accountancy futures – issue 10
DESCRIPTION
Accountancy Futures – Issue 10 (Published by, and copyright of ACCA) The main cover feature is Corporate Culture – getting your organisation on the right track. Also included is governance, funding, sustainability, carbon taxes, children's rights, integrated thinking, healthcare and a look at the ebola effect.TRANSCRIPT
AccountAncy FuturescriticAl issues For tomorrow’s proFession i edition 08 i 2014
Ac
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29 lincoln’s inn Fields london wc2A 3ee united Kingdom +44 (0)20 7059 5000 www.accaglobal.com
FROM ALGORITHMS TO ACTIVISTScorporAte reportinG And tHe diVerGinG demAnds oF inVestors
plus: inteGrAted reportinG pioneers i peArson cFo interView i BiG dAtA i diVersity i tim HArFord i stAndArd cHArtered AsiA FinAnce cHieF i sme FundinG i tAx And trust i tomorrow’s cFo cAreer pAtHs i stocK mArKets And sustAinABility i Future oF Audit
AF8_Cover.indd 1 08/01/2014 14:41
ncy Futuresdition 08 i 2014
FROM ALGORITHMS TO ACTIVISTSestors
ersity i nd trust i
uture oF Audit
ACCOUNTANCY FUTURESCRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 09 I 2014
AC
CO
UN
TAN
CY FU
TURES I E
DITIO
N 09 I 2014
POLITICS, PROTEST AND PILLAGEA NEW WORLD OF RISK FOR MULTINATIONAL BUSINESS
PLUS: KPMG GLOBAL CHAIRMAN I MINT ECONOMIST I SIR DAVID TWEEDIE I NATURAL CAPITAL I THE NEW SPACE RACE I CONFIDENCE ACCOUNTING I CEO/CFO RELATIONSHIP I PUBLIC AUDIT IAFRICAN SUSTAINABILITY REPORTING I DAWN OF THE MOOC I CHINA FINANCE INNOVATION
ACCA offi cesAUSTRALIA AND NEW ZEALAND SYDNEY +61 2 8999 9080 [email protected] *BANGLADESH Dhaka
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*ACCA HEADQUARTERS 29 Lincoln’s Inn Fields, London, WC2A 3EE, UK +44 (0) 20 7059 5000
Stephen Heathcote Executive director – markets [email protected]
Jamil Ampomah Market director – Sub-Saharan Africa [email protected]
Mark Cornell Market director – Americas and Western Europe [email protected]
Stuart Dunlop Market director – MENASA [email protected]
May Law Market director – Asia Pacifi [email protected]
Lucia Real-Martin Market director – emerging markets [email protected]
Stephen Shields Director of global employer relationships [email protected]
Andrew Steele Market director – partnerships & recognition [email protected]
Electronic and iPad versions of Accountancy Futures are available at www.accaglobal.com/futuresjournal
AF_Cover_Final.indd 1 03/09/2014 16:09
Accou
ntan
cy Futu
res | Ed
ition 10
Plus: IFAC president | Robin Cosgrove Prize | Governance |Funding | SMPs | Shared services | Integrated thinking | Ebola effect | Healthcare | Sustainability | Children’s rights | Whole of government accounts | Carbon taxes | Cambodia profession
Critical issues for tomorrow’s profession Edition 10 | 2015
Corporate cultureGetting your organisation on the right track
ACCA offi cesAustralia and New Zealand Sydney +61 2 8999 9080 [email protected] | Bangladesh Dhaka +88 02 882 4672 [email protected] | Botswana
Gaborone +267 318 8756 [email protected] | Cambodia Phnom Penh +855 (23) 991 676 [email protected] | Canada Toronto +1 416 966 2225
[email protected] | Caribbean Port of Spain +1 868 662 4777 [email protected] | China Beijing +86 10 6526 9776 [email protected]
Chengdu +86 28 8620 2085 [email protected] Guangzhou +86 20 8755 7932 [email protected] Hong Kong +852 2524 4988 hkinfo@
accaglobal.com Macau +853 8294 6708 [email protected] Shanghai +86 21 6391 6777 [email protected] Shenzhen +86 (0)755 3395 5710
[email protected] | Cyprus Nicosia +357 (0)22 391 000 [email protected] | Czech Republic, Slovakia and Hungary Prague +420 226 223
000 [email protected] | Ethiopia Addis Ababa +251 115 159533 [email protected] | EU Brussels +32 (0) 2 286 11 37 [email protected] | Ghana Accra +233 (0)302 731 735 [email protected] | India [email protected] | Indonesia Jakarta +62 (21) 392 5175 info.indo@accaglobal.
com | Ireland Dublin +353 (0)1 447 56 78 [email protected] | Kazakhstan Almaty +7 (727) 271 9836 [email protected] | Kenya Nairobi +254
(0) 20 265 0973 [email protected] | Malawi Blantyre +265 (0) 1832 253 [email protected] | Malaysia Kuala Lumpur +6 (0)3 2027 4756 myinfo@
accaglobal.com | Mauritius Ebène +230 401 0220 [email protected] | Myanmar Yangon +95 1 387 947 [email protected] | Nigeria
Lagos +234 1 461 6269 [email protected] | Oman Muscat +968 2449 3686 [email protected] | Pakistan +92 (0)51 111 22 22 75 Islamabad
[email protected] Karachi [email protected] Lahore [email protected] | Poland Warsaw +48 22 509 5010 accapolska.pl | Romania, Bulgaria,
Greece and Moldova Bucharest +40 31 780 00 12 [email protected] | Russia Moscow +7 495 737 5542 [email protected] | Scotland Glasgow +44
(0)141 582 2000 [email protected] | Singapore Singapore +65 6734 8110 [email protected] | South Africa Johannesburg +27 11 217 2288 infoza@
accaglobal.com | Sri Lanka and Maldives Colombo +94 (0)11 2301920 [email protected] | UK London +44 (0)20 7059 5000 [email protected] | USA
New York +1 (212) 310 0105 [email protected] | Uganda Kampala +256 (0)414 251328 [email protected] | Ukraine, Baltic and Caucasus States
Kiev +38 (044) 498 34 50 [email protected] | United Arab Emirates Dubai +971 (0)4 391 5451 [email protected] | Vietnam Hanoi +84 (0)4 3946 1388
Ho Chi Minh City +84 (0)8 3910 3488 [email protected] | Wales Cardiff +44 (0)141 582 2000 [email protected] | Zambia Lusaka +260 211 376825
[email protected] | Zimbabwe Harare +263 (4) 304 436 [email protected]
| ACCA headquarters 29 Lincoln’s Inn Fields, London, WC2A 3EE, UK +44 (0) 20 7059 5000
Electronic and iPad versions of Accountancy Futures are available at www.accaglobal.com/futuresjournal
Stephen Heathcote
Executive director – markets
Jamil Ampomah
Market director – Sub-Saharan Africa
Mark Cornell
Market director – Americas and Western Europe
Stuart Dunlop
Market director – MENASA
Lucia Real-Martin
Market director – emerging markets
Andrew Steele
Market director – partnerships & recognition
Think Ahead
Accountancy Futures
Editor Lesley Bolton [email protected] +44 (0)20 7059 5965
Contributing editors Jo Malvern, Chris Quick, Colette Steckel
Sub-editors Dean Gurden, Peter Kernan, Jenny Mill, Eva Peaty, Vivienne Riddoch
Design manager Jackie Dollar
Designers Bob Cree, Robert Mills
Production manager Anthony Kay
Head of ACCA Media Chris Quick
Pictures Corbis Printing Wyndeham Group Paper Antalis Ltd.
This magazine is produced on paper that contains certified fibres and is manufactured under strict conditions that allow the grade to carry the EU Eco-label. The mill operates under the ISO 14001 certified environmental management system.
ACCA President Anthony Harbinson FCCA Deputy president Alexandra Chin FCCA Vice president Brian McEnery FCCA Chief executive Helen Brand OBE
ACCA Connect Tel +44 (0)141 582 2000 [email protected] [email protected] [email protected]
A list of ACCA offices can be found on the back cover.
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 170,000 members and 436,000 students in 180 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of over 91 offices and centres and more than 8,500 Approved Employers worldwide, which provide high standards of employee learning and development.
Accountancy Futures Edition 10 was published in March 2015.
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 2015 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.
29 Lincoln’s Inn Fields, London WC2A 3EE United Kingdom +44 (0)20 7059 5000
Chiew Chun Wee
Head of policy, Asia Pacific
Ewan Willars
Director of policy, ACCA
Sue Almond
External affairs director
Arif Mirza
Regional head of policy, MENASA
Think Ahead
The London Tube
system is a good
example of corporate
culture (see page 6).
Editorial board
Accountancy Futures
2 | Edition 10 Edition 10 | 83
Accountancy Futures
Chair: Ng Boon Yew FCCA,
Executive chairman, Raffles Campus
Accountancy Futures Academy
Chair: Faris Dean FCCA,
Solicitor, Lyons Davidson
Global Forum for Business Law
Chair: Alan Johnson FCCA,
Board member, Jerónimo Martins
Accountants for Business Global Forum
Chair: Adrian Berendt FCCA,
Independent consultant, Global Forum
for Governance, Risk and Performance
Chair: Stephen Emasu FCCA, Public
financial management expert, IMF
Global Forum for the Public Sector
Chair: Robert Stenhouse FCCA, Director,
national accounting and audit, Deloitte UK
Global Forum for Audit and Assurance
Chair: Rosanna Choi FCCA, Partner,
CWCC Certified Public Accountants
Global Forum for SMEs
Chair: Lorraine Holleway FCCA,
Head of financial reporting, Qatar Shell
Global Forum for Corporate Reporting
Chair: Tom Duffy FCCA,
Consultant and partner, Affecton
Global Forum for Taxation
Chair: Andrea Coulson, Senior lecturer
in accounting, University of Strathclyde
Global Forum for Sustainability
Chair: Sara Harvey FCCA,
Director, Hines Harvey Woods
Global Forum for Ethics
In organisations, regulations alone are not enough
to influence ethical behaviours; this depends on
improvements in governance and risk management.
