cost-effective and innovative

business process improvement and

change management.

Leadership and management

Managing resources and

leading organisations effectively

and ethically; understanding

stakeholder needs and

priorities.

The adoption of shared services is growing slowly but surely in China, with an increasing number of state-owned enterprises and multinationals

keen to benefit from the standardisation and enhanced efficiency that they can bring in areas such as finance, IT and HR processes. And, given the size and expansion of China’s economy, the potential for growth is huge. However, barriers remain. In late 2012 ACCA and Deloitte conducted a survey to explore the finance shared services (FSS) and outsourcing strategies of organisations in China. Remote delivery: the China story found that while the rapid development of Chinese enterprises and their active acquisition of overseas companies is pushing them to standardise their financial systems and processes, the unique status of state-owned enterprises and traditional finance practices still exert a strong hold. A series of ACCA seminars held across China – in Chengdu, Dalian, Hong Kong, Qingdao

and Shenzhen – subsequently discussed the findings and shared experiences.The report includes a case study of Ping An Group, the first insurance company in China to have a shareholding structure. It has developed into an integrated financial services conglomerate with three core businesses: insurance, banking and investment. Ping An set up a shared service centre (SSC) in 2002, in order to standardise the processes of the whole group, providing services such as insurance underwriting claim adjustment, financial accounts settlement, call centre services, data processing, credit review and overdue payment follow-up, therefore achieving uniform standards, increasing efficiency and controlling risks.The move has paid off. ‘Despite the number of subsidiaries growing, the ratio of operating cost to total revenue of the group decreased, after adjusting to inflation,’ a Ping An representative told delegates at the Shenzhen seminar.

Appetite for sharingAn ACCA/Deloitte survey shows that while China’s appetite for shared services is growing, many companies still face significant hurdles

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‘Maximising profits is usually not the mission of state-owned enterprises’

LACK OF SUPPORTBut Ping An’s story does not reflect the wider picture. Speaking at the Shenzhen seminar, Marco Liu, a partner specialising in finance transformation at Deloitte Consulting China, pointed out that 60% of the 249 survey respondents did not deploy any FSS or outsourcing activities in their finance functions, and that 70% said that the main obstacle to implementation included a lack of support from top management. ‘Looking at companies with an annual revenue of US$100m, 75% of the enterprises in the global survey have deployed FSS/outsourcing activities, compared to just 30% in the China survey,’ he said.Liu added that the fact that Chinese enterprises operate largely within the country contributes to the relatively small demand. ‘Maximising profits is usually not the key mission of state-owned enterprises,’ he said. ‘It is more important to achieve better control and process efficiency by centralisation and standardisation instead of cost reduction through shared service centres.’Zhao Licheng, dean of Dalian Institute of Software and Service Outsourcing, suggested at the Dalian seminar that state-owned enterprises lack an internal driver for financial transformation, and he doubted that they would truly embrace the benefits of transparency provided by FSS.Despite these challenges, Liu believed that the trend towards shared services and outsourcing is irreversible, citing the aggressive overseas expansion plans of multinationals as a catalyst, as illustrated by home appliances giant Haier and the world’s largest telecommunications equipment maker, Huawei.

FSS AND STATE-OWNED ENTERPRISESHe also pointed out that some state-owned enterprises are at the forefront of FSS and outsourcing. Many have new strategic targets resulting from the 12th Five Year Plan – hence their finance functions are working on transformation proposals in which the feasibility of FSS is usually considered.‘Chinese enterprises that have an eye on global expansion are interested in improving their finance capabilities, service quality and in standardisation of their finance processes. They like to be in line with best global practice. Cost cutting is just an added benefit,’ said Liu.Frank Zhang, regional financial controller of G4S North Asia, which offers services to

banks, commented at the Qingdao seminar that finance transformation among Chinese enterprises tends to be passive. ‘One of the main drivers has been the need to respond to the legal requirement,’ he said. But for container giant Orient Overseas (International), cost optimisation was the main concern when it first set up an SSC in Shanghai in 1996. Paul Mok, group financial controller, told delegates in Hong Kong that with more than 290 offices in 60 countries, OOIL’s centralised account processing centre in Shanghai has provided significant cost-cutting opportunities for offices in more expensive locations in Japan, Europe and the US, as well as greater efficiency and better internal control, utilisation of human resources and staff development.Bonnie Peng – now vice president and head of Wal-Mart SSC but CFO, Smart China Group, when she attended the Shenzhen seminar – shared the same view, describing her experience of working for a US multinational in the 1990s. ‘At that time China, India and the Philippines were the ideal countries to set up SSC, the prime reason being the low operation cost. We are happy to see that China is catching up rapidly.’ But it’s not just all about cost cutting. Liu said: ‘Chinese companies tend to play it safe and choose the cities which are relatively more expensive in China.’ Indeed, according to the ACCA/Deloitte survey, 91% of enterprises

that have not yet implemented FSS or outsourcing activities said they would choose to set up in financially mature cities – which tend to be more expensive – or where their headquarters are located. This

indicates that talent pools and infrastructure factors, rather than

cost, have a greater bearing. Zhang agreed that cost was often a secondary factor. ‘The drivers of FSS and outsourcing activities in China are more about

centralisation to reduce financial risk and increase standardisation, to be in line with the required regulations. Time saving and cost optimisation are added benefits.’Adam Lee, general manager of Career International’s staffing division, believed that companies are better off viewing FSSCs as business partners. ‘An FSSC is no longer a supporting office,’ he said. ‘A company should

focus on how to add value to the core business,’ he said at the Shenzhen seminar. Mok expressed similar views. After over 10 years, the company’s SSC in Shanghai has shifted its processing jobs to a new SSC in Chongqing in western China, where labour costs are lower. Shanghai has become a financial control centre handling higher-level control and monitoring jobs originally carried out by the headquarters in Hong Kong. The SSC is a ‘great tool to facilitate the transformation of finance functions within the company’, he said.

STAFFING CHALLENGEOne major challenge for SSCs is sourcing and retaining the right talent, especially given the risks presented by high staff turnover. Guo Xin, president and CEO of Career International, understands the importance of stability. ‘From a person’s resignation to new appointment, even an elementary post requires up to three months to totally complete the process. A high turnover rate definitely has a cost impact.’But Tony Wang, general manager of Maersk Global Service Centres’ Chengdu finance centre, said that China has a unique environment in terms of hiring FSS staff. ‘We require staff to be good at using computers and at foreign languages. I would be more inclined to look for graduates with good skillsets.’Liu noted that some organisations prefer university graduate employees for certain

FSSC tasks – reasoning that a 15%-20% turnover rate is acceptable – while Ping An’s representative believed that it was important to operate a fair and respectful system, with employees aware of the promotion process. ‘People will not always stay because of the salary; team environment, career path and sense of belonging are also important,’ he said. Ping An’s big portfolio of companies allows it to move talented employees around, enriching their knowledge along the way.Most of those attending the seminars agreed that establishing an SSC does not always lead to a positive outcome. Peng Jiajun, head of Haier’s group innovation research centre, added that one should not look at FSS from a narrow perspective and should consider other stakeholders, including both internal departments and customers.Liu added that a company’s finance transformation is related to its strategic positioning. ‘How is the finance department positioned?’ he asked. ‘The CFO should, he maintained, step out from a traditional stewardship role to become a strategist to support the enterprise’s strategic decision making and a catalyst to drive the company-wide transformation. In other words, the transformation of the finance functions is about creating value.

Gary Tsang, journalist


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‘SSC is a great tool to facilitate the transformation of finance functions within the company’

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The matrix revolutionHay Group’s Signe M Spencer explains what today’s innovators can learn from successful matrix organisations, which have collaboration at their core

Matrix structures can be complex. They can eat time. Indeed if not managed well they can be the enemy of any sort of progress.

What has emerged repeatedly as a theme in my work, though, is that the characteristics that work well in a matrix are the same ones that lead to good innovation. But isn’t innovation all about the lone scientist or maths guru having a ‘lightbulb’ moment? In most fields today, this is no longer the case. In biosciences, for example, where I do a lot of work with organisations, it’s no longer possible to make new discoveries with the capabilities of just one lab. Most of the significant advances that can be made by one single lab have already been made. Innovation these days needs more capability. And it’s here where matrix skills cross over into innovation. One project in particular made me aware of this – the US Innovation in Federal Government project. In our work with federal employees across government, we came across award-winning leaders who seem to have a knack for making innovation happen, whatever the obstacles. We interviewed 15 of them to see what we could learn from their stories.What was striking was that all their innovation stories were about collaboration across boundaries. The characteristics of their success correlated closely with what we were finding in a study of high-performing matrix organisations. If you want to innovate, this suggested, act like you’re working well in a matrix – and vice versa.The leaders shared a set of attributes:

* Resilience. They aren’t seriously impeded by structural, procedural, cultural or political barriers. And when they do encounter resistance, they don’t give up.

* They are visionary, self-aware and constantly broadening their perspective.

* They know how to navigate through and around their organisation’s structure, culture and politics. They also understand and respect the roles, boundaries and agendas of other organisations.

* They purposefully leverage networks and relationships, and use complex influencing skills to collaborate across organisational boundaries.

* They build strong, diverse teams through their leadership, creating a sense of purpose, fostering a climate that facilitates innovation and developing others as an essential part of their job.

One case study from the government programme perfectly illustrates the relation between matrix and innovation skills (see panel on Alfred League).

COLLABORATION: A MARKER FOR SUCCESSAnother study I worked on backed the findings from the project. This time we were looking at a ‘hard-science’ company that derived its competitive advantage from a steady stream of innovations. Out of the behavioural interviews we carried out, we compared the best innovation stories with less successful ones. The ability to collaborate was a huge marker for success. One of the company’s scientists, in talking about an innovation that went wrong, admitted: ‘My mistake that time was that I tried to go it alone.’In this scientific company we also found an overlap between the skills that make for good innovation and the capabilities that help people work across boundaries. The good innovators and the effective matrix operators shared an ability to understand others and see things from their perspective, great self-management skills, and excellent personal resilience. Indeed, the ability to deal effectively with failure is a powerful marker for success for both matrix stars and top innovators.It turns out that characteristics like these are also what we call ‘growth factors’ for senior leaders – that is, the tell-tale signs that show a person is cut out to do well in top jobs. We discovered this while working for clients who had asked us to help them identify high-potential talent. They wanted to know how to pick out their next generation of leaders. Could the next CEO or CFO be identified early in his or her career? Was it possible to predict what people would be capable of five to 15 years into the future?

PERSONALITY, NOT INTELLECTUAL FIREPOWERLooking into Hay Group’s data we identified four characteristics that predicted leadership.

Signe M Spencer is a global leader for capability assessment for Hay Group, the global management consulting firm. Her 20 years’ work with the group has included competency research, such as integrating competency findings across a wide variety of jobs, improving methods of competency research, designing and validating competency applications, and coaching executives. Her role includes conducting high-level assessments for senior executive and CEO succession and selection.


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Matrix organisationsMatrix structures are characterised by people, regardless of formal structure, working together across functions. They are common in most global organisations, where they are virtually the only way to manage and benefit from multiple geographies, product lines and customer groups while delivering economies of scale. It is not enough just to be able to lead; it is also essential to be able to collaborate with different sets of individuals and influence people over whom you do not have direct control. Successful matrix organisations, which also happen to be prominent innovators, are 3M, Microsoft and Procter & Gamble. According to Hay Group, ‘The matrix structure should not run the company; it allows the company to run.’

They were an eagerness to learn, take risks and to get outside your comfort zone; possession of a broad perspective; personal maturity and emotional self-control; and being able to understand others. These growth factors closely match the competencies that support innovation and collaboration. Scientists, for example, are much more effective when they seek different perspectives on the area they are innovating in. Inviting people with different skills and opinions is more likely to crack the problem than recruiting in your own image.The research of Howard Gardner, a celebrated psychology professor with whom I worked at Harvard, underlines the importance of risk-taking to innovation. In his work on creativity, Gardner suggests it is more about personality than intellectual firepower: ‘Individuals who enjoy taking risks, who are not afraid of failure, who are attracted by the unknown, who are uncomfortable with the status quo are the ones likely to make creative discoveries.’

FINANCIAL INNOVATIONWhat of innovation in the finance industry though? Like risk, innovation has become a loaded term in this sector recently. It seems to get companies into trouble. Too much innovation – for example creating financial instruments of byzantine complexity – has been blamed for triggering the financial crisis. Arguably, what financial companies need right now is a different type of innovation. One that helps them connect with customers and serve them better. We’ve seen this in developing markets like India, for example, where mobile banking took off quicker than in the West.When we benchmarked the leaders of financial functions, two factors stood out that separated

the best from the rest. In their stories, the best leaders said that when someone made an irresponsible suggestion, they pushed back: they had the emotional maturity to refuse. Second, we found that the best were also good at developing others. Both of these factors are also important in innovation. Good leaders can make good innovators.

JUDICIOUS RISK-TAKINGWithin all organisations, financial departments have a strong influence on innovation because they hold the purse strings. If they can bring some of the skills we’ve discussed so far to bear on the issue, though, they can help foster, rather than hinder innovation. The classic cases here are Google and 3M, both companies whose leaders were prepared to take the risk of giving employees time to work on their own projects and which have yielded innovations including Google News, Gmail, Post-it Notes and Scotch brand tape.And when finance departments add to judicious risk-taking another great innovator’s trait, the ability to manage failure, they can help keep the flame of new development going. This can be as simple as creating a culture in which unsuccessful projects are shut down honourably, rather than becoming career threatening for the innovator in a way that would discourage any further attempts.

THE POWER OF COLLABORATIONIn summary, our findings from many different studies and stories point to a powerful correlation between good matrix skills, good leadership, and successful innovation. It turns out that if you’re looking for the next big thing, the best way to find it may be with skilful collaborators, not rocket scientists.


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Alfred League Alfred League is the ultimate team player and team leader. Just a week-and-a-half after League, then division chief for imagery and geospatial sciences at the US National Imagery and Mapping Agency, received an urgent request from the armed services in Iraq and Afghanistan, he was able to deliver the first of many instalments of an innovative software package that provided satellite views of the battlefield to help personnel make informed decisions and save lives. Neither League nor his staff knew exactly how to produce such computer software when the request came in, but this was of minimal concern. Although outside of his group’s normal purview, League was eager to take on the project. He felt both a duty to contribute to the larger mission of protecting people and country and, based on his knowledge of current technology and past projects, he had confidence that he could help. Gathering everyone around the lunch table, League presented his team with the task and background. The team was assembled from across the organisation and had a wide range of experience. Sandwiches in hand, their ideas started to fly.Connections were quickly made to private-sector companies that had technology with the potential to be part of a solution. When promising software was discovered, League flew out to meet the owners and personally ask for their partnership. League and his team quickly adopted the technology for military use, and over time made refinements. The technology that League so quickly deployed offers the military crisp, real-time photographs of the battlefield taken from satellites and provides essential intelligence information that can be viewed on laptop computers by military personnel in the field. This technology has been adapted for widespread civilian use, allowing individuals to easily use their home computers to look at satellite photos of buildings, neighbourhoods and communities.

It is always refreshing to hear candour from a senior accountancy professional, and that’s what you get from TV Mohandas Pai, the former CFO of Indian information

technology giant Infosys – not least when he’s describing the obstacles facing finance professionals in moving up to CFO level. ‘To be a CFO, they must have a view of the entire business: its strategy, how to handle business excellence, raising capital, deploying capital, earning returns, communicating to investors and networking with many finance providers,’ says the man who, as HR director at Infosys, introduced the iRace (Infosys Role and Career Enhancement) banding system. ‘They must also have an ability to create systems and controls, IT capacity and to be a risk manager.’To achieve that, Pai says, Indian professional accountants need much better training in risk management, management accounting, decision making, financial analysis and investment analysis, as well as IT and administrative processes.This is even more important as the country moves to adopt International Financial Reporting Standards (IFRS) – a process delayed for reasons that include the lack of preparedness among accountancy professionals.Lack of skills is one thing; lack of people is another. India’s talent pipeline is, Pai believes, too narrow, being pinched by a shortage of good faculties and the struggle to teach huge numbers of students – an area close to his

Skill seekerTV Mohandas Pai has uncompromising views on how to prepare accountants – and India – for the next move

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heart in his current role as chairperson of Manipal Global Education Services. ‘India’s enrolment in colleges has gone up from 10 million to 25 million in the last 10 years, and still there are 100 million people in the 18-to-24 age group who are eligible to go to college,’ he says.