In the case of the London Underground, the culture
at the heart of the Tube has been passed on to its
users through effective enforcement of its norms and
practices. It shows that while regulation is critical,
culture influences behaviour, how groups get organised
and how norms get passed along. Research by ACCA
and the UK’s Economic and Social Research Council
examines the influence of corporate culture, regulation
and compliance systems in driving organisationsal
behaviours. Its conclusions aim to give business leaders
innovative guidance on the path to cultural assessment
and change. Read the articles on pages 6-13.
Just over one year on from the launch of the International
Integrated Reporting Council’s reporting framework,
numerous developments are taking place to foster its
adoption. Key to this will be encouragement and leadership at board level. Read the coverage beginning on page 33,
together with how traditional assurance methods might meet the challenges of this brave new world.
We cover a wide range of other issues in this 10th edition of Accountancy Futures: corporate reporting; confidence
accounting and audit; sustainability, including articles on how children’s rights matter for business and on another 10th
anniversary – that of the Prince of Wales’ Accounting for Sustainability Project (A4S). We find out about new ACCA
research on public sector finances: whole of government accounts. We also hear from senior finance professionals
from across the world, including an interview with new International Federation of Accountants president Olivia Kirtley.
Lesley Bolton, editor
Global forumsACCA’s 11 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
You can find out more about ACCA’s research
and insights activities at www.accaglobal.com/ri
Denotes ACCA’s research
and insights reports
Accountancy Futures
Edition 10 | 03
| Risk and governance
06 The right track
New research aims
to help organisations
develop the right
corporate culture
10 Better boards
How to design and
develop effective
boards
11 Value myth
The Purpose of the
Corporation project
tackles the ‘myth’
of shareholder
value
12 A matter of ethics
Two winners of the
Robin Cosgrove Prize
on ethics in finance
share their views
14 Risky business
How much should
businesses tell
shareholders about the
risks they face and their
plans to address them?
37 Gathering evidence
Traditional assurance
methods face a
challenge in adapting
to integrated reporting
40 All change
Sustainability reporting
has transformed the
way companies report
44 Consider the child
Companies need to
prove that their supply
chains are free from
child exploitation
16 Balancing act
Corporate governance
often neglects to
address behaviour
| Smart finance
19 At the crossroads
Choosing between
alternative financing
and bank loans
23 The small time
The challenges facing
small and medium
practices
26 Room at the top?
Shared services is
changing the pathway
to top finance roles
29 Viewpoints
CFOs on the key
challenges they face
| Sustainability
33 Integrated thinking
Adoption of integrated
reporting needs
board-level leadership
| Corporate reporting
47 Beyond profit
Corporate social
responsibility is
changing the way
businesses think about
accounting
| Audit
49 Measuring up
Why accountancy
should be seen as
a measurement
science
Taking the Tube reveals an extraordinary journey into British culture... in London people grumble in line 07
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04 | Edition 10
60 European growth
Expansion was a key
theme at the seventh
CFO European summit
62 Power of ideas
Innovation is key to
Malaysia’s plan to
become a high-income
economy
64 Work in progress
Cambodia’s economy
is growing fast, but its
accounting sector still
has a long way to go
53 Goodbye to all that
Audit will never be the
same again
| Public value
55 Going global
IFAC president Olivia
Kirtley on the issues
facing the profession
| Global economy
58 Mining for skills
Botswana seeks
qualified accountants
66 Turning the tide
Skilled accountants are
making an impact on
financial management
in Latin America and
the Caribbean
68 The Ebola effect
Fear of Ebola has
devastated the
economies of the
hardest-hit countries
| Public sector
71 Health risk
Can we build a
sustainable future for
healthcare?
74 The whole story
Amid intense scrutiny,
governments are trying
to work out what they
owe and what they own
| Tax
75 Not so green
As the first country to
repeal its carbon tax,
what next for Australia?
78 Time for action
As international
tax avoidance hits
the headlines, the
OECD has made swift
progress in developing
policies to tackle
the issue
| Diversity
80 Inclusive role
Encouraging greater
diversity is high on
the corporate agenda
– and finance has a
key role to play in
managing it
| News
82 In brief
Celebrating 110 years
of ACCA, developing
the accountancy
profession in
Afghanistan, ACCA
and IMA team up
on future-focused
research, and a
new breed of
adviser. ■
‘The Ebola epidemic is not going to dramatically slow the continent’s economic momentum’ 70
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Edition 10 | 05
The right trackNew research looks at how boards can better anticipate potential drawbacks of organisational culture and offers advice on how best to address these, as ACCA’s Pauline Schu explains
06 | Edition 10
Accountancy Futures | Risk and governance | Culture
In 2014 ACCA and the UK’s Economic and Social
Research Council (ESRC) completed an international
research project that examined the infl uence of
corporate culture, regulation and compliance systems
in driving either functional or dysfunctional behaviour
in organisations. The conclusions, outlined in the report
Culture and channelling corporate behaviour, aim to
provide business leaders with innovative guidance on
the path to cultural assessment and change.
Effective channellingIf you have ever used the London Underground, the
following will all sound familiar to you: please mind the
gap; please stand behind the yellow line; please stand
on the right; please keep left – in other words, please
go with the crowd and do not ever interrupt the fl ow
of movement.
On the Tube system, around a million commuters are
trying to make it to work on time every weekday morning.
Securing a smooth and uninterrupted fl ow of trains and
passengers is therefore the main priority of Transport
for London (TfL) as an organisation. Effective traffi c
regulation is needed to channel users’ behaviour, and
constant reminders are displayed and broadcasted all
over TfL’s routes. At peak times, staff are on the platform,
tirelessly repeating that customers should stand behind
the yellow line and let passengers off the train fi rst.
London is a particularly cosmopolitan city, bringing
together people of various cultural mindsets, yet nearly
everyone eventually comes to conform to the ‘herded-
sheep’ behaviour that makes the Tube as effi cient as it
can be, even at peak hours.
The behaviour of others signifi cantly infl uences the
behaviour of individuals. On the Tube, standing on the
wrong side of the escalator or blocking opened Tube
train doors by standing right in front of them causes
protest and remonstration. Generally, though, people
will remain standing or moving with everyone else and
comply with TfL’s exhortations.
Taking the Tube reveals an extraordinary journey into
British culture (or at least its clichés). While some
cities experience chaos during peak traffi c jams,
or when workers go on strike, in London people
grumble in line. The culture at the heart of the
Underground system has been passed on to its users
through the effective enforcement of its norms and
practices. Rules and procedures are critical in ensuring
appropriate conduct, and the constant reminders
of the staff on platforms prove effective tools »
Points for consideration by the board* Align and embed core values at the very top.
* Watch out for the trickle-down effect and dynamics in groups.
* Track how decisions are being made.
* Be honest about the value of regulation and codes.
* Beware of unintended consequences attached to any incentive structure.
* Find out what motivates people.
* Anticipate trends.
Pauline Schu is policy
and research offi cer at
ACCA and manages
ACCA’s culture and
channelling corporate
behaviour work.
Edition 10 | 07
Culture | Risk and governance | Accountancy Futures
Insights from ACCA’s researchThrough its global membership and extensive network, ACCA is in a unique position
to capture cutting-edge thinking and practice, and to deliver value-adding and
practical insights to business and finance leaders. The latest research on corporate
culture and its impact on behaviour and ethics is an example of ACCA’s ability to
draw on emerging issues and communicate them to a range of audiences. In so
doing, ACCA challenges assumptions, but also provides a framework to enable a
range of practical applications for its partners and members.
Read the latest thinking at www.accaglobal.com/culture
Is there a role for audit?The Institute of Internal Auditors has built a strong case for the involvement of
internal auditors in ethics; a recent report notes that the audit of cultural indicators
should move beyond processes and controls, and combine hard data with intuition.
Culture and the role of internal audit: looking below the surface can be downloaded
at tinyurl.com/iia-culture
in channelling passengers functionally.
London Underground shows that regulation is critical
to functional organisations. It also reveals how culture
influences behaviour, how groups get organised, and
how norms get passed along to newcomers. Finally,
it demonstrates how this is a day-to-day job. Signs
throughout the stations, members of staff everywhere
and recorded traffic updates flawlessly aired all
contribute to channelling functional behaviours that
allow the smooth and organised movement of crowds.
Regulation, together with softer behavioural ‘nudges’,
provides an effective system of control.
Similarly in organisations, regulations on their own will
remain powerless to influence ethical behaviours until
governance and risk management improve. Filling the
office with stickers proclaiming ‘I love ethics’ will not
help, but creating an environment where people can
Accountancy Futures | Risk and governance | Culture
08 | Edition 10
Robert WollSpeaking at the ACCA Hong Kong CFO Summit 2014, Robert Woll said that to
make corporate culture work well, CFOs should align incentives for managers and
employees, and ensure that they do not create subcultures. ‘CFOs and other leaders
should take a holistic approach to compensation and incentive structures to ensure
that employees’ behaviour is in line with the overall values of the company.’
Partner at law firm Deacons
comfortably discuss their concerns may. A safe and
effective whistleblowing procedure should also be
seen as a key safety valve for the organisation.
Limits of rulesIn the UK’s banking sector, the Libor scandal, which involved
the manipulation of interbank lending rates, highlighted
how extensive rules, procedures and compliance systems
failed to create the conditions for ensuring appropriate
conduct in some of the largest financial institutions. The
sub-prime crisis and the mis-selling of a wide range of
financial products to businesses and individuals likewise
showed how rules and procedures did not protect
customers and certainly failed to regulate ethics in finance.
Implementing ethical practices in business is difficult. The
definition of ethics is subjective and often works on a case-
by-case scenario. Yet sound corporate governance and
internal control can help promote ethical behaviour – as
long as that is what the organisation wants. During the
inquiry into the Libor scandal, it was argued that misconduct
was not solely characteristic of a small number of traders
but much more deeply entrenched. Investigations into
banks’ business practices also concluded that both their
incentive structures and control systems were ‘so defective
that they incentivised traders to benefit their own book’ –
behaviour made possible because management ‘turned a
blind eye to the culture of the trading floor’.
In the UK, the Financial Stability Board now expects
boards of financial institutions to assess their risk
culture, and boards in other sectors might soon be
required to do so too. In Culture and channelling
corporate behaviour, ACCA proposes a framework to
help organisations understand the drivers of behaviour
(in terms of risk, challenge or reward), and explains how
to go about assessing their own culture.
The report lists a number of trade-offs that need to be
balanced by the boardroom and by staff. For example,
is there openness to mistakes or is there zero tolerance
and a blame culture? Is the organisation innovative or
is it tightly controlled? Does profit rule or does public
value matter more?
Sound corporate governance and internal control can help promote ethical behaviour – as long as that is what the organisation wants
The model is a first step towards developing other
tools for behavioural analysis. It is hoped that both
businesses and academia will contribute to advancing
this new and important area of research. ■
Read Culture and channelling corporate
behaviour at www.accaglobal.com/culture.
The report was co-authored by Pauline Schu and Paul
Moxey, former head of corporate governance and risk
management at ACCA.
In the City, boards of
financial institutions
are now expected
to assess their risk
culture.
Culture | Risk and governance | Accountancy Futures
Edition 10 | 09
The drive for better boardsDr Sabine Dembkowski and Dr Stefan Wegener, co-founders of Better Boards, are bringing together the thinking on how to design and develop effective boards
Dr Sabine
Dembkowski and
Dr Stefan Wegener
are co-founders
and managing
partners of Better
Boards, a consulting
firm dedicated to
developing effective
boards that make a
superior contribution
to the value creation
process in their
organisation. Find out
more at www.better-
boards.co.uk
Almost daily we read on the business pages
about fallouts or failures of boards. In fact, recent
research highlights that 58% of all CEOs lose
monies for their investors and, during the course of a
holding of a private equity firm, 63% of board members
are replaced. So what is going wrong?
Dr Sabine Dembkowski, co-founder and managing partner
of Better Boards, highlights the fact thawt the majority of
executive development programmes tend to stop one or
two levels below the board. ‘Having worked with heads of
business units or department heads in the past, it has often
become clear that the problem lies elsewhere,’ she says. ‘In
fact, what we saw on this level were beautiful examples of
the mirroring effect in action in large organisations.’
Dembkowski explains that members of boards may be
more closely observed than they realise, with those working
How to build a better board1 Composition
It is crucial to understand how different
specialists, preferred roles and personality styles
complement each other.
2 Leveraging strengths
It’s important to understand the individual
strengths of members and how they can be
leveraged to create something bigger than the
sum of the individual parts.
3 Clarity about roles and responsibilities
Substantial grey areas are the norm rather
than the exception on many boards. The most
effective ones are crystal clear about roles and
responsibilities.
4 Common vision
A clear common orientation at the top is
pivotal.
5 Resolving conflicts
Effective boards and their members understand
how to resolve conflicts between the board and
the next management levels.
6 Organising work
The organisation of the executive committee’s
work depends critically on the board
secretariats and the interplay between the
chairman and CEO. Effective boards understand
how to structure their work.
7 Regular reviews
Regular timeouts, where board members can
connect with each other and reflect on their
work, are crucial to success.
for them displaying behaviours that are interpretations
of what they see at board level. ‘To address this issue,
more and more organisations all over Europe conduct
management and board audits. We have seen hundreds of
such reports and designed, delivered and/or participated
in numerous feedback sessions,’ she says.
The outcome of all this is that Better Boards has developed
its own online board audit tool. ‘We bring together thinking
from industry, management consultancy, investors and
private equity, and focus on top executive development,
effectiveness and value creation,’ says Dembkowski. ‘Our
reports are designed in such a way that it is easy and
obvious what the specific actions should be without any
interpretation on our side.’ ■
Pauline Schu, policy and research officer, ACCA
10 | Edition 10
Accountancy Futures | Risk and governance | Culture
What is a corporation for?The Purpose of the Corporation project takes on the ‘shareholder value myth’, as Paige Morrow of public interest law firm Frank Bold explains
What is the purpose of a corporation? To
satisfy customers, pay employees living
wages, generate returns for investors,
create social good, or some combination of all four?
The Purpose of the Corporation project is an apolitical,
multi-stakeholder platform that brings together
business, academia, civil society and trade unions to
answer the question and develop a pragmatic vision
for the future of publicly listed companies.
The project takes on the ‘shareholder value myth’, as it
was termed by Lynn Stout of Cornell Law School in her
book of the same name, which challenged the dogma
that directors are legally obliged to place the interests
of shareholders first through a single-minded focus on
earnings and share price. The dominant belief, dating
back to Milton Friedman in the 1970s, was that the only
role of corporations in society was profit maximisation.
In fact, as far the law is concerned, a corporation may
choose to maximise quarterly returns but boards may
equally decide to reinvest profits, increase wages or
research new products.
The share price offers a deceptively simple metric
for business and managerial performance. Pay for
performance schemes often create perverse incentives
to engineer short-term performance through share
buybacks, mismanagement or accounting fraud. The
collapse of giants like Enron and Arthur Andersen were
glaring examples of this, but the effects may not be
immediately self-evident. The pervasive practice of
Paige Morrow is head
of Brussels operations
for Frank Bold, a
public interest law
firm specialising in
environmental, energy
and commercial law.
repurchasing shares diverts cash that could be invested
in innovation or expansion into new markets. In 2013,
US companies in the S&P 500 index bought back
US$500bn of their own stock. A study recently cited by
The Economist concluded that a doubling of buybacks
was correlated with an 8% fall in spending on R&D.
Corporate scandals have been a factor in the
push by consumers and civil society for increased
corporate engagement with environmental, social
and governance (ESG) issues. Is there a trade-off
between companies doing well and doing good? New
research by Robert Eccles (awarded honorary ACCA
membership in December 2013), George Serafeim
of Harvard Business School and Ioannis Ioannou of
London Business School suggests that sustainability
and corporate performance may be mutually
reinforcing. Their analysis of 180 US companies from
1993 to 2010 compared a portfolio of businesses with
a high commitment to ESG matters to rival businesses
with very similar performance, size, capital structure and
growth opportunities in 1993 but which failed to show a
commitment to sustainability. Whereas US$1 invested
in a highly sustainable company yielded US$22.58 in
2010, the same US$1 returned only US$15.35 when
invested in a low-sustainability business.
Their research has practical implications. About 6,000
large European Union companies will be required to
report on ESG matters when the directive on non-
financial reporting becomes effective in 2018. The EU is
also contemplating a shareholder ‘say-on-pay’ similar
to the one already in force in the UK. Responsible
shareholders could then pressure companies to
develop executive bonus plans linked to non-financial
indicators in addition to share price.
Social and legal expectations have evolved to
require companies to do business responsibly. Many
successful global companies, such as Dutch consumer
product giant Unilever and Danish pharmaceutical
Novo Nordisk, have unlocked the value creation
potentially associated with integrating sustainability
into core business strategy. Through roundtables,
policy briefings and research papers, the Purpose
of the Corporation project fosters this discussion of
how corporate governance can best advance the
interrelated objectives of corporate performance and
sustainability. ■
Find the Purpose of the Corporation project and its
publications online at www.purposeofcorporation.org
and @purposeofcorp
Edition 10 | 11
Culture | Risk and governance | Accountancy Futures
A matter of ethicsThe Robin Cosgrove Prize promotes ethics in finance. Here, two previous winners of the prize look at technology in finance and personal accountability
G ood business relies on good ethics. ACCA has
partnered with the Robin Cosgrove Prize as
part of its global commitment to promoting
ethics in finance. Robin Jarvis, special adviser to ACCA,
has been a member of the prize jury since 2012. ACCA
was the first accountancy body to introduce an ethics
paper; since it was founded in 1904, ACCA has strived
to promote integrity, opportunity, diversity, innovation
and accountability.
Over the past few years ACCA has been conducting
research into corporate governance, organisational
culture, and behaviour in the boardroom, and supports
this global prize as part of its aim to ensure that the
conversation around ethics in finance is not limited to
any one region or group of stakeholders.
Here, two previous prizewinners from 2013 have
contributed short essays on ethics in finance. The views
they express here are their personal views.
Prabhay Joshi: Ethics and loyaltyA year and a half on from my experience with the
Robin Cosgrove Prize, it is clear that the debate
around ethics and regulation in finance is still firmly
in the limelight. I was delighted to be recognised for
my contribution in 2013, and it is great to see that the
prize is continuing to grow with the support of ACCA.
My essay concerned the interplay between individual
decision-making and an organisation’s cultural values.
One of the key themes I explored was an employee’s
loyalty towards their company, and the potential
dangers of this from an ethical perspective. If an
individual’s values become too closely aligned with
those of the business they work for, they may lose their
ability to make independent ethical decisions.
The role of regulation is left as an open question
following on from this: can technical regulation ever
serve as the complete remedy to a problem that
revolves around individual ethical decision-making? I
suggest that a skilled finance professional who wants
to manipulate the system will always find some way of
doing so, no matter how comprehensive the regulation
is. The focus of regulation therefore should be on
instilling a sense of personal accountability in these
individuals.
Last year saw changes in the UK’s banking landscape
designed to bridge this accountability gap. First, the
inception of the Banking Standards Review Council,
chaired by Sir Richard Lambert, will aim to measure
UK banks against a set of conduct benchmarks. More
recently, the Prudential Regulation Authority (PRA) and
the Financial Conduct Authority (FCA) have consulted
on a ‘senior managers regime’ to improve individual
accountability at the top of an organisation and bring
the prospect of criminal prosecution to senior managers
in the event of reckless misconduct in their area.
Rafael Gomes, another 2013 laureate (see below),
presented an interesting angle to this question: is it not
banks’ duty to act in the spirit of the law, rather than the
letter of the law? Public opinion seems to be consistent
in this regard: banks have a systemic importance in the
economy, and their conduct (irrespective of regulation)
needs to reflect this responsibility.
It is a real honour to have had the opportunity to make
a contribution, however small, to Robin Cosgrove’s
legacy. I would recommend anyone with an interest in
the subject to submit an essay and contribute to the
growing global debate around ethics in finance.
Rafael Gomes: Technology in financeFinance is increasingly a digital business. It is also
a business under scrutiny for ethical misconduct.
Here are four fintech trends that will force us to think
creatively about ethics in finance.