‘EMPOWER ENTERPRISES’Meanwhile, Pai notes that 20% to 25% of the stocks in Indian listed companies are held by foreign institutional investors and in the financial year ending March 2013, India received US$22.4bn of foreign direct investment. But according to Pai, foreign investment should have been at least double this amount: ‘We want more money to come in; we want better transparency; we want to adhere to global standards and empower enterprises to raise capital globally,’ he says. And IFRS is a key solution, ‘for IFRS is the language with which [international companies] express themselves’. He says, hopefully, a broader understanding of IFRS among Indian banks and other financial institutions will manifest within two years. And while Pai is generally appreciative of government supporting IFRS and other reforms to improve financial reporting, things could have been done better; he is critical, for instance, of some provisions within the new Companies Act that provide for criminal penalties against chartered accountants.

TV Mohandas Pai TV Mohandas Pai, 54, is a professional accountant best known for his work with Indian information technology giant, Infosys. As CFO from 1994 to 2006 he is credited with enabling the first listing of an India-registered company on the NASDAQ exchange and instituting India’s first employee stock option plan. In 2006, Pai became Infosys’s HR director, over the next five years recruiting more than 150,000 new employees. Pai has been a trustee of the International Financial Reporting Standards Foundation, and served as a board member and on the sub-committee on accounting standards of the Securities and Exchange Board of India (SEBI). He is also the chairperson of SEBI’s primary markets advisory committee. In addition he has been appointed to various government committees and was involved in setting up the country’s tax information network.Currently, Pai is chairperson of the board of higher education conglomerate Manipal Global Education Services. He continues to be a part of various initiatives to developing human resources, IT, the quality of education and the availability of skilled manpower.

CORRUPTION CRACKDOWNPai has been instrumental in introducing various corporate transparency measures such as Infosys’s whistleblower policy, and he wants to see this implemented across Indian industry. ‘Boards should be held accountable for not taking actions whenever an issue comes to their attention, either through a whistleblower or otherwise,’ he says. India, he believes, needs an anti-corruption practices act, mirroring legislation in the US: ‘Payment and receipt of bribes or manipulating the accounts and tender processes should become a criminal offence,’ he declares.Pai adds that while India has its fraud and corruption problems, they are no worse than in many other countries; the difference is that in India’s unbridled media, cases are publicised robustly. ‘We create a hype, which is picked up globally and shows us in a poor light,’ he says.

OUTGROWN BUREAUCRACYPai believes that the fundamental challenge for the Indian economy is the government’s lagging administrative capacity, which is 10 to 20 years behind what is required to manage a fast-growing US$2 trillion economy that is ever more complex and globalised. ‘Ten years ago, our GDP was US$450bn; in the next 20 years, it could be US$10 trillion,’ he explains.While India’s economy is unstable, with the current 5% annual GDP growth rate the lowest in the last decade, Pai believes that the situation will be reversed before too long. ‘The impetus for growth will come back because India is a very supply-constrained market,’ he says. ‘In two or three quarters, we will see some growth coming back and that should rev up the economy.’But Pai cautions against losing India’s traditional values in pursuit of growth – a trend he has noticed among some Indian corporations which, under pressure, have adopted the West’s work culture and ethics. ‘In the Eastern part of the world, we are family-oriented people; we defer to our elders and have respect for people in the position of authority,’ he says. ‘I don’t see why we should jettison our culture for a better tomorrow.’ In any case, the signs are all there that India has a bright future. ‘Japan has done very well with the same culture,’ Pai notes. ‘China has demonstrated that it can retain its own culture and grow pretty fast. India is also going to do the same.’

Raghavendra Verma, journalist based in Bangalore

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The research produced by ACCA’s Accountants for Business programme – described in its report Driving SME growth through an evolving finance

function – was a real eye-opener for me. I say that even though its most important conclusion came as no surprise at all. The main finding, derived from in-depth statistical analysis, was this: ‘The development of the finance function is not the result of business growth, but one of its causes.’ The problem is that CFOs also have to make sure that this message is understood by the CEO in particular, and by other stakeholders, whether internal or external to the business.

Everyone should know that the CFO is not there just to keep the score or to email reports showing performance against budget.

VALUE OF FINANCEThere are many great challenges in being the CFO of a small or medium-sized enterprise (SME) but sometimes the one that needs to be addressed first is convincing the CEO of the value that finance can bring to the business. This is especially true when the CEO is the founder or a significant shareholder; they often view the company as their creation and may have little appreciation for the real benefits a CFO can bring the business.

Recipe for growthCFO empowerment is crucial if SMEs are to develop to their full potential. But CEOs may need convincing, says GEA Westfalia Separator’s Gabriel Low

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There are two important aspects in getting this message across. The first is that you may have to go back to square one and convince the CEO the business will actually benefit from empowering the CFO to implement a quality, rigorous, process-focused finance function. It’s really important that things are done properly, so the business has the information it needs to make decisions, so it knows what its cash needs are, and so it can fulfil its legal and regulatory obligations. That in itself can help a business grow simply because it knows what exactly is going on – no more shoeboxes stuffed full of invoices and receipts.

MAKE THINGS HAPPENBut the second and most important thing – over and above the key tasks of accounting, financial reporting and keeping tabs on the cash – is to demonstrate to the CEO that a great finance function can grow the business by making things happen that wouldn’t have happened otherwise. This message from the research – that the finance function is a cause of business growth – is one that CFOs themselves have to completely take on board too. They won’t persuade the CEO or anyone else of this fact unless they believe it – and live it – themselves by delivering those positive contributions to the growth of their business. CFOs don’t like to blow their own trumpet but they do need to be able to say: ‘If I weren’t here, this result would have been x% less than it is.’ What may be more difficult for some CFOs is to do what’s necessary for that statement to be true. I was astounded to read in the research that the majority of SMEs don’t carry out proper, regular business planning. It’s a cliché

but it’s true that if you are failing to plan then you are planning to fail. CFOs play the most vital role in developing business plans, in making sure that those plans are robust, and in working with everyone in the business to make sure that the plans are adhered to or that the right actions are taken if the business gets knocked off course for any reason.The most interesting aspect of my job is being part of helping the business to grow to the next level. It’s a very rewarding challenge to be able to get people to work as a team, to make the organisation work more smoothly, and to be able to make decisions and act on them very quickly. It’s exhilarating to be able to see how the business is developing, to be aware of problems or opportunities that might be lying in wait six months down the road, and to be able to take action today.Of course, to be able to do that, the SME CFO has to do much more than just pure finance work. In a small business, the CFO handles a great number of things – and is closely involved in almost everything else. For example, I look after the HR function, training our managers, as well as IT and risk management. I am also right at the centre of the commercial aspects of the business, working shoulder to shoulder with the CEO, with sales people, and with the engineers in our manufacturing operations. This is not a job that you can do just by sitting in an office looking at spreadsheets and reading emails. But then, why would anybody want to do that?

Mark Gold FCCASENIOR PARTNER, SILVER LEVENE, UK‘Small and medium-sized practices (SMPs) have a number of roles in adding value for SME clients: quasi-FD, first port of call and proactive adviser. An important element in these is helping SMEs fulfil their international trade potential. A recent paper from ACCA’s Global Forum for SMEs,Tapping into SME international potential, calls on governments to recognise that this is not just about export, but also takes the form of import, foreign direct investment, international subcontracting and technical cooperation. Policies and business support networks need to reflect this. In addition, there is a need for SMEs to make better use of advisers, such as accountants, and for SMPs themselves to be proactive in this area.’Chair of the SMP forum of European accountancy body FEE, member of ACCA’s Global Forum for SMEs, and past ACCA president

Video See Gabriel Low, along with Brian O’Shea FCCA, CFO of ElectraLink, talking about the role of CFOs in growing small businesses at www.accaglobal.com/smallbusiness

Gabriel Low FCCA is CFO (South East Asia) of GEA Westfalia Separator (SEA) and a member of ACCA’s Global Forum for SMEs.

CFOs need to be able to say: ‘If I weren’t here, this result would have been x% less than it is’

SME specialA special edition of ACCA’s magazine Accounting and Business explores the benefits a good finance function can bring to SMEs. Read it at www.accaglobal.com/smallbusiness

Dorothy Ngwira FCCA is managing partner at Graham Carr, the Malawi member firm of international accountancy network Nexia International, and a member of the SMP committee of the International Federation of Accountants.

Competing on a global scaleWhile Malawian practitioner Dorothy Ngwira senses growing optimism among Africa’s SMPs, she warns that there will be challenges along the way

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There can be little doubt that small and medium-sized practices (SMPs) are an increasingly significant force in Africa’s economic future in their

support for the needs of small and medium- sized enterprises (SMEs). SMEs’ resources and needs are significantly different from those of their larger business counterparts, and they are very much dependent on SMPs to meet these needs. Not surprisingly, SMPs themselves tend to have very different needs and a smaller resource base as compared to larger accountancy practices. The International Federation of Accountants’ (IFAC) SMP committee was set up a decade ago to address these needs by providing support to the growing SMP community globally. With demand growing for accountancy, advisory and tax services from the continent’s burgeoning small business sector, together with new investors who need additional levels of assurance, today’s SMPs in Africa have great opportunities.

In Malawi in recent years, we have seen the number of SMPs double. Employing the majority of accountants working in practice, these SMPs provide a broad range of professional services, such as traditional audit, accounting and tax services. But they also provide value-adding business advice to their SME clients. SMEs are critically important to the health and stability of the global economy, accounting for the majority of private sector gross domestic product, employment and growth. But they face challenges as well. According to the IFAC SMP Quick Poll: 2012 Round-up, challenges in Africa include the burden of regulation, economic uncertainty and difficulties accessing finance. However, SMPs face their own challenges. In the same survey, African SMPs cite keeping up with new regulations and standards, attracting and retaining clients, and a pressure to lower fees as the top three issues. And the biggest concern for the future was reported to be the reputation of the profession, followed by the

difficult global financial climate and increased regulation. Technology and communications can also prove difficult to access, although investment on the ground is helping.

WORLD OF OPPORTUNITYBut as SMPs overcome these challenges, they can see a world of opportunity ahead of them, with the services they can offer growing and evolving. The IFAC poll shows that, while audit and assurance remain the fastest-growing services offered by SMPs, advisory and consulting services come a close second. For instance, offering sustainability services to SMEs is proving a rich seam for firms. SMPs can support their SME clients when they do business internationally, too. Joining an international network of accountancy firms can enhance this, and they can benefit from referrals from clients based in other countries.I sense a growing optimism among SMPs in Africa. According to the IFAC report, last year 42% of SMPs in Africa and the Middle East reported that their performance was better than the year before, while only 22% said it had been worse. Some 44% believed that 2013 will prove to be better than 2012, and only 14% thought that it would be worse.In June 2013 I attended IFAC’s annual SMP Forum in Uganda, of which ACCA was the gold sponsor, representing its investment in supporting IFAC’s commitment to SMPs. The Forum was hosted by the Institute of Certified Public Accountants of Uganda (ICPAU) and the Pan African Federation of Accountants (PAFA), and attracted more than 180 participants from 30 countries. Inevitably, many of the participants were from the African continent.

ON THE AGENDAThe two main issues addressed at panel sessions reflected their importance on IFAC’s SMP agenda. The first was the role SMPs play in providing SMEs with essential technical and advisory services, in addition to traditional accountancy provision such as auditing and taxation services. One of the panellists, Japheth Katto FCCA, CEO of Uganda’s Capital Markets Authority, ACCA Council member and IFAC board member, emphasised that SMPs can be the hub of SME networks delivering important services to the sector. The second panel session addressed the issue of enhancing SMP value through assurance and practice management. Brendan Murtagh FCCA, a former ACCA president and a member of IFAC’s International Auditing and Assurance Standards Board, argued that there is evidence that the market demand

Opposite and below: St Balikuddembe market in Kampala, Uganda, is one of the largest in Eastern Africa. Kampala hosted the International Federation of Accountants’ annual SMP Forum in June 2013.

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from SMEs is moving away from audit towards providing other services including reviews and other assurance engagements. Both panel sessions therefore suggest that there is a clear pattern in the move from traditional accountancy services and a widening of what SMPs should be offering their clients. These panel sessions were followed by the Forum participants dividing into two groups to share their views on the earlier panel discussion. The input of participants, in the main reflecting the needs of SMPs in Africa, will be considered further by the committee in its policy and subsequent development of products and services such as IFAC’s audit and practice management guides.

Last year 42% of SMPs in Africa reported that their performance was better than the year before, while only 22% said it had been worse

Maria Pinelli has a real passion for high-growth entrepreneurial businesses. Her eyes light up as she talks about them. ‘You are

operating in and on the business rather than as an outside adviser,’ she explains. ‘It really is a labour of love.’ Over the years, EY’s global vice chair of strategic growth markets has helped entrepreneurs to expand internationally, undertake capital transactions and carry out initial public offerings in Canada, China, the UK and the US. The turnover among the constituents of the indices listing the world’s most valuable

companies is surprisingly high. More than 55% of the global Forbes 2000 list turns over every five years, while the FTSE 350 has turned over 50% since 2008, and in Bombay the top public companies turn over at a rate in excess of 90%. ‘The market leaders of today are not the leaders of tomorrow and change is inevitable,’ observes Pinelli. Working with entrepreneurial companies, often in emerging markets, is exciting but also a challenge. ‘We have to think globally and act locally,’ says Pinelli. ‘We can’t lose sight of the fact that our business is done every day on the ground in communities, with people and with clients.’Entrepreneurs also face myriad challenges themselves. They want to maintain their entrepreneurial spirit and innovation, while sustaining their growth and building processes, infrastructure and controls to support that growth. Then there are the questions of where and how to grow ‘because the choices are abundant’. She cites access to capital and the right use of capital as particular issues in the current economic climate. Then there is the search for talent – people who will bring with them industry expertise and the ability to take innovative ideas and turn them into actionable services and products.

Entrepreneurs in developed markets also have plenty of hurdles to jump when looking to expand their businesses into the developing world. ‘It’s naïve to think a Western company can just drop into an emerging market and teach it about the Western way to be successful,’ observes Pinelli. ‘Everything from research and development to customer insight to the business model has to be developed with a local lens.’ She believes that Western entrepreneurs have plenty to learn from their peers in the developing world, not least techniques for delivering products and services to the masses at a low price. ‘How they innovate is different,’ she says. ‘It’s a concept we call frugal innovation.’And expansion into new markets doesn’t just work in one direction. ‘Emerging markets are coming into developed markets and taking over,’ says Pinelli. ‘Already we are seeing the influence of the emerging market buyer in the big brands now.’Pinelli tips real estate, infrastructure, healthcare and innovative services as the business sectors set to perform best over the next decade. She points out that retirement facilities are set to become big business in China where the one-child policy means that families can no longer take care of ailing parents. She also says technology will drive innovation in financial services and mobile, while clean technology and sustainability will impact on energies.Pinelli oversees EY’s prestigious Entrepreneur Of The Year programme, set up in 1986 so successful entrepreneurs could inspire others and receive the recognition they deserve. In 2008, Pinelli founded EY’s Entrepreneurial Winning Women programme after noticing that few women are featured in Entrepreneur

Taking entrepreneurs forwardWorking with entrepreneurs is immensely exciting, says Maria Pinelli, EY’s global vice chair of strategic growth markets

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Maria Pinelli Currently global vice chair of strategic growth markets at EY, based in London, Maria Pinelli has spent most of her working life with the firm. In 1986, she joined Clarkson Gordon, an EY predecessor firm, in Hamilton, Ontario, after studying commerce and French at McMaster University. In 1997 she was made a partner in EY’s Canadian practice and worked in Hamilton, Toronto and Vancouver. Moving to New York in 2006 to take up the role of Americas leader for strategic growth markets, she was appointed to her present post in 2011.

Women are more willing than men to give up the economic comfort of certainty to aspire to something uncertain

Of The Year. Female entrepreneurs tend to have drive, determination, passion and vision, notes Pinelli. They are also more willing than men to give up the economic comfort of certainty to aspire to something uncertain. ‘They tend to pay down debt quicker, hire more and, according to some early research, be more transparent,’ she adds. Women own approximately a third of all businesses in the world, nearly half of them in developing markets. Tapping into women’s economic potential would be the equivalent of having an extra billion individuals in business and in the workforce, contributing to the global economy and stimulating growth, Pinelli explains.But the challenge for women comes with building scale. ‘They don’t think big,’ Pinelli observes. ‘And they need to think big. They need to work on the business, not in the business. That’s a key mind shift.’But Pinelli is heartened that things in this area are looking up. A June 2013 survey from the EY Global Center for Entrepreneurship and Innovation polled women Entrepreneur Of The Year winners – and found that the world’s most dynamic female go-getters are feeling the confidence. They told EY they are confident – or somewhat confident – in the economic direction of their country, 88% versus 71% for their male counterparts. They also intend to out-hire the men in their domestic workforces, 73% to 69%. What’s driving the hiring? The need to boost productivity to meet demand in their home markets, which suggests a scaling up for this high-achieving group. Through the Entrepreneurial Winning Women programme, EY identifies a select group of female entrepreneurs with established, successful businesses and clear potential to scale – and then helps them to do it. ‘Women who have been part of our programme have grown their sales by an average of 50% a year,’ Pinelli reveals with obvious satisfaction. ‘By providing the right information, networks and guidance, we’re able to help these talented women access mentors, networks and capital. If women started businesses with the same capital as men, we would have six million more jobs in the US alone.’

Sally Percy, journalist

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The link, once considered integral, between the adoption by a business of limited liability status and the imposition of legal accountability

requirements has been progressively loosened in many countries in recent years. Differential rules, whereby smaller companies are subject to less extensive reporting obligations, have become standard in many jurisdictions, and the conviction that economic growth can be engineered by freeing up small businesses from regulatory burdens has led to renewed efforts to reduce or even eliminate statutory requirements for small companies to prepare and publish accounting information. The initiatives undertaken have included the European Union’s introduction of a new micro-company regime that requires only minimal information to be included in company accounts and allows individual member states effectively to exempt the companies concerned from publishing any accounting information on the public record. There are few today who would argue against the proposition that regulatory requirements need to take into account the information value of each requirement and the effort and cost involved in compliance. Invariably, smaller entities will have fewer stakeholders who are interested in their activities than will be the case with large companies, and the relative cost of compliance for them will be higher because of their limited resources. These factors tend to justify the adoption of tailored solutions for smaller entities. It remains, however, the case that the adoption of limited liability status, whether by a micro business, an SME or a multinational enterprise, results in a transfer of risk from the individual entity to those with whom it does business. Rules designed to provide comfort to third parties that a company is managing its internal financial affairs in a responsible fashion remain relevant at all levels of the corporate sector, and the value of rules on transparent reporting can be as much to do with providing decision-useful information to the marketplace as about compliance and determination of tax liability. Rules in these areas go some way to addressing the increased risk that third parties inevitably run when they do business with a limited

company, even a very small one. If they are removed, a measure of stakeholder protection will be lost, unless comparable protections are provided in other ways. Unfortunately, government-level debates often pay little heed to this deficit and often seem motivated by a simple concern to reduce the financial compliance costs to the reporting entity, with the implicit assumption that the rules concerned have no valuable role in protecting the interests of stakeholders (including the company’s own shareholders and employees) or indeed in furthering the business interests of the company itself. Unless these debates address the role of accounting and reporting in the wider context of stakeholder protection, they therefore risk creating a distorted scenario in which compliance costs are reduced (or appear to be reduced) only at the expense of those individuals and businesses who assume the risk of trading with companies.

WORLD VIEWSThese issues have been addressed in an ACCA report, Protecting stakeholder interests in SME companies. The report looks at how a number of countries around the world see the contribution of accounting and disclosure rules to the protection of stakeholder interests in the SME context. Those who argue in favour of stripping accounting rules to the bone will usually point to the US. There, the main corporate vehicle for SMEs is the limited liability corporation (LLC). State legislation on the LLC invariably imposes no legal obligations to prepare or publish financial accounts, no requirements for independent audit and no requirements regarding internal financial management. The LLC is a hybrid structure and enjoys more of the characteristics of the unincorporated partnership than its equivalent structure in the UK and elsewhere. For example, members are taxed on a personal basis and sole-member LLCs (which constitute the majority of such companies) that become insolvent are dealt with as unincorporated associations rather than as corporate bodies. Dividends may only be paid on specified conditions, which include that the company should be able to continue to pay its debts as they fall due, and

John Davies FCIS is head of technical at ACCA. He coordinates ACCA’s policy positions on technical matters and has a special interest in business law and financial crime issues.

Protecting the stakeholdersReducing reporting requirements might help SMEs, but could lead to shareholders and creditors getting burnt, says ACCA’s John Davies

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any director who approves the payment of an illegal dividend will be required to repay the excess to the company. In Australia, ‘small’ proprietary companies – the great majority of registered companies – enjoy full exemption from the standard requirement in Australian company law to prepare and publish an annual financial report. However, there are two important legal safeguards. First, the directors must make a declaration of solvency. Second, shareholders holding at least 5% of the voting rights in a small company may insist that the directors prepare a report. Over and above those controls, company law imposes a high degree of personal responsibility on directors, which has the effect of stressing the practical importance of financial discipline to smaller companies. No dividend may be paid unless the company’s directors are satisfied that the amount proposed is fair and reasonable to the shareholders as a whole and does not materially prejudice the company’s ability to pay its creditors. Directors risk personal liability to compensate their company if they fail to comply with any of their legal duties and the company

The adoption of limited liability status transfers risk from the individual entity to those with whom it does business

suffers loss or damage as a consequence. Further, the tax authorities in Australia can pursue directors personally if their company fails to pay its taxes on time. Singapore is a jurisdiction that has traditionally been wedded to the virtues of full transparency on the part of all sizes of company. In a consultation on the future of company law issued in 2011, the Singapore government stated that ‘the starting premise... is that all companies, by choosing to use the company structure as a business vehicle, should provide disclosure of useful information to the public through filing with the Registrar, so as to enable persons who deal with them to make informed decisions’. While, even here, the smallest companies are entitled to certain exemptions from this principle, the law provides significant alternative safeguards. Any director who allows a dividend to be paid other than out of allowable profits will commit a criminal offence and may be made liable to repay the debts of their company’s creditors to the extent that the dividend paid exceeded the amount legally available for distribution. Directors may also be made personally liable for all the company’s debts where they have allowed their company to trade fraudulently or to incur debt which it had no reasonable expectation of repaying.

WIDER FRAMEWORKIn all three of these jurisdictions, the scaled down regulatory status of accounting rules exists within a wider framework which acknowledges that if stakeholder interests

are not to be protected via rules on those matters, they need to be safeguarded in other ways. The way this most often happens is via the effective blurring of the distinction between the corporate structure and the unincorporated form, with the consequence that a company’s directors are exposed to a higher degree of personal risk than would otherwise apply. Clearly, many small companies are attracted by regimes that call for little or nothing in the way of accounting and disclosure requirements. In some cases they may be justified in claiming that rules cost them time and money which could be best spent in running the business. They will often be attracted by the idea of not publishing information that could be of commercial advantage to competitors. But if we accept that even small companies should pay a price for their assumption of limited liability, the question is what form that price should take. For many years, accounting and disclosure obligations were regarded as helping to serve that purpose. It may be that at a certain level the cost of preparing and publishing accounting information will exceed its various benefits. But the aim of reducing compliance costs through removing accounting obligations – always assuming that they are in practice achievable – will be at the expense of stakeholders’ interests unless there is a corresponding attempt to address their interests in other ways.

Protecting stakeholder interests in SME companies is available at www.accaglobal.com/smallbusreports


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Faris Dean ACCASOLICITOR, LYONS DAVIDSON‘There are two competing interests which often apply to a corporate business entity. The first is that of the entity itself and those running it – for example, reducing regulatory obligations to reduce the costs of compliance and limiting the liability for the debts of that entity. The second is that of the stakeholders who deal with the entity – for example, the financial risk to creditors of doing business with the entity and ensuring that it is properly managed through compliance with set rules. Countries have adopted various rules to strike a fine balance between distributing risk between these two competing interests to ensure fairness and transparency.’ Chair, ACCA Global Forum for Business Law

Professor Robin JarvisACCA SPECIAL ADVISER‘One of the most important uses of the published annual financial reports of companies is the trade credit decision. Research indicates that trade credit is the most important source of finance to SMEs. The assessment of this financial information will be critical in the decision whether credit is given or not and, if given, the extent of the credit period. Financial information therefore helps to protect small companies against non-payment while giving credit to their customers. The cutback in the legal requirement for micro and small businesses to lessen the financial information that they publish is therefore likely to have a worrying effect on the protection and credit given by these size of companies.’

A clear pictureAccess to finance and the long arm of anti-corruption legislation mean that SMEs in the GCC are having to step up their corporate governance practices, says Pinsent Masons’ Alison Hubbard

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Saad Maniar FCCAMANAGING PARTNER, HORWATH MAK, DIFC (MEMBER, CROWE HORWATH INTERNATIONAL), DUBAI‘As markets become more open and global, and business becomes more complex, the SMEs in the GCC region need to understand that good governance is necessary to support effective decision-making, to comply with applicable legislations and to continue to fuel their growth appetite. This will also enable companies to maintain high-quality standards, thereby reducing their overall risk, which means access to capital and relatively easier and cheaper debts for the SMEs. However, in times where cutting cost reigns supreme, it remains to be seen how the institutions will react to this wake-up call.’Member of ACCA UAE members’ advisory committee

With regional governments seeking to steer their economies away from reliance on hydrocarbons, wider global engagement will be key

Although a relatively new concept to the countries of the Gulf Cooperation Council (GCC) – Saudi Arabia, Oman, Bahrain, Qatar,

United Arab Emirates and Kuwait – the role of corporate governance in risk management and sustainable growth is being acknowledged, in principle at least, as regional governments seek to regain investor confidence, build sustainable economies and compete on a global platform.To varying degrees each GCC government has legislated in respect of corporate governance. Predictably, the focus of such legislation tends to be public companies, and increasingly financial institutions, as governments seek to grow their capital markets and boost confidence in the financial sector. However, there is a growing initiative directed towards private companies, including small and medium-sized enterprises (SMEs). For example, the Pearl Initiative, launched by the United Nations Office for Partnerships, the Crescent Group and the American University of Sharjah, is providing a platform for open discussion on improving corporate governance, accountability and corporate social responsibility across the GCC, and counts as its partners several high-profile private companies. In Dubai, Hawkamah – the regional Institute for Corporate Governance – and the Department of Economic Development have developed a Corporate Governance Code for Small and Medium Enterprises, setting a benchmark for best practice in corporate governance for private companies. However, for many owners and managers of SMEs, corporate governance is an alien concept, often dismissed as an issue for public companies. A prevailing view is that governance policies are ‘red tape’ by another name – a hindrance rather than a help. There is an assumption that a governance policy will be complex and interfere with the running of the business, and a concern that the tail will end up wagging the dog. The tide, however, is slowly turning as more SME owners begin

to appreciate the benefits of corporate governance, particularly in the context of access to funding.

SMEs AND ACCESS TO FINANCE The lack of finance available to SMEs in the wake of the global financial crisis has been identified as a key barrier to growth, both in terms of SMEs themselves and the wider economy. As a result, governments across the GCC have been applying increasing pressure on financial institutions to free up some much-needed capital.Although the lack of collaboration among potential lenders (in terms of information sharing and the development of lending practices) could be said to be a factor, the reluctance of these potential lenders may be understood in the face of legal frameworks that, arguably, do not provide efficient mechanisms to enable these lenders to adequately manage their own exposure. In the absence of credit-rating agencies, security registers and an efficient mechanism for debt recovery, lending in the Gulf region carries inherent risk. Although these issues are being addressed, the pace is slow.While good governance can enhance the operations of a business in various ways, it is the link to funding that seems to be the key

driver in encouraging SMEs to adopt sound practice. Put simply, lenders and potential investors want (and need) to see that borrowers are being properly managed, that they have appropriate mechanisms in place for assessing risk, that appropriately qualified people are making the decisions, and that proper books of accounts are being kept in accordance with

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This page: Dubai hotel/office complex, the Emirates Towers.

international standards. For those operating in more mature economies, these principles may seem like the fundamentals, but in a region where, historically, there has been little separation between the owners and management of businesses, and where there has been a distinct absence of a need to adopt formal policies, these fundamentals do not necessarily come naturally.

THE GLOBAL PICTURE Access to finance is not the only reason that SMEs are being actively encouraged to adopt good governance. With regional governments seeking to steer their economies away from reliance on hydrocarbons, wider global engagement will be key to sustainable growth. Investors from more mature economies will be more likely to invest in economies where transparency and access to information are the norm, rather than the exception. With the ever-expanding reach of extra-territorial legislation, such as the UK Bribery Act and the US Foreign Corrupt Practices Act, foreign investors need to be extremely careful about with whom they do business; the potential financial penalties and reputational risk associated with falling foul of anti-corruption legislation compel foreign investors

to ensure that their counterparts are adopting robust governance procedures. The GCC region is clearly an interesting prospect for foreign investors, but can also, rightly or wrongly, be perceived as a challenging environment for compliance with anti-corruption legislation. SMEs in the region seeking to engage with global partners will need to adopt good governance practices to avoid being deemed as too risky a commercial partner. This is particularly true of the family businesses that the GCC is well known for.Each GCC country has its notable large family businesses that, over several generations, have morphed into multinational enterprises, in some cases with interests spanning the globe. Many family businesses in the GCC region started out as small trading companies and grew into large diversified conglomerates with interests in retail, trading, construction, logistics, manufacturing and real estate, to name a few. Part of this growth can be attributed to the strong relationships developed with international investors.However, with a tendency towards privacy, many family businesses still have very few formal procedures in place, but will, in due course, need to consider how to take the business forward, particularly in the context of succession. Others have truly made the transition from local trading enterprise into diversified global conglomerate, with sophisticated corporate structures and governance frameworks that include the appointment of both executive and non-executive directors from outside the family circle, audit committees and anti-corruption policies and procedures.As these hugely successful family businesses openly demonstrate their commitment to good governance, it is likely that others will follow suit.

THE FUTURE It remains true that for many SMEs, corporate governance is a work in progress as the true value of good governance is not yet fully appreciated. Although SMEs are slowly beginning to recognise that good governance can lead to improved efficiency and market reputation, and reduced risk exposure, the real driving force behind implementation is likely to be the need to demonstrate that the business is a safe bet for investment. However, those with the capital to lend are well aware that a corporate governance policy is only as good as the commitment to its implementation and continued application. Any business treating governance as a tick-box exercise is likely to be given short shrift by lenders and investors.


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Alison Hubbard is a partner in the corporate group based in Pinsent Masons’ Dubai office. She has been working in the Gulf region since 2006, advising on a range of corporate matters including mergers and acquisitions, joint ventures and structuring, as well as governance, anti-bribery and other compliance matters.