1 Robots. To have a healthy sales relationship with
customers, banks must choose products that are
suitable for those buying them, and use fair and
transparent sales techniques. The advent of a new
robotic generation should therefore give us pause
for thought. One product, for example, advertises
itself as an ‘artificial-intelligence-powered personal
assistant’ and promises to hold ‘real conversations’
with customers on behalf of banks. But how would
a virtual concierge know how to sell the likes of
payment protection insurance (PPI) suitably? Or
how would a granny describe her risk appetite
to a virtual concierge in a way that both parties
understand it? Programming robots to sell financial
services will pose an ethical challenge.
2 Financial automation. High-frequency trading (HFT)
– ultra high-speed algorithms that detect when an
order has been placed in the market and race to
fulfil it first – has become a wealthy segment of the
capital markets industry. US and European regulators
are examining whether HFT is akin to front-running,
the illegal practice of placing a trade ahead of a
customer order when it is known that the customer’s
order will probably move prices. Yet HFT is not really
about traders’ conduct – it is circuitry. It would be
considered unethical for traders to eavesdrop on
Prabhay Joshi is a
financial services
consultant at PA
Consulting Group
and former winner of
the Robin Cosgrove
Global Prize for Ethics
in Finance.
Rafael Gomes is a
risk consultant at
Accenture and former
winner of the Robin
Cosgrove Global Prize
for Ethics in Finance.
12 | Edition 10
Accountancy Futures | Risk and governance | Culture
The Robin Cosgrove PrizeThe Robin Cosgrove Prize is awarded in an essay competition designed to promote
ideas on trust and ethical behaviour in all aspects within the finance sector. The
prize is biennial and is awarded to the best innovative ideas for ethics in finance.
The award honours the vision of Robin Cosgrove, a bright investment banker, who
died at the age of 31. He believed passionately that the lack of integrity and ethical
practice in banking and finance could be a major barrier to sustainable economic
development.
The prize is managed by the Observatoire de la Finance, a Swiss not-for-profit
foundation in Geneva, and Dr Carol Cosgrove-Sacks, Robin Cosgrove’s mother, in
partnership with ACCA.
The award is available internationally, and entries may be written in English or
French. For more information, visit: www.robincosgroveprize.org
their competitors with hidden microphones, but
HFT uses automated artificial intelligence. Decision-
making is literally hardwired into the technology
infrastructure. If information advantage has always
been a tricky subject for regulators and economists,
then technological automation and speed are set to
multiply the ethical challenge.
3 The surveillance bank. Compliance departments
increasingly use surveillance technology to detect
potential untoward behaviour within banks. But
much misconduct happens across different banks,
not within them. While it might make sense for banks
to share surveillance data, it would be extremely
complex to do so. The answer may be to extend
employee surveillance outside the banks’ walls.
Banks often analyse social media data to understand
which customers are high risk before they provide
them with a loan. Will they conclude that monitoring
employees’ LinkedIn, Facebook and Twitter accounts
would help them identify high-risk workers too?
4 Crowdfunding. Peer-to-peer (P2P) platforms enable
users to bypass traditional banks and transfer money
between themselves as loans, equity, insurance and
payments. In October 2013 the Financial Conduct
Authority (FCA) began the process of designing
regulation for crowdfunders. While these digital
services will undoubtedly bring long-term benefits,
they also pose ethical risks. Conflicts of interest
are often intrinsic. P2P platforms benefit from high
transaction volumes, so they may have an incentive
to claim that borrowers pose lower risks than they
actually do. A truly fraudulent platform could even
socially engineer borrowers and transactions, as
other online businesses have done, to encourage
traffic. The crowdfunding industry should take this
threat seriously because a single rogue platform
could send risk-averse customers racing back to
more traditional, traceable competitors.
So what is to be done? In November 2014, professor
Stephen Hawking warned of the danger of technology
evolving beyond our ability to use it responsibly.
Bankers, regulators, accountants and advisers will
increasingly rely on technological nous to deliver
effective and ethical capital. Over time, more of us will
need to learn how technology systems are built, how
financial data moves between them, and what makes
these increasingly smart machines tick. ■
Culture | Risk and governance | Accountancy Futures
Edition 10 | 13
Risky businessIn business just about anything could happen – in theory, at least. But does that mean you should tell your shareholders all about it and how you intend to address it?
Running a business is inherently risky – there are
the small everyday risks (one of your suppliers
goes bust, or the price of a commodity rises
sharply), and then there are the risks that you think will
never happen but sometimes do (a fire, a worldwide
credit crisis, a ship loaded with your stock sinking).
Boards (good ones, at least) routinely discuss what
could go wrong and what to do about it. But how much
of all this should they tell their shareholders?
A series of high-profile corporate failures and incidents
in recent years (the BP Deepwater disaster and Sony’s
recent hacking experience, to name two) have given
more teeth to the argument that companies need to
do a better job of explaining the risks they face to their
shareholders and other stakeholders.
Opening upThe financial crisis has seen that argument bite
deeper, and prompted a range of legislation (including
IFRS 7, Financial Instruments: Disclosures, and the
recommendations of the Enhanced Disclosure Task
Force of the Financial Stability Board) aimed at
improving risk disclosure in the financial sector. The
2008 crisis certainly raised the profile of risk reporting
and brought discussion of risk more into the open.
According to a new report from ACCA, though, formal
risk reporting by companies still has a long way to go.
ACCA’s Risk reporting study details the views of a range
of senior risk experts representing preparers, users and
regulators. It argues that all sides recognise that risk
reporting needs to improve. The real question is how
to make that happen.
Many of the experts consulted agree that progress
has been made since the financial crisis. But too
much risk reporting today is unnecessarily generic,
compliance-driven, bland. Or, as Eric Tracey,
consulting partner with investment manager
Governance for Owners, witheringly says, it covers
‘everything but the kitchen sink, in which case it
becomes completely useless’.
At the root of the problem is a fundamental difference
between what users want and what preparers are
Accountancy Futures | Risk and governance | Reporting
14 | Edition 10
Simon Constant-Glemas‘There has been a huge increase [in regulation faced by multinationals] since the
financial crisis, and the question is whether that drives better risk management
or not. There have certainly been unintended consequences; at Shell we are
captured by criteria that are not intended for us, simply because we are large.
In my view that has the potential to distract organisations from good risk
management.
‘My main concern is that the raft of new regulatory requirements could result in
organisations seeing risk reporting as just another box-ticking exercise, rather than
driving better risk management. We have to be careful that we’re not reporting risk
in order to satisfy a process, but that risk management is used effectively as a way
to differentiate the business.’
VP corporate and UK country controller, Shell
prepared to give. To put it simply, users want to see
more discussion of the risks a company faces, while
preparers want to say as little as possible for fear of
spooking the horses.
Companies fear that providing too much detail about
risks could scare off investors or reveal sensitive
information. The latter is an argument that analysts
scoff at. ‘It’s a fantastic smokescreen to hide all sorts of
things,’ says Tracey. ‘You ought to be able to describe
your risks without giving away something you should
keep secret. It’s precisely because it is sensitive that
something should be reported to shareholders.’
So what do users want to see? The report details a wish
list that includes a discussion of the risks that really matter
to the company, preferably in order of priority. Users want
to know why management believes that these risks are
critical and what it plans to do to mitigate them. They
also want to know of any new risks that have emerged
since the last risk report. Above all, users want candour
– an honest discussion of risk within the context of the
company’s strategy and business model.
Putting a price on riskBut could risk reports go further still? Journalist
and financial analyst Jane Fuller raises the more
controversial possibility of quantifying risks. It would
be more useful for analysts, she argues, if management
explained that a particular event (such as the risk of
litigation) rarely happened but put a figure on the
potential financial impact on the company if it did
(based on, for example, actual litigation payouts in
similar cases).
‘This approach might cause migraines in many a
boardroom,’ she says, ‘but it would result in a far more
useful discussion about risk.’
The march towards better risk reporting seems to be
gaining momentum, in some countries at least. At the
end of last year, the UK’s governance regulator, the
Financial Reporting Council, announced changes to
the corporate governance code so that it recommends
that directors include ‘a robust assessment of the
principal risks facing the company’ in their annual
report, along with an explanation of how these risks are
being managed.
The experts consulted for Risk reporting agree
unanimously that better risk reporting is beneficial
to companies as well as users, with one contributor
pointing out that risk reporting has now moved on
from a focus on mitigation to a way of adding value to
the organisation.
Ewan Willars, director of policy at ACCA, thinks that
good risk reporting gives investors greater confidence:
‘We believe that greater disclosure of risk is not a
threat, but a chance to demonstrate the strength of the
company’s controls and management.’ ■
Liz Fisher, journalist
Risk reporting is available at www.accaglobal.
com/ab/161
Frank Curtiss‘I’ve seen a lot of progress in risk reporting since the financial crisis. Risk has now
become something that can be discussed, when previously it was a four-letter
word. The better [risk] reporters are telling us something useful about risk – the
levels of disclosure used to be terrible across the board, but now there are plenty
that are not.
‘The big challenge now is the mass of companies whose risk reporting is
inadequate at best. There are some shining examples, good reports that tell the
story honestly and in the voice of the company. The trick now is to get the others
up to speed.’
Head of corporate governance, RPMI Railpen Investments
Reporting | Risk and governance | Accountancy Futures
Edition 10 | 15
Balancing actGood governance balances rules and flexibility, but joint research from ACCA and KPMG shows that behaviour is too often neglected
16 | Edition 10
Accountancy Futures | Risk and governance | Research
The entire point of having rules, he says, is to safeguard
stakeholders’ interests; to this end, the rules in a corporate
governance framework should be more purposeful and
decided. But at the same time, the framework must
allow for some flexibility, as different companies will
face different circumstances. If companies are subject
to too many prescriptive requirements, doing business
will become very difficult for them, and a ‘compliance
culture’ of doing the bare minimum may result. Too little
enforcement, on the other hand, may lead to companies
simply ignoring the guidelines.
‘Why have rules if they are not mandatory?’ asks Low
rhetorically. ‘For the same reason we have speed
limits.’ He points out that many jurisdictions, including
Singapore, adopt a balanced approach, extracting the
most important of the requirements and making them
mandatory by adding them to the listing rules. Such
codified requirements typically safeguard stakeholder
and shareholder interest. The rest of the framework is
voluntary, on a ‘comply or explain’ basis.