Small and medium-sized enterprises (SMEs) represent over 90% of global business and account, on average, for 50% of the gross domestic

product of all countries. However, while SMEs are closely involved in many areas of regulatory and policy development, there is considerable room for improvement in their record on sustainability. No definitive estimate of the impact of SMEs on the environment is available, but it is thought to be broadly in line with their economic contribution.SMEs are not active in the ongoing debate about sustainable business practices, and the reasons for this are complex and closely related to their unique characteristics. They are usually owner-managed and independent; are less bureaucratic and procedure-orientated than large companies; and the challenges they face are often short term. However, it is widely accepted that SMEs need to be involved in the debate if environmental challenges are to be addressed.In its recent report, Embedding sustainability in SMEs, ACCA’s Global Forum for SMEs proposed recommendations that will need to be adopted by governments, businesses and the accountancy profession if efforts to engage SMEs in sustainable business practices are to gain momentum. Improving SMEs’ approach to sustainability will require a collective effort from SMEs, policymakers, regulators and – perhaps most importantly – the accountancy profession. The ACCA report discussed

recent research on the adoption of sustainable practices by SMEs, which recognised the necessity of working with and through organisations already known and trusted. Accountants could serve as a credible channel for communication on sustainability-related issues, since they are often the only business adviser with whom a smaller company is frequently in contact.But as the report adds: ‘The potential for accountants to offer sustainability advice is

not only linked to their close affinity with the sector and the access and trust this tends to generate, but it is also very much linked to their core competence.’ Professional advisers have a unique understanding of the challenges of running a smaller business and are ideally placed to advise business owners. They can play an important role in helping SME owner-managers in areas such as the adoption of an environmental management system, supply chain management, accreditation, stakeholder engagement and sustainability reporting.There is only limited evidence that accountants are moving in this direction. A survey for Forbes Insights in 2011 found that only 12% of SMEs that use accountants for financial management advice also use them for advice on operations. However, it is inevitable that the increased focus

on business sustainability will increase the demand for sustainability-related skills and advice.The motivation for SMEs to adopt sustainable business practices is already present. Good environmental governance is increasingly important to the sector as a means to strengthen customer loyalty and enhance company image, and there are important business and competitive advantages. SMEs have much to gain from sustainability – from increased efficiency to better employee engagement. The motivation

of the owner-manager must be the starting point of

the debate.

Seeing the green lightSMEs – and the environment – have much to gain by embracing sustainable practices, and the accountancy profession holds the key, says Rosanna Choi

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Rosanna Choi FCCA is a partner with CWCC Certified Public Accountants and a past chair of ACCA Hong Kong. She is chair of ACCA’s Global Forum for SMEs.Embedding sustainability in SMEs can be found at www.accaglobal.com/smallbusreports

In this fast-moving and globalised economy, large corporates have learned how to adapt and maximise profits while small and medium-sized enterprises

(SMEs) and mid-caps are usually not so well prepared. Trading globally is becoming something usual, but the associated financial risks are often not well understood or managed.In this post-financial crisis scenario, banks are being forced to deleverage, and companies are experiencing increasing difficulties in getting access to credit and financial derivatives with which to hedge risks. SMEs and mid-caps are, as usual, much more affected than large corporates. But while several surveys have addressed foreign exchange (FX) hedging among large corporates, data on SMEs and mid-caps is much rarer.A recent study by Kantox and ACCA, Hedging FX Risk, has revealed the challenges faced by SMEs and mid-caps with an exposure to

FX risk. This study was based on a survey of 119 SMEs and mid-caps from more than 15 countries; the typical respondent had revenues of just over US$200m and traded about 19% of revenue a year in foreign currencies.

‘INSUFFICIENTLY HEDGED’The first finding is that SMEs and mid-caps are significantly exposed but insufficiently hedged. The majority (83%) experienced FX losses or gains in 2012 due to exchange rate volatility, and for one-third (33%) the amount of FX loss or gain has exceeded US$1m, resulting in a direct impact on profit margins. Despite these substantial exposures, 14% of businesses still did not hedge FX risk. Those that did so usually preferred simple methods such as forward contracts and natural hedging.SMEs and mid-caps need simple, transparent and low-fee solutions to hedge FX risk. Businesses are frustrated by the cost and complexity of hedging products. Respondents who chose not to hedge FX risk usually cited high costs and opacity regarding rates. Despite good intentions, SMEs and mid-caps do not actively manage FX risk. Even if the majority (77%) of businesses claimed to have a formal written FX risk-management policy, only just over half (51%) monitored their FX exposure at least weekly. In times of high volatility, such as most of 2012, the 49% of respondents that were not monitoring their positions at least weekly were running a high risk of FX loss. Perhaps worse, 30% did not analyse their exposure in order to understand their potential FX loss in the event of adverse market movements.

Hedging FX risk is available at www.accaglobal.com/access

Philippe Gelis set up Kantox, a peer-to-peer foreign exchange platform, in 2011. Previously he was a consultant with Deloitte, focusing on clients such as Santander Group and from the venture capital industry. He has an MBA from Toulouse Business School.

Hedging their betsPhilippe Gelis, chief executive of Kantox, asks why SMEs and mid-caps, despite good intentions, have not learned to manage foreign exchange risk

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Manos SchizasSENIOR ECONOMIC ANALYST, ACCA‘Internationalised and innovative SMEs are faster-growing, more profitable and better able to create wealth and jobs. But they’re also high-profile, high-value-added clients for any adviser, including professional accountants. The majority of these SMEs need to deal in foreign currencies at some point in their lifetime but will rarely be able to manage the risk involved in an optimal fashion. It makes sense to ask whether small accountancy practices – SMEs’ most trusted advisers – are well placed to offer advice in this area. Our research found that practitioners with strong professional networks can target clients with international aspirations, and FX risk management should be part of their offering.’

Trust: it’s intangible and almost indescribable, but you know when it’s there and you feel it when it’s gone. It’s also essential to the orderly

running of society; we need to be able to trust that the institutions and organisations we put our faith in are representing our interests fairly and acting in a responsible way. As professionals, we gain our status through professional qualifications and the membership of a professional body like ACCA, but it takes more than that for an individual to be trusted by their clients and colleagues. The professionals that we trust the most are those whom we believe to be acting with integrity and for the greater good – who have no vested interest and who give fair, independent advice. But it’s not just the ‘why’ that is important; the ‘how’ is equally crucial. Trust is instilled by professionals who can clearly explain how they have arrived at a decision. The advice of a professional who does not may be perfectly sound, but if a client does not understand how it has been arrived at, a decision can appear to be arbitrary. So, you’ve managed to establish trust; how can you lose it? Clearly, any legal breach or violation of a professional code of conduct has major repercussions on an individual’s or organisation’s trustworthiness and reputation, but the erosion of trust in the professions is happening in slightly more subtle ways. Many people do not understand the volume of expertise called upon when giving a professional opinion. With modern technology, anyone can access an opinion on any subject, anywhere, at any time, so some question why they are paying extra for a professional opinion – isn’t the professional just charging exorbitant fees for something they could get for free? It is up to us to demonstrate, through both our work and our professional bodies, why it is better to invest your trust and money in a qualified professional rather than an unknown internet ‘expert’.

GREAT EXPECTATIONSIn addition, the public’s expectations of institutions and professionals have never been higher, but in a world where resources are stretched, perceived delivery is low. This disconnect between what can actually

be achieved and what people think should happen is damaging to the trust between professionals and the public, with the latter repeatedly seeing their aspirations frustrated. Managing expectations and ensuring that people are aware of the parameters is therefore integral to preserving trust.This all begs the question: ‘Why bother?’ Surely if you’re not breaking any laws and delivering a good, professional service you’re trustworthy, so why go further to engender extra trust? Put simply, trust brings a competitive advantage in terms of an enhanced public reputation and repeat business. Of course, in a perfect world, organisations and professionals should want to be considered trustworthy as an end in itself, but in the absence of perfection, the impact of trustworthy behaviour (or not!) on the balance sheet is increasingly being understood by businesses throughout the world.

TAKE RESPONSIBILITYHow do you therefore rebuild trust when it is lost? The first step is to admit mistakes and take responsibility; in general, people are more forgiving of organisations and individuals that are willing to say that they got it wrong, then take visible steps to put things right. Depending on exactly what has happened, a cultural change may also be required. Led from the top, this needs to go beyond the legal requirements and be done in collaboration with all employees so that they understand and can embody the values and cultural change, and the outside world can see that it is not just a PR exercise. This brings me on to the future of trust. It is clear that some societies around the world are becoming less tolerant of perceived breaches of trust by both politicians and companies, however much they may be operating ‘within the law’. Are we entering an era when the reward structure in society is changing to recognise good, trustworthy ethical behaviour and penalising those who place self-interest over the public interest? If so, trust is only going to move up the agenda. It is therefore crucial that we, as professionals, lead the way, both in our own professional lives and in encouraging our clients to adopt good practices and behaviours that encourage and foster trustworthiness.

Professions for Good, of which ACCA is a founder member, is a collaboration of the major professional bodies in the UK, collectively representing over one million of the UK’s qualified professionals. Earlier in 2013, ACCA hosted one of a series of roundtables on trust in the professions run by Professions for Good. Louis Armstrong is former chief executive of the Royal Institution of Chartered Surveyors, and has been both a barrister and an admiral.www.professions forgood.com

In professionals we trust? With public trust in the professional community having taken a battering, Professions for Good chair Louis Armstrong considers how to restore it

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Ian Powell (right) joined PwC UK in 1977 as a graduate trainee. He became a partner in 1991 and developed the Continental European BRS Advisory practice. He was elected chairman and senior partner in 2008.

Professor Barry J Cooper FCCA (left) is head of the School of Accounting, Economics and Finance at Deakin University, Melbourne, and ACCA president (2012-13).

ACCA International Assembly

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‘Our profession has a fundamental role to play in rebuilding trust in reporting and assurance’

Telling it like it is Auditing and financial reporting can play a key role in restoring public confidence, but only by becoming more robust, informative and transparent. This is the view of PwC UK chairman and senior partner Ian Powell, who believes the time is ripe for a widespread debate on the future of audit.Speaking at ACCA’s International Assembly he said that the unexpectedly prolonged downturn had undermined the public’s trust and faith in markets, and this has had a knock-on effect on the accountancy and auditing profession. ‘Our profession has a fundamental role to play in rebuilding trust in the reporting and assurance of the information on which markets rely,’ he said. In the past, Powell added, too little attention had been paid to the advice of investor Warren Buffett that financial statements and reports needed to ‘tell it like it is’. As professionals, Powell concluded, accountants should recognise that trust can only be rebuilt with clear communication, transparency and accountability.

For an interview with Ian Powell visit www.accaglobal.com/abpowell

Proof of value Given the challenging economic environment, it is more important than ever that the accountancy profession proves its value to society, ACCA president Barry Cooper told delegates at ACCA’s International Assembly.‘Without the trust of its clients, the accountancy profession cannot continue to evolve and provide services fully,’ Cooper said at the event in London in November 2012. ‘The value of our work depends on accountants being seen to be able to take an objective and ethical approach; if the profession is seen as failing to operate in a way that protects society’s interests, then its value to business is lost.’These concerns underpin ACCA’s research programmes, which cover audit, access to finance, risk and reward, environmental sustainability, and how finance teams work.‘By asking what it is businesses and society need from accountants, we can help change the profession for the better,’ Cooper said.

The fallout from the financial crisis has been felt in many areas, with one of a number of impacts being on the reputation of finance professionals.

As a result, business ethics have taken on a new level of significance in the public’s perception. For accountants, who have a well-formed international rulebook in the form of the International Ethics Standards Board for Accountants (IESBA, the Ethics Board) Code of Ethics for Professional Accountants, this may seem ironic. But perhaps the difficulty is not the code but that not enough people outside the accountancy profession are aware of it.The man tasked with addressing that problem is Jörgen Holmquist, who in September 2012 became the first independent chairman of the Ethics Board. Appointing the former director-general of internal market and services at the European Commission was seen as something of a coup, not least because Holmquist had overseen the development of the EC’s regulatory response to the financial crisis. For the Ethics Board, the independent body charged with developing and maintaining an ethics code for professional accountants worldwide, his appointment as its first independent (and non-accountant) chairman was the first step in publicly demonstrating its commitment to an impartial and robust ethics code. Officially, a key part of his role is to ‘enable, encourage and promote a deeper understanding by stakeholders and the public of the strategies and activities’ of the IESBA. ‘Outside of the profession, the Ethics Board is not particularly well known and we have to recognise that,’ he says. ‘There is a lot of competition for attention, in the sense that there are many regulatory and advisory bodies. But my ambition is that we will become well known around the world, and in a good way.’ Within the profession, he adds, it’s vital that accountants know they are not alone when facing difficult ethics issues. For the general public, it is more about restoring trust. ‘There is quite a lot of interest in accounting and auditing at the moment, particularly in whether accountants are living up to the standards expected of them,’ he says. ‘The public has become more interested in ethics as a result of the financial crisis; living

The ethics chiefIESBA chairman Jörgen Holmquist describes the challenge of creating a robust ethics code for accountants that is trusted inside and outside the profession

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‘A lot of people were against the proposals, especially the requirement for auditors to report suspected illegal acts to the authorities’

Jörgen Holmquist became the first independent chair of the IESBA in September 2012. He is also chair of the European Corporate Governance Institute and the European Fisheries Control Agency, a special adviser to European Commissioner Maria Damanaki, and a senior adviser at the international public affairs consultancy Interel.Prior to joining the IESBA, Holmquist was director general of the European single market and financial market regulation in the European Commission, from 2007 to 2010. Before joining the EC in 1997, he served in the Swedish Ministry of Finance for 20 years.

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we can fully understand their concerns and if we change our approach significantly from the ED, we will re-consult.’

RULES-BASED OR PRINCIPLES-BASED?The issue illustrates the difficulty the board faces in refining a code that can be applied across multiple jurisdictions. The fundamental argument still rumbles on over whether it should be rules-based or principles-based, with some European regulators privately arguing strongly for a rules-based approach as anything else would be too difficult to enforce. ‘A rules-based code would be difficult, if not impossible, because of the different legal traditions in different countries, and we cover more than 125 jurisdictions,’ says Holmquist. But he also argues that a principles-based approach is the only viable answer. ‘Academic research shows a rules-based approach just encourages box-ticking, while a principles-based approach forces people to reflect whether their behaviour is ethical or not,’ he says. ‘And we want people to think about what is right and what is not.’ He dismisses a further criticism, that the code is a lowest common denominator, as ‘patently untrue’. It has been adopted more or less wholesale by Australia, he notes, while a study by European accountancy body FEE found it more demanding than European legislation.Nevertheless, he acknowledges that some regulators find enforcement a challenge and says the IESBA will consider ways of alleviating their concerns. The board is also due to discuss auditor rotation and the offering of non-assurance services to audit clients. ‘By the time my term is up I’d like us to be well-trusted by regulators, the profession and investors,’ he concludes. ‘I’d like us to have a higher profile and to be better known, and to have contributed to the sense of ethics and principles being taken seriously.’


standards have gone down in many places, insecurity has increased and people are upset by what they see as unreasonable pay levels in the banking industry and elsewhere. And then there are more recent policy discussions, like the apparently low levels of tax paid by large multinational corporations relative to their profitability levels. These are issues that touch on values, ethics and morality and they have become far more important.’