Singapore’s corporate governance code, for example,
contains provisions to indicate that requirements are
guides and principles rather than codifications. Some
companies, says Low, have chosen not to comply with
requirements such as those related to remuneration,
and have indicated so in their financial statements,
which is an acceptable form of non-compliance.
‘On the other hand, if a big company doesn’t comply
with some very basic requirements such as internal
controls, that would be too glaring for stakeholders
and shareholders to accept,’ he adds.
It is possible, he says, to determine how effective
an individual market’s governance framework is by
examining how the framework and its implementation
correlate to market performance. The ACCA/
KPMG study, however, did not examine levels of
compliance with corporate governance frameworks
or outcomes for companies. The study finds that
behavioural requirements such as risk governance and
stakeholder engagement are typically less well defined
in frameworks. In comparison, well-known structural
requirements such as the remuneration committee and
director independence are usually well set out. Yet it is
the behavioural requirements that have been identified
as critical for improving corporate governance
adequacy and effectiveness.
Again, the obvious answer might seem to be to
enhance the corporate governance framework. But Low
cautions here against focusing too much on such »
Corporate governance is a matter of balancing
the need for enforcement with the need
for flexibility, according to a 14-month
collaborative research study by ACCA and KPMG. But
at the same time, the most important aspects of good
corporate governance – the behavioural elements
pertaining to areas such as communication, evaluation
and risk governance – are often less well defined,
making them difficult to articulate, let alone enforce.
The study, Balancing rules and flexibility, examined
corporate governance requirements across 25 markets
and turned up several interesting results, says Irving
Low, head of risk consulting for KPMG in Singapore.
‘One of the most interesting findings is that
emerging markets scored very highly for the clarity
and completeness of their corporate governance
frameworks,’ he says. ‘India, Russia, Brazil: does it seem
counterintuitive? In fact, on closer examination you
will see that these markets have recently revised their
corporate governance frameworks. On paper, they
have all the right rules and requirements, but whether
they have yet implemented these requirements is
another matter.’ The study ranks India’s corporate
governance framework on a par with Australia’s, and
Russia’s with Hong Kong’s.
Low, who presented the findings internationally in
November 2014, points out that similar discrepancies
can be found in developed markets. But while
issues with emerging markets may be attributed
to implementation or enforcement, problems in
developed markets are more usually related to human
behaviour. For example, the US has a relatively mature
corporate governance framework and placed second
among the markets studied, but has seen multiple
corporate scandals over the years.
‘This is a people-related issue,’ Low says. ‘What makes
the world go round is behaviour, and that’s not very well
covered in most corporate governance frameworks.’
Rigour versus flexibilityAdditional rigour in corporate governance frameworks
might seem an obvious way of preventing corporate
scandals. It is easy to assume that raising the number
of requirements and making them mandatory should
compensate for human inclinations to behave badly.
But Low is sceptical of this easy way out: ‘A corporate
governance framework should not simply focus on
having more requirements,’ he says. ‘It should attempt
to achieve a balance between rules and flexibility.’
Irving LowIrving Low is head of risk consulting for KPMG in Singapore and co-author of the ACCA/KPMG Balancing rules and
flexibility report. He is also the deputy head of internal audit, risk and compliance for Asia Pacific, which includes
New Zealand, Australia, Singapore, Indonesia, Vietnam, Philippines, Taiwan, Hong Kong, China and Japan. His
focus is in risks and controls, with extensive experience in undertaking board and governance reviews in both the
private and public sectors for both profit and not-for-profit organisations. The other areas he is involved in include
enterprise and risk management implementation, risk identification, Sarbanes-Oxley and internal audit. His client
base is geographically spread, from the US, UK, Middle East to Asia Pacific.
Research | Risk and governance | Accountancy Futures
Edition 10 | 17
frameworks simply because there is a limit to what a
corporate governance framework can do. ‘The real
question is, how can we incentivise good behaviour?’
One natural check on bad behaviour, he suggests, may
be companies’ own need to survive. To sustain their
operations beyond a year, they need a sound business
model and corporate governance structure, and will have
to adhere to both. ‘Consider what happened to Lehman
Brothers. They had good policies and structures, but
management decided to override policies such as not
taking more risks than they could absorb or accept, and
that was when the problem began.’
Unfortunately, he adds, there is not much that regulators
and policymakers can do to pre-empt such behaviour
within individual companies. ‘Greed, ill intention and
motivations cannot be governed at a local or national
level. Such things have to be left to the companies
themselves to handle,’ he says.
As far as corporate governance frameworks are
concerned, Singapore, says Low, is currently at a ‘sweet
spot’. The ACCA/KPMG study concludes that Singapore
leads the Asia region in the clarity and completeness of
its framework, although there are still areas requiring
improvement, most notably in behavioural aspects,
such as board diversity, performance evaluation and
stakeholder engagement and communication.
This good performance does come with considerations,
one issue being the burden of compliance. Singapore’s
corporate governance code has been reviewed twice
so far, in 2003 and 2012, and companies have raised
concerns about the latest revision. ‘Some companies
feel the Singapore framework is quite onerous,’ Low
says. ‘However, I believe that it can be implemented in
a straightforward way. Since the framework is principles-
based, companies can simply adopt what is relevant
to them. For now, all we need to do is pause, let the
market digest the framework, and let it manifest itself in
companies’ behaviour.’
In any case, he adds, Singapore is still in a tenable
position: ‘Compared to some other markets, we have
seen very few cases of class action against companies.
It may be a matter of culture: our society is not as
Considerations for SingaporeThe Singapore corporate governance framework
performs well in assurance, audit committee and
financial integrity, disclosures and risk governance.
But like many other markets, it falls short on the
behavioural aspects. Here it may be able to draw
on the best practices of other markets, including:
* a stewardship code, as in the UK
* broader definitions of diversity, as in the UK
* measurable diversity objectives, as in Australia
* regular external reviews for larger companies, as
in the UK
* greater disclosures to stakeholders, as in Malaysia
* mandatory CSR reporting and encouragement
of more integrated reporting.
litigious as, for example, the US. And I don’t think we
want that level of litigiousness. What we want is for
people to do the right thing because they want to.’
Singapore is also well placed to lead the region in
achieving corporate governance parity, which will be
significant in light of upcoming regional integration.
Low says: ‘As we embark on the ASEAN Economic
Community in 2015, it will be important to have
some consistency in corporate governance between
jurisdictions. In this area, the ASEAN countries should
be able to achieve parity comparable to the European
Union. As long as companies are willing to subscribe to a
broad set of corporate governance requirements, there
should be a general understanding across borders.’
He adds that changes to the corporate governance
framework of any country should be undertaken
with an eye to context. Historically, major changes in
frameworks, including the OECD principles themselves,
have been sparked off by various financial crises and
corporate or even industry collapses. But Low favours a
combination of proactive thinking and moderation.
‘We certainly shouldn’t wait for disasters to happen
before we take action, but we must bear in mind
that not all countries are at the same rate of maturity.
Revisions are normally done incrementally and, if
policymakers are forward-thinking, they will proactively
take lessons from other jurisdictions to up their game in
terms of transparency and accountability.’ ■
Mint Kang, journalist
Singapore’s corporate
governance framework
is currently at a sweet
spot.
You can download the Balancing rules and
flexibility report at www.accaglobal.com/ab/158
‘What makes the world go round is how we behave, and that’s not very well covered in most governance frameworks’
Accountancy Futures | Risk and governance | Research
18 | Edition 10
At the crossroadsWith the allure of alternative financing on one hand, and the familiarity of bank loans on the other, which way should finance professionals turn, asks Manos Schizas
Manos Schizas
is former senior
economic analyst at
ACCA. He led ACCA’s
Research and Insights
programme on access
to finance.
Edition 10 | 19
Funding | Smart finance | Accountancy Futures
Business finance is at a crossroads. And which
way finance professionals turn could have a
significant bearing on how businesses are
funded in the future. The situation is best summed
up by two key questions. How many times recently
have you read an article in the financial press about
how alternative financing will be the future saviour of
enterprise? Quite a few, I’m sure. At the same time, how
often have you read that the banks’ doors are firmly
closed to those entrepreneurs looking for investment
to grow their businesses? Too often to count, I suspect.
And yet, bank loans and overdrafts remain the types
of finance ACCA members are most often involved
in raising on behalf of clients. Which presents finance
professionals with a dilemma. Innovation is rife in
the financial services industry and yet the majority
of funding applications facilitated by ACCA
members still relate to bank loans – anecdotal
evidence suggests the advantage of familiarity is still
very powerful. Despite attracting an enormous amount
of venture capital and capital market funding,
alternative finance platforms have yet to make inroads
within the profession, at least outside a few early
adopter markets in the West.
The backdrop to this is of course the financial crisis that
engulfed global markets in 2008. We are still feeling the
aftershocks of the crisis more than half a decade later,
but as of mid-2014, ACCA has reported that financing
conditions at the global level are at their most benign
since the recovery began in 2009. In most parts of the
world, less than a fifth of large corporates and less than
a third of SMEs were reporting problems accessing
finance, despite the headlines.
But the key factor behind this shift appears to be an
extraordinary level of global monetary stimulus, which
is likely to prove short-lived, much like the coordinated
monetary easing agreed by the G20 at the London
summit in 2009. And as traditional finance providers
have demonstrated a remarkably high resistance to
risk, the beneficiaries of this stimulus have been larger
organisations in the more developed regions of the
global economy.
Fundraising challengesSo the reality is that even though the macro picture
appears to be improving, small businesses still face
huge challenges when it comes to fundraising. ACCA’s
own research has found that a substantial share of
business financing is still only available on a risk-free
basis. The recipients must be seen as risk-free or able
to provide significant security.
However justified, the need for collateral (and the
narrow range of assets eligible as such) is keeping
some of the most promising businesses out of reach of
much-needed finance.
The silver lining is that, as has been seen in many
markets before, where there is a breakdown in how
the market works, there is always the opportunity
for disruption. If traditional finance providers fail to
respond to the needs of those that require finance,
then others will step up and provide alternatives. But
it will not happen overnight. And this is where ACCA
members have a crucial role to play.
ACCA’s research has revealed that between the first
quarter of 2013 and the second quarter of 2014,
nearly a third (31%) of its members were involved in
raising finance, either for their own organisations or
for clients. Most active of all were members in Africa,
with 40% personally involved in raising finance, and
31% trying to raise finance for their own organisations.