‘GRADUAL PROCESS’ The profession too has had its share of scandals and is viewed more critically than it was five years ago. ‘I firmly believe that if we work on the important issues and come up with credible, reasonable solutions, the press around the profession will improve,’ he says. ‘People will see that the profession is covered by international ethics and other standards that are of high quality; they’ll see that a good job is being done. But it won’t happen overnight.’The Ethics Board’s work plan concentrates on strengthening the existing code in key areas. In early 2013 it released two sets of amendments that provide more comprehensive guidance for professional accountants in dealing with conflicts of interest, and that establish a robust framework for how to deal with a breach of an ethics requirement of the code, particularly an independence requirement in an audit engagement. Its toughest challenge so far, though, has been in its proposals to establish new ethics requirements that deal with responding to suspected illegal acts. An exposure draft (ED) published in August 2012 proposed that in some circumstances, accountants in practice and elsewhere should be responsible for externally disclosing suspected illegal acts carried out by their clients or employers. The response was largely negative, with critics arguing that it is the role of national regulators to say when an accountant can break their contractual duty of confidentiality. Holmquist admits that the illegal acts proposals are a ‘big litmus test’ for the board and that its final promulgations will be widely judged. The IESBA had lengthy discussions during the first half of 2013, considering both the responses to the ED and an alternative ‘straw-man’ draft. As yet, no solution is off the table. ‘A lot of people were against the proposals, especially the requirement for auditors to report suspected illegal acts to the authorities,’ says Holmquist, ‘but there was also almost unanimous support for us to deal with the question of illegal acts. We need to have further contact with our stakeholders so

Dermot Madden FCCAOFFICE OF THE DIRECTOR OF CORPORATE ENFORCEMENT, IRELAND‘Whistleblowing can only be effective if the organisation genuinely allows its staff to be able to say things people don’t want to hear. It cannot be used for personal gain, must be forensic, and must be evidenced. Accountants are in a unique role since they are most likely to have the skills to meet these criteria.’Member of ACCA’s Global Forum for Business Law

In 2012, Ward Diesel Filter Systems, a New York state-based company, agreed to pay the US government US$628,000 to settle claims that it submitted

false pricing information. Ted Siska, the whistleblower who brought the matter to light, received US$94,200 of the settlement for his trouble.A year before, Michael Woodford had been dismissed as chief executive of Japan’s Olympus Corporation after querying US$1.7bn of ‘inexplicable’ payments. Woodford eventually won a US$16m payoff for his dismissal. Around the world, more employees are blowing the whistle – but the way they are treated differs greatly. In the UK, 15% of whistleblowers are dismissed, according to a study of 1,000 whistleblowing incidents by the University of Greenwich. By contrast, in the US, the ‘qui tam’ provisions of the False Claims Act – where a private individual can receive part of the proceeds of a successful prosecution – mean that whistleblowers may be rewarded, sometimes with huge sums. Bradley Birkenfeld, the former UBS banker who provided US prosecutors with information about the bank’s efforts to promote tax evasion – subsequently leading to the government’s recovery of more than US$5bn in taxes from 33,000 tax dodgers – received a US$104m payoff in 2012.

GROWING LEGISLATIONBoth the Organisation for Economic Co-operation and Development and the United Nations Convention Against Corruption urge countries to introduce laws, and the number of countries that have adopted serious whistleblowing legislation is steadily climbing. The US has whistleblowing enshrined in several statutes and a support organisation in the National Whistleblowers Center. In the UK, the 1998 Public Interest Disclosure Act (PIDA) provides some protection from employers and is being amended to cover whistleblowers being victimised by co-workers.In Romania, whistleblowers are entitled to have a member of the media present when they make their allegations, while in South Korea, laws focus on rooting out corruption. Norway protects employees who make practically any kind of criticism of their employer, even if they

are complaining about something that’s legal, and South Africa has a watered-down version of the UK’s PIDA. In all, around 50 countries have some kind of whistleblower protection in place, sometimes as part of anti-corruption, employment or freedom of information laws.But even with a measure of legal protection, deciding to blow the whistle is never easy. ‘If an accountant comes across material that causes concern, he has a dilemma because he needs to be able to accommodate his own professional obligations with those of his obligations to his employer,’ says John Davies, head of technical at ACCA.‘Any responsible company should provide a procedure whereby any such concerns can be aired and resolved in a way that does not necessarily oblige anyone to disclose sensitive information to a third party,’ he adds. Yet the University of Greenwich found that 83% of workers need to blow the whistle at least twice before senior managers take them seriously.Woodford says that any whistleblower needs to face the fact that organisations tend to protect themselves. ‘Very few people stand at your side when the proverbial hits the fan; they will distance themselves from you. You’re not going to be liked and sometimes the rights and wrongs of your case can seem an irrelevance.’

PROTECTION VITALIt is because of this that Suelette Dreyfus, principal researcher with the World Online Whistleblowing Survey at the University of Melbourne, believes that whistleblower protections are vital both within organisations and in law. ‘If people see whistleblowers are treated badly, few people will be inclined to step forward the next time there is serious wrongdoing,’ she says.

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Whistleblowers get louderWhile the number of countries that have adopted serious whistleblowing legislation is climbing, a set of uniform international standards is essential

Dreyfus believes that shareholders should press companies to introduce internal procedures. ‘It’s usually in the shareholders’ best interest for there to be strong and meaningfully enforced protections,’ she adds.It is essential that staff have confidence that their careers won’t suffer, says Dermot Madden, a professional accountant in Ireland’s Office of the Director of Corporate Enforcement. But the ‘greatest impediment’ to effective whistleblowing is the reaction of line managers whose control procedures have failed. ‘This is often the reason why whistleblowers are not rewarded but are often fired or put in a position where they have no option but to leave,’ he says. ‘Therefore, the safeguards for whistleblowers must be set out in law and adequate compensation provided to them if they feel they have no choice but to leave.’ The International Ethics Standards Board for Accountants (IESBA), in co-operation with the International Federation of Accountants (IFAC), is considering proposals that would significantly increase the requirement of accountants to blow the whistle in some clearly defined circumstances. These proposals have caused some controversy (see interview with chairman Jörgen Holmquist on page 74).Davies says that professional accountants need to know more clearly where they stand.

‘At the moment, they can think about blowing the whistle but the decision is down to them as individuals,’ he says. ‘That can be a difficult dilemma. I hope the revised ethical guidance from IESBA, when it comes, will give accountants a more solid foundation on whether or not to blow the whistle in different situations.’

Peter Bartram, journalist

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In Romania, whistleblowers are entitled to have a member of the media present when they make their allegations

Pundits often attempt to explain the stock market’s gyrations, but most predictions seem to have no more than a 50/50 chance of being

right. In certain situations, though, there is a potential way to exceed these odds. You need to determine a company’s ‘tone at the top’, which is a shorthand way of looking at and evaluating the ethical standards of top management. If the tone at the top is suspect, a prudent investor will sell first and ask questions later. While a good tone at the top isn’t a guarantee of future stock market performance, history suggests that well-managed companies have superior financial performance over the long run.One recent example of poor tone at the top is Groupon. The voucher company grew so quickly that management decided to have an initial public offering (IPO) when it was still relatively young. Its management apparently didn’t believe that its actual sales growth, as reported under US generally accepted accounting principles (GAAP), was fast enough to justify the IPO and its anticipated initial price per share. The initial financial statements Groupon filed with the Securities and Exchange Commission (SEC) were rejected on the grounds that the company was overstating revenue. This was warning number one. Warning number two was a revision in early 2012 of already filed financial statements and some problems with internal control. Since then, there have been more missteps and slow growth. The accounting issues at Groupon showed that the tone at the top was poor.An older example is Enron, the demise of which has been the subject of innumerable articles. All I want to say here is that, at the time, the tone at the top was clearly more focused on making the numbers than on providing clear financial reporting. When analysts were bold enough to ask Enron’s management truly penetrating questions, they were laughed at for ‘not understanding’ the company’s business model. A second red flag was the ever-increasing reported earnings growth, quarter by quarter. Few companies can, for long, string together an unbroken record of ever-increasing sales and profits without engaging in some sort of accounting gamesmanship.

‘WARTS AND ALL’Sound financial reporting can be seen as wanting to report to shareholders and creditors what really happened, warts and all. Companies with poor tone at the top issue financial reports that try to put the best face on things, even if it means covering up bad news.Any financial report contains individual judgments, and there’s nothing wrong in applying professional judgment to individual accounting issues. Companies start to go wrong when management deliberately make most or all such choices in one direction with the direct effect of reporting higher income. For example, in the first quarter that a company fears missing its external commitments, individual choices are made so that the firm ‘meets the numbers’. Further, every single choice in that early period can be defended, and, in all probability, each is in full compliance with GAAP. Three months later the company has to issue another quarterly statement, and it has already used the ‘easy’ changes to accounting assumptions. To report continued gains in income in the next quarter, the company has

to absorb the previous adjustments in current results plus provide for steadily increasing growth – also from the current quarter’s reported results. If actual operations haven’t improved or have gotten worse, what can they do?This is where tone at the top becomes critical. If management were committed to ethical financial reporting, they would admit publicly that operations had been disappointing and that earnings were below expectations. Then they would disclose what they were going to do to correct the problems. In essence, such an action is fully commensurate with a good tone at the top.With a poor tone at the top and the same situation, there are several courses open. One would be to institute a cut-price sales programme to cover up the potential reduction in sales. Another would be to declare: ‘Our new,

Alfred M King is vice chairman of Marshall & Stevens valuation firm. He is also a member of the Institute of Management Accountants (IMA) – Nation’s Capital Chapter. Previous roles include managing director of IMA and CFO of American Appraisal Associates.

The dangers of tone deafnessPoor tone at the top is a strong predictor of aggressive or questionable financial reporting, says IMA Nation’s Capital Chapter member Alfred M King

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I have a simple suggestion: analysts should always be required to make a call on the company’s accounting

competitive product is on the verge of going to market.’ A favourite trick is to undertake a reorganisation and front-load the costs. In this way, recurring costs are characterised as ‘one-time non-recurring reorganisation costs’. Finally, sales could be borrowed from the next month, temporarily masking the problem.

‘TOO GREAT TO HIDE’Shareholders may not be able to identify, in advance, a company with a poor tone at the top. But when business problems become too great to hide and public explanations are required, many shareholders suddenly realise that tone at the top does matter.There’s a high correlation between aggressive accounting and a relatively poor tone at the top. Good companies usually have more good news than bad news and more good results than bad results, but they, too, suffer. IBM has been one of the most highly regarded companies for 75 years. Yet there have been periods where IBM has missed forecasts, lost market position and experienced management turmoil. Still, even at the height of its problems, it was quite open about where it stood and what it was doing.How can we protect ourselves? Most analysts who write published reports on prospective investment opportunities have a strong background in accounting; they have a strong idea as to how aggressive or conservative the company’s financial reporting is.Right now, most analysts use one of three recommendation categories: buy, hold or sell. I have a simple suggestion: analysts should also be required to make a call on the company’s accounting. They could use the terms conservative, neutral and aggressive. As an investor, I would look very favourably on a conservative accounting rating, would look unfavourably on a neutral one, and would immediately sell a stock that received an aggressive rating.If my assumption about accounting policy as a proxy for tone at the top is realistic, and if most analysts could be impartial in their rating of accounting, we as investors would be well served.

This is an abridged version of an article that first appeared in the March 2013 edition of IMA’s Strategic Finance magazine www.strategicfinancemag.com

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A favourite trick is to undertake a reorganisation and front-load the costs

Last year a UK government report from its social mobility adviser, Alan Milburn, called on the professions to do more to break down the barriers

to socially-neutral recruitment. These include recruitment processes that focus on a narrow range of universities, haphazard arrangements for work experience and internships and weak attempts to raise career awareness in schools. Action was needed, it said, to change the fact that recruits from less advantaged backgrounds – those from low-income families, or whose parents did not go to university or who had a challenging home life – are under-represented in the professions, including accountancy. One initiative that may help is Professions Week (www.professionsweek.org), in October 2013. Set up by a group of professional bodies, including ACCA, it aims to champion the availability of professional careers to a young audience. ‘This is an opportunity to talk directly to 14-to-19-year-olds about what a professional career looks like and for them to see all the different routes in,’ explains Sarah Hathaway, head of ACCA UK.Firms are also scrutinising their selection processes. Grant Thornton UK partner Sacha Romanovitch, responsible for people and culture, says: ‘Applicants from different backgrounds are often smart and very bright, but we don’t necessarily know how to select for those characteristics. We’re tracking people who have joined and been successful to see if we can articulate what these are.’ More should be done to ensure that once inside a firm, everyone has the same chance to progress. Grant Thornton UK CEO Scott Barnes points to the ‘inbuilt egalitarianism in the accountancy profession’, adding: ‘Once people are confident in the workplace and start passing exams, differences tend to disappear.’Professions for Good has developed a social mobility toolkit which can be used to assess an organisation’s progress in this area. ‘What we need is evidence that social mobility is embedded within an organisation and is delivering results,’ warns Hathaway. Otherwise, ‘there’s a risk that once government interest moves onto a different element of policy, the gains will be reversed’.

Pat Sweet, journalist

Widening the netPeople from less advantaged backgrounds are under-represented in the UK professions, but a number of initiatives are underway to change this

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Alison LallyHEAD OF PEOPLE CAPABILITY, DEPARTMENT FOR WORK AND PENSIONS

Martin CookCOMMERCIAL MANAGING PARTNER, UK AND IRELAND, EY

‘We recruit 60 to 80 people a year to be finance professionals across government. We don’t use UCAS points as a selection criterion as that can discriminate against some entrants; we ask for a 2:2 degree in any subject, and have demanding tests and assessment. Our recruits don’t need specialist expertise before they join us; they do need the drive and potential to be the leaders of the future. And we offer support mechanisms, like buddies and mentors who understand the challenges they will face.’

‘I’m from a working class background myself and my route out was via education, but I think it’s now harder to move forward in that way. That’s why it’s the role of business to set up a platform. There’s a lot of self-interest in this because we want the smartest people with a wide range of experiences, whatever their backgrounds. But we also need to think about how we maintain that level of diversity through to leadership. Networking groups are good environments for people who can’t get rid of the feeling in themselves that they don’t belong, as they can share experiences.’

Nida Naeem ACCA chairs ACCA’s subcommittee for the public sector in Pakistan. She began her career at PwC and has multi-sectoral experience in audit, business and risk advisory, research, accounting and finance.

In search of transparencyNida Naeem looks at how corruption, poor governance, lack of accountability and transparency have damaged a poverty alleviation scheme in Pakistan

In Pakistan, poverty alleviation remains a pressing issue. According to the Human Development Index, 60.3% of Pakistan’s population live on under US$2 a day,

compared with 47% in nearby India. Wealth distribution is highly uneven; the top 10% of the population earn 26.1% and the bottom 10% earn only 4.4% of national income. A number of state-run poverty alleviation programmes are funded by official ‘Zakat’ collections. Zakat is an obligation for Muslims to give a specific amount of their wealth to the poor and needy, formalised by the government in 1980 as the Zakat and Ushr Tax.Zakat is deducted at source by commercial banks in the Islamic month of Ramadan and credited in the Central Zakat Council’s (CZC) account maintained at the State Bank of Pakistan. Disbursements are made through district-level local Zakat committees in the form of subsistence allowances and through educational, health and social welfare institutions and Islamic schools or mudarassahs. About 40% of the Zakat funds are retained by CZC and are transferred to the national medical, educational and welfare institutions, bait-ul-mal fund and some are distributed in emergencies.With Muslims accounting for 95% of Pakistan’s population, a state-administered system of Zakat can be a big source of welfare spending, with potentially less incidence of evasion due to its religious nature. However, repeated corruption, embezzlement and misappropriation scandals have damaged the credibility of the government’s Zakat programme.The report Pakistan: A Profile of Poverty, published in the Journal of Economic Cooperation Among Islamic Countries, shows that acquaintanceship or other association with the local Zakat committee chairman or members has commonly been cited as the reason for being on the list of Zakat beneficiaries. The same report shows that 14% of the committee members are corrupt and 13% give Zakat funds to their friends and acquaintances. In 10% of cases, it was found that the money recorded as disbursed in committees’ registers was more than what was actually disbursed. In addition, Zakat funds are often used for political purposes.

IMPROVE GOVERNANCEImprovements in governance and administration are vital to turn the programme around. Public disclosure of annual plans for the receipts and expenditure of Zakat institutions, as well as audited accounts, would go a long way in increasing transparency, building public trust and improving financial management. In addition, a robust monitoring and accountability mechanism to identify and penalise violations of protocols, checks and balances, and independent audits would aid transparency and accountability, while deterring politicisation and misappropriation. Accountants and auditors have a critical role in helping to prevent and detect fraud.Effective accountability based on disclosure and reporting is likely to require some level of training in financial and management skills for the public at large or (in the case of Pakistan where a majority of the population is illiterate) for those undertaking a representative or advocate role (eg elected officials). Similarly, practices of disclosure and reporting, while retaining accuracy and precision, should be communicated with the non-specialist in mind.