Members in the Middle East and Asia-Pacific follow
closely, with 37% and 35% of members »
Dubai Multi Commodities Centre, Dubai, UAECreated in 2002, the DMCC Free Zone, based at Jumeirah Lakes Towers, is a
government authority with a mandate to enhance the flow of commodities trade
through Dubai, creating a thriving marketplace for trade and enterprise. It is the
largest free zone in the UAE, and is on target to register 10,000 members by 2015.
But according to Jignesh Sanghvi, head of the finance function in the corporate
office at DMCC, finance for start-ups can prove very tight. As he says: ‘While the
general business outlook in the region is bright, it can be tricky as with any market
at times, particularly for a Sharia compliant start-up to expand or develop.’ Sanghvi
believes that few local banks are comfortable in financing new businesses, forcing
these smaller businesses to turn to private financiers at a significantly higher cost.
To cater for this, the free zone has created DMCC Tradeflow, which offers a Sharia-
compliant financing route. It is one of many DMCC financing platforms, which also
include asset management, commodity and currency derivatives exchanges, but
it allows traders to effectively mortgage their goods, with all parties adhering to a
specific set of rules that help to speed up the process, reduce legal costs and open
up access to finance.
Accountancy Futures | Smart finance | Funding
20 | Edition 10
SADL Consulting, South AfricaAfter successfully advising its clients in many areas, including fundraising, SADL Consulting found that it needed
to raise finance itself in order to achieve its ambitious growth plans. But in the process of securing a commercial
mortgage for new premises, SADL’s chief executive Suren Panday was frustrated to discover that the bank required
personal sureties, in addition to proof of earnings for the business itself, despite having had the company audited
by an independent international auditing firm.
Panday was also frustrated by the interest rates asked for by the bank, which he felt were too high. ‘The banks are
just being greedy,’ he says. And to add to the frustration, the process took longer than three months, despite all
the necessary paperwork being completed efficiently and on time.
Panday says that he would not approach a bank for this funding again. Instead, he would strongly consider getting
a loan from the company’s private shareholders; the bank loan was granted against their finances anyway, and
they could draw down the money from the business over the following years. Shareholder loans and funds from
family and friends are popular sources of capital in South Africa, particularly among start-ups with no business or
personal track record.
Funding | Smart finance | Accountancy Futures
Edition 10 | 21
respectively trying to source funds for their businesses
or clients.
Looking across the size of organisation, it becomes
clear that members are most engaged at the SME
level – 55% of members working in small and
medium sized practices and 41% of those in
SMEs were involved in raising finance. And
ACCA research has confirmed what many already
believe to be true – that, at least among SMEs,
businesses around the world see finance
professionals as the foremost experts in financial
management and business financing.
But of the 31% of members who were involved in raising
finance, the majority were helping businesses secure
bank loans and overdrafts, although more specialist
types of financing were also well represented among
the membership’s fundraising efforts – a quarter (25%)
of ACCA fundraising members (or 8% of the total
membership) sought funds from the capital markets,
usually on behalf of clients, and a similar proportion were
involved in raising supply chain finance, including invoice
discounting, factoring, reverse factoring and trade
finance. Government guarantees and export finance
also figured in the finance professionals’ armoury.
And of course there is always the bank of family and
friends, which was tapped by 14%.
Authoritative adviceInterestingly, newly popular methods such as
crowdfunding and peer-to-peer lending were
only sought out by some 4% of all ACCA’s
fundraising members, and almost all of this was
recorded in Europe.
But throughout all the fundraising techniques, there
is increasingly the need for timely information. This
requires finance professionals to act as true business
partners. Practitioners are increasingly expected
to provide a quasi-assurance service to fundraising
businesses. They need to be able to speak directly
to the senior directors and explain the long-term
implications of financing decisions. And with an
increasing array of financing options, there is a risk that
business owners are distracted, often with disastrous
results, so such businesses will need authoritative
advice to help them narrow their options, not merely
evaluate them.
So looking forward, professionals need to position
themselves so that they can play a decisive role in
any organisation looking to raise finance or help
others to do so. Businesses need reasonably priced
and quick finance, but more importantly they need
good planning, trust and finance appropriate to their
purposes and circumstances. They need to know which
way to turn.
This is the crossroads that faces the complete finance
professional of the future. ■
Haines Watts, Devon, UKAs the 13th largest accountancy firm in the UK, Haines Watts has done well in
picking up start-up businesses during the recession. Partners in the firm will go with
clients to meet banks and other finance providers to act as an independent third
party. As partner Matthew Melksham says: ‘Businesses have always relied on their
finance directors and accountants to check things over… all our clients are owner-
managed businesses; their decisions will impact on their families, so it’s important
they make the right decisions.’
However, as recently as the summer of 2013, the practice had to go looking for
finance offers from alternative providers. ‘At one stage we were in real difficulties
using high street lenders for commercial lending because they either could not help
or they wanted more security than the business could sensibly offer,’ Melksham says.
But it has since become easier to raise finance because ‘high street lenders are
coming back to a sensible place…with reasonable offers, sensible levels of interest
and requirement for security’. Melksham believes that the driver for this change was
a clear message from the UK government that they need to ‘sort their business out
and get the economy moving’.
Peer-to-peer lending and crowdfunding are also proving popular. But the biggest
challenges stem from the expectations of both lenders and clients. Unassisted,
clients may set unrealistic cashflow projections and try to talk the business up,
resulting in loss of confidence and trust from the lender; investment readiness is
a major challenge. Conversely, clients are convinced that lenders are trying to rip
them off and end up turning good deals down.
Read the report: The state of business finance
at www.accaglobal.com/ab/154
‘The need for collateral is keeping some of the most promising businesses out of reach of much-needed finance’
Accountancy Futures | Smart finance | Funding
22 | Edition 10
Hitting the small timeSmall and medium practices are at the sharpest end of the business, and face many of the same challenges as their clients, according to the latest research
The future opportunities for small and medium-
sized practices (SMPs) are fantastic, says
Mark Gold FCCA, partner at UK firm Silver
Levene. ‘This is simply because of their clients,’ he
explains. ‘SMEs by their very nature require outside
help, and it is a role the professional accountant can
play completely.’
Gold is one of 17 partners at Silver Levene, an £11m
turnover practice based in London. He also chairs
the SMP Forum of FEE (the European Federation of
Accountants), and is both a former ACCA president
and a former chairman of ACCA’s SME committee.
Gold observes that time and again, accountants are
seen as the most trusted advisers to businesses, both
large and small. But he also makes the point that SMPs
are businesses themselves. They face many of the
opportunities and threats that their clients face, such as
changes in technology and the regulatory environment,
and need to adapt their businesses accordingly.
So what have SMPs themselves been telling us about
the opportunities and challenges they face today, and
will face in the future?
IFAC, the International Federation of Accountants, has
just published its latest survey of small and medium-sized
accountancy practices around the world. It will make
interesting reading for the thousands of practitioners
who relish being at the sharpest end of business.
According to the survey, attracting new clients and
keeping up with regulations come at the top of the list
of SMPs’ challenges, with pressure to lower fees, rising
costs and differentiation also seen as key. The survey
also suggests that economic uncertainty and rising
costs are at the top of their clients’ list of challenges.
However, despite these issues, nearly three-quarters
(72%) of SMPs say they are either maintaining or
growing the previous year’s practice fee revenue.
Tax and consulting are tipped to be the two biggest
sources of revenue growth for the year ahead. However,
a number of themes have emerged recently that have
had a direct impact on SMPs, and will continue to.
Rising audit thresholds around the world are affecting
the business models of SMPs, as are technological
innovation and the internationalisation of business.
‘Audit thresholds is the one people focus on,’ says
Gold. ‘When Silver Levene sat down to talk about
rising thresholds in the UK years ago, some people
were concerned, while others saw it as an opportunity
because they could see the shackles coming off. We
wouldn’t be tied down by all the audit restrictions, so we
could help clients with the advice they really needed.’
Gold has recently returned from Denmark, where »
Giancarlo Attolini‘The world of the SMP is a swiftly changing one, and it is the fastest sector in the profession in adapting to change
because it has to – SMPs evolve or die. I expect the number of SMPs to diminish and the number of SMP accountants
to increase. This is because there is going to be a huge increase in the number of accountants – if you look at Asia
and Africa, there are huge numbers of students – but we will also see the integration of more practices. There will
probably be fewer sole practitioners, and SMPs will become bigger. The complexity of regulation will require more
expertise in each practice, while competition will force lower fees, so SMPs will look for economies of scale.’
Chair, IFAC SMP Committee
See Giancarlo Attolini on video at www.accaglobal.com/ab/176
‘The challenge is to put yourselves in the client’s shoes and demonstrate the value of the audit or its alternative’
Four steps for future successAccording to Kamlesh Vikamsey, an India-based practitioner in a small firm,
speaking at the recent World Congress of Accountants, there are four steps SMPs
need to take to ensure they succeed in the future:
* To address the changing demographics of business owners, SMPs need to ensure
they have the right age mix, including suitably tech-savvy young professionals.
* To address a changing SMP workforce, SMPs need to formalise their HR policies
and hone their staff retention strategies.
* To tackle changing competition, SMPs need to offer high-quality, value-added
services tailored to the specific needs of the client.
* And finally, to meet the changing needs of SMEs, SMPs need to expand their
service offerings to include advisory as well as assurance services, develop
their knowledge and skills to offer these services, and participate in a network,
association or alliance.
SMPs | Smart finance | Accountancy Futures
Edition 10 | 23
he spoke with accountants in practice facing an
increase in audit thresholds. ‘Some are worried, but
many are rising to the opportunity,’ he says.
Of course, audit requirements vary from one jurisdiction
to another, and this can have an impact on how firms in
these different jurisdictions approach the development
of no-audit advisory services. As Sue Almond, ACCA’s
director of external affairs, explains: ‘You can contrast
Canada, where the environment is very much that there
isn’t a requirement for an audit, with Norway, where until
recently there was the requirement for all companies
to be audited. The starting point is very different, and
therefore market expectations are different.’
However, she adds that there is still a need for a
service that can give assurance to stakeholders such
as finance providers, irrespective of whether there is
a formal requirement for an audit. ‘The challenge is
to put yourselves in the shoes of the client or finance
provider, and demonstrate the value of the audit or its
alternative,’ she says.
However, issues such as rising audit thresholds focus on
the traditional skills of qualified accountants. There are
wider forces at play as well that need to be considered.
Top of the list is the internationalisation of business. Even
the smallest of SMEs will have the opportunity to do
business across borders, and as a result will be looking
for advice in areas such as taxation and regulation.
‘Even if you are an SMP servicing SMEs, it is unusual
not to have some form of international element,’
says Almond. ‘It might not necessarily be global, but
typically there are cross-border issues.’
According to a study by the Edinburgh Group, a coalition
of 14 accountancy bodies including ACCA, seven out
of 10 SMPs have clients that undertake at least one
type of international activity. Around half have clients
undertaking import and export activity, but relatively
few SMPs have clients participating in a high number of
international activities. The study concludes that there is
considerable potential for SMEs to expand the scope of
their international activities and that those that do not
currently buy or sell goods or services internationally
could be encouraged to consider how looking beyond
home markets could boost business performance.
But it is as likely that SMPs are reacting to their clients’
demands. This is a point highlighted in research carried
out by ACCA special adviser Professor Robin Jarvis, Dr
Cristina-Maria Stolan and ACCA’s head of small business
Rosana Mirkovic. In the report, 2020 vision: Learning
from the past, building the future, Jarvis argues that
the motivation for SMPs to provide business advisory
services outside their core business activity – namely
internationalisation guidance to SMEs – was embedded
in their desire to respond as much as possible to their
clients’ requirements and business goals.
As the report says: ‘Some SMP practitioners highlighted
that their practice not only provides guidance beyond
traditional accounting services, but that they primarily
‘You can contrast Canada with Norway. The starting point for audits is different, and therefore market expectations are different’
The Northern Lights at
Tromso, Norway, where
until recently there
was a requirement for
all companies to be
audited.
Churchill, Canada.
While Canada shares
the spectacle of the
Northern Lights with
Norway, the two
countries have very
different audit rules.
Accountancy Futures | Smart finance | SMPs
24 | Edition 10
act as business advisers; in turn, providing international
advisory services represents a different feature for their
practice. This sets them apart from their competitors and
ultimately provides them with competitive advantage.’
However, the report adds that in giving advice, SMPs
are well aware of their knowledge limitations regarding
foreign markets and the services they have the capacity
to provide. They advise their clients to the limits of their
knowledge, and then ask their international network to
complement that knowledge. They then transfer the
knowledge directly to their SME clients and, ultimately,
directly refer their clients to their international network
contacts (other SMPs, law firms, bankers, business
consultants, and other SME clients) to ensure that their
clients receive the appropriate support for enhancing
their international activities.
‘This places accountants in a preferred position
compared to a number of other professions and advisory
services in supporting SMEs’ internationalisation
ventures,’ the report says.
And then there is technological innovation, much of which
is allowing SMEs, and therefore SMPs, to operate across
borders, and in a more efficient and productive way.
Gold believes this is having a huge impact: ‘Technology
has to be utilised, and SMPs have to go for it.’
Giancarlo Attolini, chairman of IFAC’s SMP committee,
agrees: ‘It is clear that developments in digital
technologies are going to affect the world even
more radically over the next 25 years than the last 25.
Technology has already made business global.’
Attolini is a founding partner of Attolini Spaggiari &
Associati Studio Legale e Tributario, an accounting,
tax and law firm in Reggio Emilia, Italy. He believes
that SMPs are facing a choice between providing
transactional and advisory services.
‘It is critical that SMPs leverage automation and
repeatable processes to enable them to add real
value to their clients through proactive consulting,’ he
says. ‘There will also be opportunities to provide real-
time collaboration and professional services to clients
utilising technology. For example, SMPs may wish to
use the opportunity presented by the cloud to offer
enhanced client accounting services.’ ■
Philip Smith, journalist
For more information visit www.IFAC.org/SMP
IFAC SMP survey (Jan 2015)
Challenges
facing SMPs
58% Attracting new
clients
57% Keeping up
with regulations
51% Pressure to
lower fees
50% Rising costs
50% Differentiating
from competition
Challenges facing
SME clients
67% Rising costs
66% Economic
uncertainty
SMP fees
4% Substantial
increase
37% Moderate
increase
31% Stay the same
28% Decrease
Mark Gold FCCAFive tips for SMPs:
1 Don’t worry – every threat provides an opportunity.
2 Remember you are a business and you supply a service. Look at what your customers need and start helping them.
3 Tell them what you can do – a lot of accountants forget to mention the other services they can offer.
4 Always think outside the box. Think about what other services (legal, HR) you can offer.
5 Remember you are in a privileged position to influence businesses – it’s what makes our work much more enjoyable.
Chair, SMP Forum, Federation of European Accountants (FEE)
See Mark Gold on video at www.accaglobal.com/ab/177
58%
57%
51%
50%
50%
67%
4%
66%
37% 31% 28%
SMPs | Smart finance | Accountancy Futures
Edition 10 | 25
A s the finance function model evolves, so
businesses are having to come up with new
ways to develop talent. The trend for global
organisations to restructure the function by setting up
shared service centres or outsourcing is changing the
traditional pathway to top finance roles.
Established wisdom has it that CFOs, to be effective,
need a rounded understanding of every aspect of
finance. That could include transactional functions,
business support and analysis roles, as well as central
reporting. But if those transactional functions have
been separated out from the in-house department,
then they become less accessible to aspiring future
finance leaders. It then becomes a more deliberate
choice to move into a shared services role – assuming
that it is even possible to do so.
So what is the impact of the shared services route
on the finance professional’s career path? Do finance
transformation roles attract the best and brightest
professionals who want to be CFOs? Or is shared
services a graveyard for those whom the organisation
believes add value, but who are not expected to
Can finance professionals with a background in shared services go all the way to the top, or is finance transformation little more than a career graveyard?
The evolution of the CFO
26 | Edition 10
Accountancy Futures | Smart finance | Shared services
achieve the top finance role?
According to a recent ACCA report, Finance
transformation roles: pathways to CFO, which examines
the views of finance leaders and experts across a wide
range of business sectors, careers in financial shared
services seem to be underrated.
‘Right now, a so-called urban legend positions finance
transformation roles as a dead-end for those who
want eventually to occupy the top finance seat at the
executive table,’ says Jamie Lyon, head of corporate
sector at ACCA and co-author of the report. ‘Perhaps
that is because of the relative immaturity of the shared
services finance model, or perhaps finance transformers
just have not had enough time to reach the top yet;
perhaps it is because organisations need to amend
their view of the capabilities now required to balance
agility and risk, growth and compliance in increasingly
complex market contexts; or perhaps it stems from a
lack of imagination.’
But individuals who take this route, according to Julie
Spillane, managing director and global director of
finance excellence for Accenture Global Services, can »
Shared services | Smart finance | Accountancy Futures
Edition 10 | 27
gain valuable skills and experiences in an era when
the CFO role has two distinct sides to it: strategy and
investor relations on the one hand, traditional finance
operational leadership on the other.
‘Being able to navigate increasing business model
complexity internally means responding to changing
expectations – knowing how to deal with operations
and the implications of culture,’ she says. ‘Shared
services experience is extremely helpful for this new
generation of leaders.’ She says that working in shared
services helps to develop the skills that are needed for
operational leadership.
Individuals who move into shared services can gain
greater responsibility and greater access to global
C-suite executives. Nigel Coffey, senior director of
finance process transformation at PepsiCo, says: ‘I
spent 10 years as a country CFO and I never met or
spoke to the global CFO. On my very first day in shared
services I was presenting to the senior leadership team.
As a shared service leader you get access to a much
more senior layer in the organisation than you will ever
get as an individual country CFO.’
Strategic versus functionalNevertheless, roles in shared services are seen as less
strategic, which could put them at a disadvantage as
potential springboards to the top finance role. Coffey
recalls: ‘When I was asked to go into a shared service
and outsourcing [SSO] role my first reaction was, “you
must be joking!” I called it the graveyard of ambition;
there’s no progression, no career.’
Peter Moller, a partner in Deloitte Consulting, cautions
aspiring CFOs against overvaluing shared services
experience. ‘Let’s not kid ourselves,’ he says. ‘Finance
shared services leaders have limited experience moving
up the finance value chain. Shared services operations
by their nature are never going to be strategic.’
Finance organisations most likely to see potential
CFO talent among shared services pools are those
with very mature – and successful – SSO models. Such
organisations are consciously plotting career pathways
through SSO operations, realising that skills honed
there are key to building a strong finance management
bench and top-tier talent.
Sandy Khanna, vice president at IBM global process
services, has seen organisations deliberately fast-
tracking individuals into finance leadership through
transformation or shared services roles because they
value the business experience gained. ‘You’ll always
find that the good finance leaders find great roles
because they’re in demand,’ he says.
Could it ultimately be that organisations wanting to
appoint their CFOs from shared services backgrounds
will have to do the persuading? ‘We don’t want to be the
bean-counters of old,’ says Andrew Bacon, head of the
EMEA shared services centre for Korean multinational
Doosan Infracore. ‘Ask 100 shared services leaders and
you’ll find that few aspire to be the traditional CFO.’
Indeed, some may be looking towards another top job
altogether. ‘For somebody entrenched in finance, the
move into a more operational role might be a good
move toward a CEO role,’ Bacon says.
Whether it’s the shared services professional who needs
to be persuaded of the CFO job, or the board that need
to be persuaded of the shared services candidate, it’s
looking like both could benefit from a strong fit of skills
and experience. ■
Sarah Perrin, journalist
For more information, download the Finance
transformation roles: pathways to CFO report
from www.accaglobal.com/ab138
Skills honed in shared services are key to building a strong finance management bench and top-tier talent
Nigel Coffey‘When it comes to selecting a chief finance officer, I think the choice is a CFO who understands the numbers rather
than one who understands the back-office functions. There is a snobbery in finance: the guys in the front of the
house – that is, the planning and reporting side – think that they know the business; they think that the guys in the
back office don’t really “get” the business. But I think that the guys in the back office often understand the business
an awful lot better than the guys in the front do.’