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Governments across the globe have become increasingly concerned that many multinational companies are effectively choosing the amount of

tax they wish to pay and where. In the UK, for example, Google has been grilled about why, having generated US$18bn in revenue from the UK between 2006 and 2011, the company paid just US$16m in UK corporate taxes for that same period.The media internationally have been captivated, running stories about minimal tax payments on the back of apparently substantial revenues or profits. However, there is a risk that inflammatory headlines and simplistic reporting can confuse and misrepresent what are in fact complex issues.It is true that many businesses arrange their tax affairs in a way designed to keep their bills down. Some take a more aggressive approach than others, but nearly all follow the law. Companies have a responsibility to their shareholders to run efficient businesses; this requires the control of costs, and tax is a business cost like any other. If companies pay higher taxes, that cost must be passed on or recovered in some way – perhaps through lower pay for staff, lower returns to shareholders or higher costs to customers.The general trend among governments worldwide (the US being a notable exception) is in fact to reduce corporation tax rates. The UK, for example, is moving towards a rate

of 20% by 2015. Government incentives for specific business behaviours also push down corporation tax payments. Again in the UK, there are numerous incentives for investing in research and development, including the new patent box scheme which results in a corporation tax rate of just 10%.Another often overlooked fact is that companies pay a wide range of taxes – many of these have carried rising rates. UK VAT is now 20%, double the rate when introduced in 1973, and the top rate of stamp duty has increased by several hundred percent. According to PwC’s latest study on the total tax contribution made by the UK’s largest companies, taxes borne by the Hundred Group increased by 19% between 2005 and 2012 (see below). As PwC’s analysis highlights, the UK’s biggest businesses also make wider contributions to society beyond tax payments; they provide employment, make substantial capital investments and support research and development.

GLOBAL CHALLENGENevertheless, the emergence of global businesses presents a major challenge to nationally based tax administrations. Businesses with complex international supply chains become involved in protracted discussions with multiple jurisdictions, seeking to avoid the risk of double taxation. Tax treaties are designed to address such problems but are not foolproof. Tax authorities have become increasingly concerned about the risk of double non-taxation, questioning the ability of companies to manipulate internal structures and transfer-pricing agreements to shift revenues from higher to lower tax jurisdictions.Another challenge stems from the rise of digital business. When business activity in a location was dependent on having a physical presence there, identifying taxable profits was straightforward. Now a company may be resident in a location far from where revenues are generated. Customers in mainland Europe could pay for a service run by a company headquartered in Ireland, with IT servers in India. Even if a warehouse is located in Germany, this wouldn’t constitute a permanent establishment under standard tax treaties. The issue of the residence-source tax

Tax: time for a fresh approachWith mounting pressure on companies to pay a ‘fair share’ of tax, how can global tax rules be reshaped? ACCA’s Chas Roy-Chowdhury investigates

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The big picture from Britain’s biggest companies‘A consistent message that has come from the results of our Total Tax Contribution survey over the eight years that it has been carried out is that corporation tax is only part of the picture when considering how much the members of The Hundred Group contribute to the UK economy. In 2012, for every £1 in corporation tax, another £2 was paid in other business taxes borne, while in 2005 the equivalent figure for those other taxes was £1. Over that period, the total taxes borne have increased by 19%. This shift in the tax burden reflects the policy of successive UK governments. The wider contribution made needs to be remembered and properly taken into account when assessing the impact of past policies and considering what new policies may be required to meet future objectives.’Andrew Bonfield, chair, Hundred Group Tax Committee and FD, National Grid and Andrew Packman, partner, PwC

Source: Total Tax Contribution: Surveying the Hundred Group, PwChttp://tinyurl.com/d4kujhx

Chas Roy-Chowdhury FCCA is head of tax at ACCA. He is the staff expert on ACCA’s Global Forum for Taxation. He worked in public practice before joining ACCA.

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Andrey Sukhov FCCATAX MANAGER, RUSSIA, UKRAINE AND THE CASPIAN REGION, SHELL EXPLORATION AND PRODUCTION SERVICES‘Russia needs comprehensive financial and business practice reforms which should include energy sector tax reforms and moving to more profits-based taxation rather than duties and levies. Other priorities are tax incentives for small businesses to promote innovation and judicial reforms improving the protection of property rights. There are some useful reforms on the horizon; a draft tax incentives law on reducing taxes on companies developing liquid-rich shales is under consideration, and there could be future tax breaks for companies seeking to develop hydrocarbon reserves in the Arctic. A more constructive and real-time relationship between tax authorities and large companies would also be beneficial.’

balance was one of six key pressure areas identified in the February 2013 report from the Organisation for Economic Cooperation and Development (OECD), Addressing Base Erosion and Profit Shifting. Others included international mismatches in the ways that entities are characterised, intra-group financing, transfer pricing issues, the effectiveness of anti-avoidance rules and the existence of preferential regimes. G20 finance ministers appear keen to develop comprehensive, coordinated strategies to address such issues and prevent the erosion of their tax bases. Redesigning elements of the corporate tax system certainly seems desirable. Change is likely to be impeded, however, by the US, due to its persistently high

rate of corporation tax and deferral regime (only taxing foreign profits when repatriated). Furthermore, governments in the developed world might not like the results of ‘improved’ regimes. Achieving a fairer outcome wouldn’t necessarily just shuffle funds between the established Western nations, but would very likely see a shift of tax revenues to nations such as Brazil, India and China. It may well be time to take a fresh look at how global companies are taxed, but policymakers must take care. Established concepts – such as the arm’s length principle – still have worth. Double-tax treaties do not necessarily require wholesale reworking. There are no quick fixes if global businesses are to be taxed in a way that is not only fair but is also seen to be fair.

Protesters demonstrate against corporate tax avoidance outside a branch of Starbucks in Dublin, Ireland. The protest was timed to coincide with the G8 summit of world leaders, held in Northern Ireland in June 2013.

Over several decades it has been argued that because women were increasingly taking their place in the workplace, there would be a

rise in the number of females taking senior organisational roles. This is commonly known as the pipeline theory and its failure has been well documented by academics, particularly in relation to the accountancy and legal professions. Despite the plethora of legislation and guidance to overcome overt forms of discrimination, the levels of women in senior positions remain low, as reported by organisations such as the European Commission and the International Labour Organisation (ILO). According to research by EY, women make up 51% of the world’s population, yet even in Canada, the country ranked number one in EY’s Worldwide Index of Women as Public Sector Leaders, only 45% of public sector leaders are women. And after Canada it’s all downhill. In Japan, the world’s third-largest economy, women account for 2.5% of public sector leaders and in India, the world’s largest democracy, only 7.7%.In 2012, the European Commission’s public administration database revealed that 35% of politicians in the European Parliament were women; in the national parliaments female representation ranged from 0% in Malta to 62% in Finland. As for municipal leaders across EU member states, the position of mayor or leader was occupied on average by women 13% of the time. Senior positions in public administration across the 27 member states were filled by women 29% of the time; in many European countries men outnumbered women by at least two to one in the top two tiers of public administration.

A previous European Commission (2010) report found that many of the positions given to women were in ministries with ‘soft’ portfolios as opposed to those with key economic functions. Since then the percentage share of women has increased in both the European Parliament and European Commission, but there is still some progress to be made across national political and public administrations. The number of women at the top of supreme audit institutions across Europe was six (20%) as opposed to 24 men, which suggests that there is still a need for barriers to be broken down.

CROSSING THE DIVIDEThe question is how women can cross the divide and take on senior roles and public sector board positions. There are a number of different approaches that have been taken by various public bodies and governments. In Wales, the Equality and Human Rights Commission said back in 2009 that it wanted to see more transparency and creativity in job advertisements and selection criteria. It also identified aspects such as a long working hours culture as preventing women from progressing, and called for a rethink of approaches to working practices.More recently, the UK saw a potential threat to gender equality in public services that could have put it back years. In 2010 the Fawcett Society – a charity that campaigns for equality between women and men in the UK on pay, pensions, poverty, justice and politics – took legal action against the coalition government on the basis that it had not fully considered the impact of the Budget cuts on gender. Following this action – which failed in the courts – the UK government made a commitment to tackling gender inequality in the boardrooms of public sector bodies and set out a strategy

The ascent of womanWhile research shows that gender diversity pays off, the representation of women in senior positions is still not good enough, says ACCA’s Gillian Fawcett

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Carla Moody FCCASENIOR REGIONAL MANAGER, MONITOR, UK ‘Senior positions and board-level posts should be accessible to women but I don’t agree with quotas. I don’t believe positive discrimination exists; everyone has a right to be treated fairly and judged on their individual merits. The way to tackle inequality is to ensure equal opportunities through education and training, and for employers to recognise the value of a diverse workforce. The culture of the organisation is very important in supporting women into senior posts – for example, being focused on outcomes rather than the amount of time spent in the office.’ Member of ACCA’s Global Forum for the Public Sector

Gillian Fawcett is ACCA’s head of public sector and is responsible for developing policy on technical matters affecting public services and monitoring developments. She is the staff expert on ACCA’s Global Forum for the Public Sector.

female auditor generals is more than likely to be replicated around the world. While the UK’s National Audit Office (NAO) has a majority female board and a relatively good mix of female senior audit managers and above, even here the story is one of falling female numbers. In the past year women at director level and above at the NAO fell from 32% to 27.5%, against a target of 34%. Gabrielle Cohen, the NAO’s assistant auditor general and chair of the Diversity Delivery Board, is quoted as saying she is ‘still optimistic and believes that there is scope to do more’.There is little doubt that females can bring a better balance at the top whether in politics or in business. A number of studies have highlighted that organisations directly benefit from stronger financial and business performance. The challenge is for public bodies to understand what those barriers are and to introduce new solutions that enable females to develop their careers so that they have an equal chance of rising to the top.

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Nida Naeem ACCACHAIR, SUBCOMMITTEE FOR THE PUBLIC SECTOR, MEMBERS NETWORK PANEL, ACCA PAKISTAN ‘This is not just a gender game. As long as women are so under-represented at the top of public sector organisations those organisations are missing out as they are unable to draw from the widest possible range of talent. From my experience I find that I can bring different perspectives and a voice to the table, to the debate and to the decisions. This allows public sector organisations to benefit from positive value and impact.’ Member of ACCA’s Global Forum for the Public Sector

for women to make up at least half of all new appointees to the boards of public sector bodies by 2015.

ON TARGET?Norway is seen as a leader on gender equality and the participation of women in decision-making. Women make up 40% of the country’s parliamentarians and have held senior political positions including the post of prime minister. However, gender progress in the country’s corporate sector has been slower. In New Zealand the government set a 2010 target for equal representation of women and men in the membership of government and statutory agencies. It set up a Ministry of Women’s Affairs to identify women with appropriate experience and ensure that they are known to the decision-makers. There is insufficient literature and data on female finance professionals working in the public sector and further research is required. As highlighted above, the low number of

Norway’s justice minister Grete Faremo (left) chats with Sweden’s migration minister Tobias Billstrom and justice minister Beatrice Ask.

Amid the financial crises experienced by various European Union (EU) member states in 2009, Poland was the only country that did not

enter recession. In fact, Poland hasn't posted negative growth in more than 20 years. Although its economic progress has slowed in recent years, the country is still the envy of much of the EU, which continues to struggle with economic stagnation and recession in some countries. Poland’s economic performance has even been dubbed a miracle by some, but it was largely thanks to domestic consumption and relatively low levels of debt,

although strong accounting and auditing standards have played a role.Piotr Kalisz, chief economist for Citi Handlowy, Citibank’s Polish arm, points also to tax cuts that came into effect at the end of 2008. These reduced both personal and corporate income taxes and had been passed by the previous government, which was voted out of office in 2007. But the new government – led by centre-right pro-business party Civic Platform – kept the legislation in place. As a result, individuals and businesses received a boost to their bottom lines just as the crisis was hitting Europe hardest.

Poland’s economic miracleWhile Poland has avoided stagnation and recession, there is still potential for the country to strengthen its financial reporting and business practices

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Above: Wrocław’s new football stadium, built ahead of the UEFA Euro 2012 football championship, co-hosted by Poland and Ukraine.

DOMESTIC DEMANDAt the same time, a huge number of infrastructure projects were gearing up in Poland ahead of the Euro 2012 football championships, which it co-hosted with Ukraine. The government was able to use EU funding to finance the vast majority of road and stadium projects, sucking money into the job-rich construction sector.This influx of money into people’s pockets as the result of tax breaks and government-funded infrastructure projects led to strong domestic consumption. ‘The key thing was that we had fairly strong domestic demand,’ says Przemysław Kwiecień, chief economist for X-Trade Brokers, a large Warsaw brokerage. While some observers credit Poland’s success with its position outside the eurozone, both Hungary and the Czech Republic have their own currencies but nevertheless fell into recession. The difference was that their economies were far smaller; with only around 10 million people each, their populations are only a quarter of Poland’s, at 38 million. Polish consumers’ propensity to continue spending despite the crisis had a far more positive effect than the steep depreciation of the Polish złoty in 2009 (currently worth about US$0.31). While in theory a cheaper złoty to the euro would have made Poland’s exports more attractive to its main export partners in the eurozone, those countries’ economies were also contracting sharply and taking in far fewer imports. But Poland’s relatively low dependency on exports actually provided a buffer from the wider crisis.‘Poland had relatively little exposure to external demand, with exports to GDP [gross domestic product] at a much lower level than for smaller and more open economies in the region, such as the Czech Republic, Hungary or Slovakia, or more developed but small economies in western Europe,’ says Piotr Bujak, chief economist for Poland at Sweden-based Nordea Bank. Another key factor was the country’s relatively low level of debt. ‘There was no overhang of excessive private sector debt – Poland has one of the lowest private sector debt-to-GDP ratios in the EU – so there was no need for aggressive deleveraging of the private sector,’ Bujak adds. Economists also believe that Poland’s proximity to Germany – the former’s largest trading partner – was helpful after 2009. Although Germany was in deep recession that year, it did begin to recover in 2010, which benefited Poland. Poland has also improved in terms of corruption perceptions and business

friendliness. Its government – the first in the post-communist era to have been re-elected – is also perceived as stable. When it comes to the effect these factors had on Poland’s growth, though, most economists interviewed felt that these factors were not key drivers of Poland’s success.

STARTING FROM SCRATCHHowever, when it comes to Poland’s accounting and auditing standards, experts agree that a stable legal framework could have had an important impact. All of Poland’s large, listed firms are required by law to use International Financial Reporting Standards (IFRS). Because Poland started from scratch in this area after 1989, the country ‘adopted IFRS quicker and easier than many developed, Western countries because of the lack of a long history of having and using its national accounting standards’, says Sebastian Łyczba, audit partner at EY Poland.This led to a financial market that was able to hit the ground running, fuelling Poland’s entrepreneur class. ‘The link between money and entrepreneurs, who are recognised as the positive difference factor in comparison to other countries in the region, was a key factor in Poland’s success,’ Łyczba adds.However, Tomasz Konieczny, a partner in PwC’s assurance and advisory services in Poland, is less sanguine. ‘Poland is still a developing country when it comes to financial reporting standards,’ he says, noting that while a small group of companies – predominantly the largest listed on the Warsaw Stock Exchange – put a great deal of effort into compliance and transparency, many others – including some publicly traded firms – have a different attitude. ‘Their aim is to make sure that they meet the minimum requirements with the minimum work and expense and they treat provision of financial information as an administrative burden,’ he suggests.Nevertheless, both Konieczny and Łyczba characterise the regulatory framework of Poland’s accounting and auditing sector as a positive influence on the country during the crisis. And there is still potential for Poland to strengthen its financial reporting and business practices: ‘There is still a lot to do when it comes to managing risks of the business and implementing appropriate mechanisms to mitigate it,’ says Konieczny. ‘The situation is improving, though, and companies see benefits of following procedures and setting up mechanisms that deal with risks they are facing.’

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If the 19th century was the British century and the 20th the American, then the 21st belongs to Asia. As the Australian government put it in its Australia in the

Asian Century white paper last year: ‘Asia’s rise is changing the world.’The key trends and opportunities for business in the Asian century go beyond China’s appetite for resources. There are also opportunities created by the expanding Asian middle class, demand for accountancy services, offshore transaction processing, and the growing business of education.

INVESTMENT FLOWS BOTH WAYSAs the West seeks to capitalise on more vigorous Asian economies, those same economies are looking offshore for investment and other opportunities. Australia’s ideal location, combined with its political stability, favourable immigration policies and relatively buoyant economy, makes it an increasingly appealing prospect for Asian investors. Foreign direct investment in Australia grew by 8.6% to AU$550bn in 2012 and this trend is expected to continue. The government continues to welcome overseas investors, particularly in infrastructure, clean energy, tourism infrastructure, innovation, agriculture and food, the digital economy, and resources. In 2011 15% of foreign investment in Australia came from Asia. In 2012 more than AU$12bn of outward direct investment flowed from China into Australia through Hong Kong.With so many options for overseas investors, Australia is likely to remain an attractive prospect and many Asian investors will benefit from contributing funding for projects that will ultimately assist their countrymen overseas.

THE RISE AND RISE OF ASIA’S MIDDLE CLASSAs Asia’s middle class becomes increasingly wealthy and mobile, it will be looking for a broad range of goods and services. Health, aged care, education, food, consumer goods, tourism and travel, and banking and financial services are all likely to experience a boom. Western organisations with a presence in Asia are likely to profit, as are those countries that are home to Asian migrants. Australia stands in particularly good stead here. There are more than 860,000 Australians of Chinese descent

in the country, which is a major destination for Chinese students and tourists. Similarly, Australia has very strong links with India. The Indian community in Australia including both permanent residents and temporary visa holders was estimated at 450,000 people in 2011 and India has been a major source of temporary and permanent skilled migrants over the past few years.

AN APPETITE FOR ACCOUNTANTSThe growth in demand for consumer goods and services will drive demand for professional and consulting services too. Brendan Sheehan FCCA, chair of the ACCA ANZ panel and managing director of White Squires, says that China, for example, has a good supply of accounting graduates coming out of its universities while other Asian countries, such as Indonesia, Vietnam and Sri Lanka, may be short of people with professional qualifications. ‘Indonesia has a population of 230 million people and there are 11,000 qualified accountants. In Australia, we have an oversupply – 23 million people and 250,000 accountants. So there is an opportunity for businesses to supply high-calibre accounting people to meet that need,’ he says.

EFFECTIVE OUTSOURCINGOutsourcing transaction processing to Asia is not new; many companies see it as a shortcut to boosting profits, particularly when budgets are tight. Sheehan agrees outsourcing can be advantageous, but counsels companies to do it in the right way and for the right reasons. He says: ‘Businesses can outsource a lot of transaction processing to their own operations in China or India. That gives them an opportunity to leverage lower-cost labour at a more economical rate than outsourcing to independents or other companies. Having said that, outsourcing is not about cost

Basking in Asia’s sunThe inexorable rise of Asia leaves Australia well positioned to profit from a region that is forging ahead as maturer economies hit the wall

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Drivers of Chinese investment Wayne Basford, head of China services with BDO in Perth, identifies three key factors driving Chinese investment in Australia: 1 the need to feed the Middle Kingdom with resources, technology,

education and financial services and more;2 the move to escape China’s rapid urbanisation – many Chinese are

now sending their children to school overseas;3 the desire to service the rich migrant population in Australia.

savings; it’s about specialisation and getting the right people in your extended organisation doing the things they like doing and are best at. If you’re outsourcing to save money, you’re doing it for the wrong reasons.’

THE BUSINESS OF EDUCATION Asian students can bring great value to educational institutions. Estimates suggest that international students contribute more than AU$17bn in export value and help create around 120,000 full-time equivalent jobs in Australian establishments. They also contribute by enriching the cultural and social mix of the institutions and communities they join.Their presence represents an opportunity for local employers and organisations. China is Australia’s largest international education market, and there are more than 120,000 Chinese students studying in Australia. Companies wishing to tap into China’s superior GDP growth would be wise to consider how best to mine this rich vein of talent, with its inbuilt Asian cultural literacy and strong language skills. Conversely,

Asian organisations aiming to capitalise on Australia’s relatively stable economy would do well to employ those students who have assimilated commercial acumen, local culture and English language skills alongside their formal studies.However, the rising number of Asian students in Australia also creates challenges, according to Philomena Leung, head of the department of accounting and corporate governance at Macquarie University, where a third of enrolments are international students. Leung says universities could benefit more if they focused on providing ‘continuous support for the entire “life cycle” of Asian international students, from the time they learn about Australia while overseas to the time they study and work here’. She adds: ‘Many Australians are still trying to adapt to the Asian impact.’ Whether Australia is ready or not for the Asian century, the influence of Asia on Australian businesses and the broader Australian community is clearly growing.

Persephone Nicholas, journalist based in Sydney

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FDI hotspot: Australia is soaking up foreign direct investment from India, Japan and China.

Qatar is a country in a hurry. Under its 22-year plan, the Qatar National Vision 2030, the country is planning to diversify away from its reliance

on hydrocarbons to become a knowledge-based, sustainable economy. Delivering that vision commits the government of the Gulf emirate to spending US$93bn on education, healthcare and infrastructure, not to mention its hosting of the planet’s most watched sports event, the World Cup, in 2022. Altogether, the state is investing US$200bn over the next decade in capital projects.‘The infrastructure has to be of a globally recognised standard, not just for the World Cup,’ says Mark Lawrie, partner and head of consulting at Deloitte in Doha. ‘Roads, the metro, stadiums, schools and hospitals are all being built concurrently, which is pretty much unprecedented. It is a huge logistical challenge to bring everything into such a small country in such a short time.’The fear of scoring an own goal is very real, given that the main financier of development is the state. Major developments are being backed by public or semi-public entities, including such developments as the US$20bn residential, retail and entertainment hub Lusail City and the US$14bn Pearl-Qatar artificial island project.

COST AND TIME OVERRUNSProject management is a clear concern, especially given the ticking clock of the World Cup. Qatar will not want delays and spiralling budgets, as was the case with the Doha Asian Games in 2006, and Hamad International Airport, which was slated to open in April 2013 (at a cost of US$17.5bn – back in 2006, the allocated budget was US$2.5bn) but still had not done so in July. Muhannad Abu Ghazaleh, accounting director and acting executive director of finance at Al Jazeera Media Group, says: ‘There’s a need to avoid some of the issues faced in the Asian Games, when it became open budget and extra cost was paid. You can’t look at finance and auditing alone, but also at supply services – contracting process, payments, follow-up. Early planning is critical.’Suggesting that some of the mega-projects

under way may cost far more than anticipated, Bank of America Merrill Lynch reported in April that Qatar was seeking permission from international football association FIFA to reduce the number of World Cup stadiums from 12 to eight or nine. Given Qatar is a small country (its two million people live in a 160km-long thumb-shaped peninsula), managing and governing these projects is a ‘massive challenge’, says Ewald Müller, director of financial analysis at the Qatar Financial Centre Regulatory Authority. ‘The next nine years and beyond the fall-out after the World Cup are going to be a big challenge for the profession, and that goes over into procurement. For me, transparency is key, and the profession needs to step up. The ratings agencies, Moody’s, have made noises about that.’While Doha arguably has the funds – especially if energy prices remain high – a Moody’s report in April highlighted the issues faced by the country’s banks: a still developing corporate governance and risk management culture; a lack of transparency surrounding local conglomerates; a questionable commercial rationale for many of the government-related

projects financed by the banks; rapid credit expansion; and the moral hazard that past government interventions have created.That Qatar is playing catch-up is noted by the accountancy profession. ‘Qatar started very late compared to neighbouring Gulf countries,’ says Dr Helmi Hammami, head of the accounting department at Qatar University, ‘we are lagging behind. There is movement behind the scenes, from education to streamlining the set of laws governing the profession – who should be certified, who should be an accountant in Qatar. That said, the profession needs a lot of improvement and the market needs a tremendous number of accountants. We need reporting. You can forget about an investor coming to a country

Heat on for QatarQatar is turning itself from a Gulf desert backwater into a cutting-edge 21st century state with a football World Cup to host in 2022. How are its systems coping under the pressure?

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‘Roads, the metro, stadiums, schools and hospitals are all being built concurrently, which is unprecedented’

where they don’t have a sound accountancy profession; we cannot ignore this.’Indicative of the newness of the profession is that the number of students studying accountancy at the university has doubled over the past five years, and that only in 2011 was a master’s degree introduced. Hammami says: ‘In terms of curriculum, we’ve improved a lot. We used US GAAP up to 2010, then we shifted towards International Financial Reporting Standards.’ But with just 60 to 70 Qatar University students graduating a year, and only half of that number being Qatari nationals, there are not enough graduates to meet demand or bolster the state’s drive to increase the number of Qatari employees.

STACKING UP THE NUMBERSIt’s a challenge. Qataris number fewer than 300,000, while the overall population has gone from under 800,000 in 2002 to 1.9 million in 2013, according to the Qatar Statistics Authority. Some 94.1% of workers

in the country are not Qataris, while 74.8% are unskilled or semi-skilled workers.‘We are working to develop a strategy with the Big Four to show students the advantages of being in a major accountancy firm,’ says Hammami.Rabih El Sous, a senior manager at KPMG Qatar, says: ‘There are many local accountancy firms in Qatar, but from what I have observed compared with Dubai, Oman and Kuwait is that Qataris appreciate working with local firms rather than the Big Four. This, interestingly, puts pressure on the Big Four to behave differently, to be closer to clients.’In the meantime, outsourcing financial services may resolve problems down the line. ‘Sometimes the speed of getting a talent on board, security clearance etc, is not as fast as in other countries, so having strong outsourcing for accounting could fulfil a need in the market,’ says Abu Ghazaleh.

Paul Cochrane, journalist

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Precious jewel: the Pearl Qatar development in Doha is an artificial island spanning nearly four million square metres. When the project was announced in 2004, the initial cost of constructing the island stood at US$2.5bn; now it is believed that construction will cost US$15bn.

At a time when the world seems increasingly led by lifelong politicians, it is perhaps refreshing to hear from a political leader who

has a solid background in business, and such is former Canadian prime minister Paul Martin.Speaking to Accountancy Futures, he showed how more than half a century of business and public life can be brought to bear in financial and commercial mentorship. For Martin has not been idle since he left frontline political life in 2006. He has headed the Martin Aboriginal Education Initiative, which has promoted economic, educational and social development in Canada’s various native communities. He sits on the advisory council of the Coalition for Dialogue on Africa, sponsored by the African Union, the UN Economic Commission for Africa and the African Development Bank. And he chairs a US$200m British-

Norwegian Congo Basin Forest Fund, which promotes poverty alleviation and sustainable development in the region.A common thread is nurturing a latent desire to improve business and public service delivery in societies that have struggled to achieve sustainable wealth in the past, but where there is growing ambition to succeed.Canada’s aboriginal communities are a case in point. In 2005, when the average income per person for non-aboriginal people aged 25-54 was C$33,000, the average for aboriginals was just over C$22,000, and for so-called ‘First Nations’ people (excluding mixed-race Métis and polar Inuit) living on reserves it was just C$14,000.Since then, poverty differentials have not changed markedly, but the mindset has. ‘There’s no doubt, the First Nations are getting more and more into business,’ Martin

Force for good As well as mentoring Canadian aboriginals in accountancy skills, former prime minister Paul Martin is transferring those lessons to economies in Africa

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says. ‘There’s an increasing number of First Nations entrepreneurs.’ On reserves, which are autonomous, self-governing communities for aboriginal Canadians, their ‘band council’ administrations often get involved in business, but Martin suggests that their commercial and regulatory activities be split: ‘Where this happens, it is better. It’s good management,’ he says.

‘A QUESTION OF EXPERIENCE’The public financial reporting of some reserves has been criticised as being sloppy or even corrupt from time to time, but Martin says that such criticism is unjustified. ‘The vast majority of the public accounts of First Nations reserves are clean,’ he says. But with many reserves being isolated small communities in the world’s second largest country, with little access to financial expertise, ‘in some instances it’s a question of experience’, he says. Martin points to an initiative during his premiership when the Assembly of First Nations asked him to create a special aboriginal auditor general’s office to oversee the accounts of reserves and their band councils. He took this idea forward and was working on the details with Canada’s then auditor general when he lost power. The initiative did not survive the switch to a Conservative government after his defeat. Martin regrets this: ‘The new government refused to do it. It’s just absurd.’ Instead of this practical step, Martin accuses the current government of bombarding First-Nation people with requests for financial reports that spawn a morass of unmanageable

and confusing statistics: ‘The problem is more with federal reporting and less the bands,’ he argues. The federal government should ‘accept that there needs to be a common agreed set of financial reports’ for First National communities, he says. Instead, the federal government in Ottawa ‘are not doing a damned thing’. Meanwhile, he notes, there is a demand for financial reporting training and mentorship in reserves – sometimes in remote small communities of a few hundred in areas such as the shores of the Hudson Bay. ‘A chief from northern Manitoba called me six months ago,’ Martin recalls. ‘He had taken over 10 years ago and his community was virtually bankrupt. He’s turned it around. The community produces annual surpluses, with money from business and government. He asked if we had any financial literacy courses that could teach the people of his community the principles of accountancy.’

AFRICA CALLINGOn a continental scale, economic development in Africa is similarly uneven, but spreading good financial and business practice is the foundation of sustainable prosperity, stresses Martin.Here again, he has continued work after leaving office that he prioritised within it. As prime minister, Martin highlighted the need for debt relief and health improvements in Africa, having a high-profile, on-off relationship with African development acolyte and Irish rock star Bono. Out of office he has worked hard to improve the economies of sub-Saharan Africa. Some common improvements are, he believes, needed, while he accepts that sustainable wealth promoters must work within a widely varied set of countries. One critical reform that could help the region, he believes, is an African common market, although not a

‘A chief from northern Manitoba asked if we had any courses to teach his community the principles of accountancy’

Paul Martin The Right Honourable Paul Martin, 74, was the 21st prime minister of Canada, leading its last Liberal government from 2003 to 2006. He had previously served as Canada’s finance minister from 1993 to 2002, when he erased the country’s federal government deficit – which in 1993 was the worst of the G7 countries. Canada’s resulting solid public finances enabled it to weather the global financial crisis in good order and it suffered only a mild recession with no major banking problems.Martin became prime minister after the retirement of his predecessor Jean Chrétien, a long-time Liberal political rival, and won a general election in 2004, only to lose in 2006 to the Canadian Conservatives, who currently lead the federal government. He has had a rich and varied career, first training as a lawyer and being called to the Ontario bar in 1966. He went on to become chairman and CEO of The CSL Group, which operates the world’s largest fleet of self-unloading vessels and offshore transshippers, and has also been an executive at the Power Corporation of Canada, in Montreal.As prime minister, Martin forged an ambitious pact with aboriginal Canadians called the Kelowna Accord, which would have funnelled millions of dollars into communities. This agreement fell with his election loss, but Martin has continued to support aboriginal development through the Martin Aboriginal Education Initiative. He has also actively promoted effective business and financial reporting in Africa.

currency union. This would promote regional trade and investment in a continent that sees too little commerce between neighbouring countries. But to achieve this, Martin says, ‘you need good national reporting, otherwise you end up with the same situation as you had with Greece. You can’t have a common market unless you have confidence in the national reporting.’ Good reporting must also be undertaken by major Western companies operating in the region, says Martin – notably in the extractive industries sector. With companies under pressure from new European Union (EU) financial declaration rules, as well as the global Extractive Industries Transparency Initiative, Martin calls for good business and financial reporting practices to apply to mining, oil, gas and timber companies across sub-Saharan Africa.

ECONOMIES DIVERSIFYThis kind of good behaviour could be catching, Martin predicts. With African economies starting to diversify and companies


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blossoming in a wider variety of sectors, the desire to take some African businesses public will grow. For that to happen, accounting principles really need to be solid and internationally acceptable: ‘They will require financial reporting that’s required elsewhere,’ he says. If that happens, then more private investment will flow into Africa and not just to extractive industries. The willingness to invest in Africa is there; Martin highlights recent Chinese investments in the Ethiopian shoe manufacturing sector as an example. Furthermore, he believes, as Africa becomes richer and more diverse economically, it will grow a larger and more confident middle class. ‘The rising middle class will demand better-quality reporting and greater transparency from their governments,’ he predicts. They will want to know how to get credit, how to

protect investors, how to get contracts, how to manage insolvency – these will become hot-button issues in Africa.Of course, this will not happen in all African countries at the same time. Some are well ahead; Martin highlights Ghana, Mauritius and Botswana as trailblazers. But others will catch up. And just because countries such as the Democratic Republic of the Congo (DRC) – of special interest to Martin – are still wrestling with violence, insecurity and a weak government, it does not mean that people should not try to seed good business and governance practice. ‘You have to keep pushing,’ he says. ‘Where you have a country with violence and questionable ethics, people will say to you accurate reporting is not a number-one priority. But if you don’t have accurate reporting and transparency, it will make it much harder to solve these problems. When people are losing their lives it’s hard to say, “Let’s bring in the accountants,” but it’s part of the answer.’How can accountants and other financial professionals help? Martin thinks they should support the educational system. While parachuting experienced executives from high-tech economies into African capitals won’t work because ‘they will have no understanding of these countries’, guest lecturers would be welcomed by students hungry for knowledge. ‘That’s where they can make a real contribution,’ he concludes.

Keith Nuthall, journalist based in Ottawa

‘The rising middle classes will demand better-quality reporting and greater transparency from governments’

Below: African countries such as Mauritius are, says Paul Martin, ahead of the game when it comes to better-quality reporting and transparency.

America’s oil explorers make for unlikely heroes. The cut-throat business tactics and extravagant lifestyles of many recent crude oil

barons bring to mind JR Ewing – the villainous oil boss in the TV series Dallas. What’s more, as extractors of ecologically damaging fossil fuels, oil bigwigs are held in particular contempt by environmentalists. Yet in recent years the captains of crude have produced a remarkable range of benefits to the public. New drilling techniques pioneered in the US have led to a surge in the nation’s oil and gas output, although these new methods are not without their environmental critics. The rewards are not merely economic. For the first time in a generation America can realistically aspire to liberate itself from dependence on Middle Eastern oil. American oilmen have even been claiming credit for lowering their nation’s greenhouse gas emissions. ‘Of course, America’s energy explorers were seeking personal enrichment,’ says Phil Weiss, an energy analyst at Argus Research. ‘They have become public benefactors only by accident.’

At the heart of this energy revolution has been a combination of hydraulic fracturing and horizontal drilling – popularly known as fracking. This technology allows the extraction of vast quantities of oil and gas trapped in rock that were previously considered beyond reach. The result has been a reverse in a multi-decade slump in output from America’s ageing oil wells. By the time of the financial crisis in 2008, US crude output had roughly halved since its peak of 10 million barrels a day in 1970. Many saw no end in sight to the declines. Yet in the past five years oil production has rebounded unexpectedly by 40% to its highest level in more than two decades. A report by PwC, Shale oil: the next energy revolution, found that the potential emergence of shale oil could influence the dynamics of geopolitics as it increases energy independence for many countries and reduces the influence of OPEC.Fracking has also unleashed giant supplies of natural gas. Output of this versatile fuel, which can be used to generate electricity, power trucks and produce plastics, has soared by 33% since 2005. Again, most energy experts

Independence day?Fracking has revolutionised the US energy industry to the point where, for the first time in a generation, the country can aspire to be free from a reliance on foreign oil

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Oil and gas development using fracking technology in the Bakken Oil Fields of Williams and Mountrail Counties in North Dakota.

had previously believed that America was running out of its own gas and would soon be reliant on imports.The most obvious beneficiary of this fossil renaissance has been the American economy. ‘Think of the main problems that have been facing the US economy – weak economic demand, a huge trade deficit and weak tax revenues,’ says John Larson, a vice president of consultancy IHS. ‘The energy resurgence has been a huge help in easing all of these weaknesses.’ CHEAPER ELECTRICITYFor a start, an abundance of natural gas has meant cheaper electricity. This saved consumers around US$107bn in 2012 alone on utility bills or US$926 per household, according to IHS. ‘This is equivalent to a pretty powerful fiscal stimulus in its own right,’ says Larson. ‘It is like shovelling money into consumers’ pockets.’ Even this understates the economic benefit. A surge in drilling activity has generated about 1.7 million jobs and could create another 1.3 million by the end of the decade. Added to the jobs created directly, cheap natural gas, a key component in many plastics and chemicals, has convinced the likes of Dow Chemicals to build new petrochemical plants in the US. ‘We are seeing a sort of industrial revival, based on cheap energy,’ says Frank Verrastro, director of energy research at the Center for Strategic and International Studies in Washington. ‘That kind of massive job creation is far greater than most government infrastructure projects would achieve.’ The oil and gas boom has also been a huge blessing for America’s public finances. On a cumulative basis IHS believes that fracking will generate US$2.5 trillion in tax revenues between 2012 and 2035 for the federal, state and local governments in the US. That is equivalent to about half of total government revenue in 2012. And there has been another bonus for America too. A large share of the bloated US trade deficit – often as much as half – has come from the nation’s need for imported oil. Since 2008 America’s net foreign purchases of crude have plunged by about five million barrels a day. With oil trading at around US$100 a barrel, that amounts to a saving of about US$185bn a year. Citi believes this could be just the start. The bank estimates that booming oil and natural gas output will cut the US trade deficit by as much as 80% in the coming decade. ‘It’s not just the lower oil imports themselves,’ explains Edward Morse, head of global commodities research

at Citi. ‘Bargain-price energy gives America a competitive edge as an exporter of other goods too.’ More precious still, for politicians at least, are the potential foreign policy rewards of being the world’s shale pioneer. Every president since Richard Nixon in the 1970s has pledged to control the country’s addiction to foreign oil. Yet by 2005 America relied on imports for 60% of the crude its citizens consumed. ‘This was a diplomatic as well as an economic liability,’ says Tom Biracree, a senior vice president at IHS. ‘This reliance shaped US foreign policy and gave huge leverage to oil producing states.’ The oil embargo of 1973, in which the Organization of Petroleum Exporting Countries reduced the flow of oil, caused its price to quadruple and forced America to ration petroleum. Ever since presidents have dreaded a repeat of this fiasco. Shale promises to significantly reduce such threats. The US is on track to overtake Saudi Arabia and Russia to become the world’s largest oil producer by 2017, according to the International Energy Agency. Meanwhile, Canada is also experiencing a boom in production from its oil sands. Take the two together and North America could be self-sufficient in terms of net trade as soon as 2020, Citi now predicts.

DIPLOMATIC MUSCLEThat should end up giving the US more diplomatic flexibility. To some extent the US has already started to enjoy the benefits of this.

OPEC – which is dominated by states such as Saudi Arabia, Kuwait and Iran – controls about 80% of the world’s crude. ‘The growth in actual oil and gas output has been coming from democracies – the US, Canada and Australia,’ says Charles Ebinger, director of energy research at the Brookings Institution in Washington. ‘That is a threat to the influence of these oil states.’The impact of this trend may deepen if the new drilling techniques spread globally. US energy companies – including Exxon Mobil – have been seeking to extract shale gas in parts of Europe, including Germany. Royal Dutch Shell, meanwhile, recently signed a contract with the Ukrainian government to exploit its gas reserves. Similarly, other nations are


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‘Bargain-price energy gives America a competitive edge as an exporter of other goods too’


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A hydraulic fracturing operation in Eastern Colorado.

thought to be sitting on impressive reserves of shale oil, including Argentina. In 2008 Wall Street bankers were being vilified for shaking the foundations of American capitalism. This was at the very point when US oil entrepreneurs were perfecting technologies that are now giving a powerful boost to the US economy and its global clout.

Of course, fracking has downsides too. In uncovering vast new reserves of gas and oil, fracking has made life harder for investors in cleaner solar and wind energy. And that may one day prove to have been a major ecological setback.

Christopher Alkan, journalist based in New York

Greener fossil fuels? The ecology of shale is not simple. Gas has not only taken market share from dirty coal; it may also have slowed the development of solar and wind energy. Critics claim that fracking has the potential to contaminate drinking water supplies. In addition, if gas is leaked from wells before being burnt, it escapes into the atmosphere as methane – a more powerful agent of global warming than CO2. Cheaper oil may also encourage drivers to use more of it. At a conference in Houston in March 2013, Ryan Lance, chief executive of oil company ConocoPhillips, said that the US oil industry should trumpet its role in reducing the nation’s carbon emissions. He had a point. Natural gas produces about half the CO2 emissions as coal when burnt to produce electricity. The fracking revolution, by uncovering vast resources of cheap gas, has caused a sharp dip in America’s use of coal. This has contributed towards a 13% fall in US carbon emissions since 2007, according to a survey by IHS. As a result, US emissions have fallen to their lowest level since 1995. Meanwhile, Europe, which often takes the ecological high ground, is pumping out ever more CO2 – despite a carbon trading scheme that was intended to curb output of the greenhouse gas. Last year alone Germany’s emissions rose 1.6% as it shifted from nuclear power towards coal.

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CFO websiteACCA, in partnership with IMA (Institute of Management Accountants), has launched a website focusing on CFOs and their needs. The move comes in response to the growing requirement among finance leaders for advice and support to help navigate the complex landscapes in which they are operating. The website, www.roleofcfo.com, is designed to support both existing and aspiring CFOs. For existing CFOs it delivers relevant research about their changing role and how to adapt to new challenges. It aims to help them acquire the skills and capabilities to develop so they are recognised in the organisation as leading the growth agenda and delivering excellence through performance accounting. The site also provides a comprehensive roadmap that identifies the career and development opportunities that aspiring finance leaders can take to reach the top.

Framework a startThe draft framework for integrated reporting is a step in the right direction but needs to be developed further, ACCA said in its response to the International Integrated Reporting Council (IIRC) consultation. ACCA’s own research has shown that many stakeholders would welcome integrated reporting, seeing benefits such as a focus on the long term, a better understanding of risks on business models and wider insights into corporate value. But it identified gaps that need to be fleshed out and grey areas concerning the relationship between the integrated report and other forms of reporting. More at www.accaglobal.com/accair2

Forums’ visionCorporate governance, business standards and trust were key future concerns identified by ACCA’s global forums at their third symposium, held in London in April 2013. ACCA’s 10 global forums gathered to discuss the most pressing challenges facing accountants, to articulate a vision for the future for the profession, and to debate thinking about the forums’ forthcoming direction. The symposium’s discussions are also presented in a new report.

A report on the symposium is available at www.accaglobal.com/globalforums

Top: ACCA president Barry Cooper (left) with John Macaulay CMA, chair, IMA, announced a strategic initiative at IMA’s annual members’ meeting in June 2013.

Above: Jamaica’s prime minister Portia Simpson Miller (pictured addressing the United Nations General Assembly in New York in 2012) calls on governments to be more inclusive in efforts to aid economic recovery in a new report from ACCA and the Commonwealth Business Council.

‘Holistic approach’Six solutions to encourage more women into senior business positions are described in a groundbreaking new report from ACCA and the Commonwealth Business Council. Launched at the 10th Commonwealth Women’s Affairs Ministers’ Meeting in Bangladesh in June 2013, the report’s foreword is contributed by Jamaican prime minister and women’s affairs minister Portia Simpson Miller. She said: ‘In order for us to make significant strides in recovering from the recession brought about by the global financial crisis, governments must take an inclusive and holistic approach in the measures and policies that they intend to put in place.’

Paving the way to opportunities: women in leadership across the Commonwealth is available at www.accaglobal.com/womcom

ESRC agreementA memorandum of concordat has been signed by the UK’s Economic and Social Research Council (ESRC) and ACCA. The strategic three-year agreement seals a relationship where the two organisations have worked in partnership over several years on a number of initiatives – such as diversity, pensions, socially responsible investment and climate change – generating an impact on a range of stakeholders within academia and business.

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Editorial boardEditor Chris Quick [email protected] +44 (0)20 7059 5966

Managing editor Lesley Bolton

Sub-editors Dean Gurden, Peter Kernan, Eva Peaty, Vivienne Riddoch Design manager Jackie DollarDesigner Robert MillsProduction manager Anthony Kay

Head of publishing Adam Williams

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ACCA President Barry Cooper FCCA Deputy president Martin Turner FCCA Vice president Anthony Harbinson FCCA Chief executive Helen Brand OBE

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A list of ACCA offices can be found inside the back cover of this journal.

ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 162,000 members and 428,000 students in 173 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of over 89 offices and centres and more than 8,400 Approved Employers worldwide, which provide high standards of employee learning and development.

Accountancy Futures Edition 07 was published in August 2013.

Accountancy Futures® is a registered trademark of ACCA. All views expressed in Accountancy Futures are those of the contributors. The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication. Copyright ACCA 2013 Accountancy Futures. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA. Accountancy Futures is published by Certified Accountants Educational Trust in cooperation with ACCA. ISSN 2042-4566.

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Sue Almond technical [email protected]

Jamil Ampomah Regional director – Africa [email protected]

Stuart Dunlop Regional director – MENASA [email protected]

Kathy Grimshaw Acting regional director – Europe [email protected]

May Law Regional director – Asia Pacific [email protected]

Andrew Leck Regional director – Americas [email protected]

Lucia Real-Martin Director – emerging markets, Asia [email protected]

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Electronic and iPad versions of Accountancy Futures are available at www.accaglobal.com/futuresjournal

ACCOUNTANCY FUTURESCRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 07 I 2013

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29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom +44 (0)20 7059 5000 www.accaglobal.com PLUS: KPMG GLOBAL CHAIRMAN I BRITISH AIRWAYS CEO I JOHN KAY ON OBLIQUITY I ISLAMIC FINANCE I INSIDE SHELL’S FINANCE FUNCTION I INTEGRATED REPORTING I THE FUTURE OF AUDIT I SMPs IN AFRICA I FRACKING AND THE NEW WORLD ORDER I POLAND’S POTENTIAL

ACCOUNTING FOR THE FUTURE14-18 OCTOBER 2013

GLOBAL, LIVE AND ON-DEMAND ACCA’s annual Accounting for the future conference brings together finance professionals from around the world to discuss the challenges and opportunities facing the accountancy profession now and in the future. Using the latest technology, this global online conference enables experts and opinion leaders to share the latest insights on how businesses and the corporate sector can maximise the value they deliver to their organisations, stakeholders, regulators and the global economy.

Topics to be covered include risk management, corporate culture, reporting for investors, integrated reporting, finance transformation, the role of the CFO, future career paths, technology trends, accountancy futures and supporting SME growth.

The event will be brought to you via live webinars and on-demand sessions. To register, and for further information, visit www.accaglobal.com/accountingforthefuture

READ ACCOUNTANCY FUTURES ON YOUR IPAD

You can download searchable editions of Accountancy Futures, with direct links to online content, to your iPad. Visit the iTunes app store or go towww.accaglobal.com/futuresjournal

RESEARCH AND INSIGHTS IPAD APP

The latest release of ACCA’s Research and Insights iPad app explores the 100 drivers of change shaping the landscape for business and professional accountants over the next decade, and includes interactive graphics and video interviews from leading experts. Search for ‘ACCA Insights’ in the iTunes app store or visit www.accaglobal.com/riapp

CORPORATE REPORTING SUSTAINABILITY GLOBAL ECONOMY AUSTRALIA

INVESTOR ENGAGEMENT STANDARDS FOR BUSINESS

MOVING UP A GEARA YEAR OF CHALLENGE FOR FINANCE PROFESSIONALS

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