Senior director of finance process transformation, PepsiCo
Chris Gunning‘What’s interesting now is the movement to global business services or GBS – aggregating all business delivery
under one functional group. While traditionally finance shared services sat under the CFO, the GBS head, often the
former head of finance shared services, is at the same table. As far as the executive committee is concerned, the
CFO and GBS leader are almost equals. It’s a different route; the finance shared services leader now says, “I’m not
part of the finance team. I run the business team separately while one of my many stakeholders is now the CFO.”’
Vice president of global shared services, Unisys
Accountancy Futures | Smart finance | Shared services
28 | Edition 10
Stepping forward
Kevin McCarthy FCCAThe former CFO for Xbox says he will continue
acting as a path-breaker. ‘New ideas don’t just
happen,’ he says, adding that he intends to
mentor a team faced with complex open-ended,
ever-changing challenges. ‘Ongoing innovation
is critical to stay ahead of the competition…
Our products compete effectively based on
our strategy of providing powerful, flexible,
secure, easy-to-use solutions that work well with
technologies our customers already have and are
available on a device.’
Full interview at www.accaglobal.com/ab/166
CFO, Microsoft consumer channels
Jonny Backman‘It’s our long-term goal that my successor can be
a Russian. There are a lot of positive things that
we can bring as foreign nationals, but we also
think there’s lots we don’t have that a local would
provide… I would really like to see how we can
take this high-performing team from a three-
second pit stop, a world record, and shock the
world and bring that down even more. That’s my
goal and vision, to take a high-performance team
that’s already surprising people and make them
even better.’
Full interview at www.accaglobal.com/ab/169
CFO, Microsoft Russia
Whether it is protecting corporate values or anticipating where future growth will be, finance leaders give their views on the key challenges they face
Viewpoints | Smart finance | Accountancy Futures
Edition 10 | 29
Sanjeev Agrawal‘CFOs have a complete responsibility to make
enquiries, as well as explore and assess the
landscape. You should be asking all the relevant
questions. I also see the role as one of value
protection and value addition, in that order. First,
keeping the place safe – making sure it’s run on good
fundamentals; liquidity is good, capital is good. And
that’s where the conscience keeper comes in. There
is huge competition and most managers are under
pressure, so somebody has to keep that balance of
thinking. The CFO has a role to play there.’
Full interview at www.accaglobal.com/ab/167
CFO Standard Chartered Bank, Singapore and
ASEAN
Mark Vale FCCA‘A key part of the job is helping to determine
the strategic direction of this part of the
company [international operations], including
where to focus our financial resources and which
metrics to use – I spend a lot of time trying
to support our business units out in the field.
We need to understand the latest dynamics in
global trade and anticipate where the fastest
growth will be. It is really important that we
have hired the right people with appropriate
skills and experience. I need to find the next
generation of UPSers.’
Full interview at www.accaglobal.com/ab/168
CFO, international operations, UPS
Accountancy Futures | Smart finance | Viewpoints
30 | Edition 10
Matt Dolphin‘If I’m ever recruiting, I have no problem getting
qualified people. What I struggle to get is
qualified people with interaction skills or the
ability to influence or to present – all those
other soft skills. The ACCA Qualification gives
you a broad understanding of what happens
in business, how businesses actually work. And
it’s a transferable skill set so it’s absolutely a
requirement. But it’s not the end of the road. It
just gets you through the door. You need some
really good people skills as well as being a
functional expert.’
Full interview at www.accaglobal.com/ab/172
Business finance partner, BA
Kathy Liu FCCAA 24-year finance executive veteran, Kathy Liu
has first-hand experience of the globalisation of
the apparel industry. ‘With such short lead times
required in the industry, obtaining your letter
of credit is going to delay the whole process.
However, now our suppliers get paid when they
put the goods on the ship coming to the US, which
helps minimise our financial risk… I am responsible
for developing and implementing sustainability
strategy across the supply chain and I make sure
that I live up to the sustainability expectations of
our retailers, regulators and customers.’
Full interview at www.accaglobal.com/ab/171
CFO, Kizan International
Viewpoints | Smart finance | Accountancy Futures
Edition 10 | 31
Helmut Hauke FCCATo gain the confidence of investors and bankers
alike, Canadian oil company Freemont Resources
needed a set of audited financial statements. ‘If
you don’t get your audit, then you don’t get a
bank loan, and you don’t get new investors to
join your company… What a financial executive
brings to the table is control, financial structure,
and a way to describe the company that will not
only be meaningful to auditors and bankers, but to
potential shareholders and buyers as well.’
Full interview at www.accaglobal.com/ab/170
CFO, Freemont Resources
Ahmad Fuaad Kenali‘The key to the success of any CFO is that they
must be effective in discharging their duties and in
adding value to the company. In order to do this,
they will have to be the trusted business adviser to
the CEO. Without support from the CEO, it would
be extremely difficult to develop and implement
changes or improvement… Developing future
leaders is key. It is incumbent upon us to develop
our talents to build a strong team to support our
growth strategy.’
Full interview at www.accaglobal.com/ab/165
Group CFO, DRB-HICOM
Accountancy Futures | Smart finance | Viewpoints
32 | Edition 10
Integrated thinkingHowever it is encouraged and led, widespread adoption of integrated reporting will come from leadership at board level, says the IIRC’s Neil Stevenson
Integrated reporting | Sustainability | Accountancy Futures
Edition 10 | 33
December 2014 marked the first anniversary
of the International Integrated Reporting
Council’s International Integrated Reporting
Framework. One year on from its launch, numerous
developments are now taking place worldwide to
encourage the framework’s widespread adoption.
This was an important theme during the World
Congress of Accountants in Rome in November
2014, attended by 4,000 people from 150 countries.
Speakers at the conference described a shift in outlook
in business towards a wider concept of value creation.
Business needs to respond by planning to achieve
long-term outcomes while managing the short term.
The conference made a powerful statement about the
opportunities for enhancing reporting. Professional
accountants are in an excellent position to innovate
reporting to meet the needs of investors and other
shareholders, so it is a prime opportunity for the
profession to show how it can continue to add value.
The strategy for integrated reporting (IR) is to achieve
the breakthrough: a meaningful shift to global
adoption over the next three years. The focus is
moving from testing and early innovations to an era
when IR becomes mainstream and adopted by a far
greater number and range of entities. Our strategy to
2017 includes a number of key themes, such as:
* leading practice through IR networks around the
world and promoting dialogue between key players
Neil Stevenson is
managing director,
global implementation,
at the International
Integrated Reporting
Council.
Jean-Marc Huët‘The call for integrated reporting is
beginning to rise in volume. With public
trust in business undermined by scandal
after scandal, we would do well to listen and
act quickly.’
CFO, Unilever
Dimitris Lois‘Integrated reporting reflects how our company
thinks and does business. This approach allows us
to discuss material issues facing our business and
communities and show how we create value, for
shareholders and for society as a whole.’
CEO, Coca-Cola HBC
Euan Munro‘State-of-the-art integrated reporting provides us with information on corporate
performance across the full spectrum of financial, social, intellectual and natural
capital that is necessary for value creation. This gives it a much more complete
picture of the long-term prospects of the business, and helps us make better
investment decisions.’
CEO, Aviva Investors
Nick Holland‘At Gold Fields, integrated thinking and integrated management has been a prerequisite, given the many divergent risks
faced by our operations around the world. As such, an integrated report is far more appropriate than the traditional annual
report, as equal and appropriate weighting is given to all issues facing a company, not just operational and financial issues.
Integrated reporting offers our shareholders a more comprehensive overview of these divergent risks and provides a more
accurate reflection of the impact our company is having on society – communities, suppliers, governments and employees.’
CEO, Gold Fields
Bertrand Badré‘Integrated reporting does more for an organisation
than just facilitate the creation of a holistic report
of overall performance. It fosters and embeds
integrated thinking; everyone has a common
understanding and speaks the same language.’
Managing director and CFO, World Bank Group
Accountancy Futures | Sustainability | Integrated reporting
34 | Edition 10
Harvard
Business School
study hails IR
as enabler of
fi nancial stability
Brazilian stock
exchange calls
for ‘report or
explain’ on IR
UK guidance on
strategic report
consistent with
IR
European
Commission
labels IR as
‘step ahead’
South Africa
endorses the
International IR
Framework
IR promoted by
G100 and major
superannuation
funds in
Australia
Securities and
Exchange Board
of India: not ‘if’
but ‘when’ for IR
IR crucial part
of Japan’s
revitalisation
strategy
Malaysian
prime minister
declares
business take-up
of IR
IR set for take-
off in Singapore
Globally:
Recommendation
to G20 on IR
World Bank
implements IR
Global momentum of integrated reporting
in corporate reporting
* building a bridge to investors to encourage
investment decisions based on integrated reporting
and thinking
* engaging with the policy and regulatory community
to ensure that IR can fl ourish.
It is clear that to achieve our objective, we will
succeed through the infl uence and advocacy of many
institutions and forward-thinking organisations which
are well placed to drive adoption in markets around
the world.
However it is encouraged and led, widespread
adoption will come from leadership at board level. This
insight has been well understood for a long time in
relation to best practice corporate reporting.
Boards drive reportingAmong the infl uencers, company boards are hugely
important. As the IIRC highlights in its recent report,
Creating value: value to the board, decisions about the
nature of company reporting begin in the boardroom,
and so the extent to which senior executives drive
adoption of IR will be vital in the coming months and
years. Corporate reporting, and the thinking that
has to accompany it, are boardroom issues. This is
where strategy, performance and the development
and communication of long-term value are best
understood, aligned and led. The International
Corporate Governance Network has endorsed this
view, revising its Global Governance Principles
to include the recommendation that boards
should produce an integrated report. Reporting
is fi rmly placed among the responsibilities of
top management.
Adopting IR can substantially help boards in meeting
their governance responsibilities, and in building and
maintaining trust in their organisation. Businesses
increasingly need to be seen to be making a positive »
What is an integrated report?The primary purpose of an integrated report is to explain to providers of fi nancial
capital how an organisation creates value over time. However, an integrated report
benefi ts all stakeholders interested in an organisation’s ability to create value
over time, including employees, customers, suppliers, business partners, local
communities, legislators, regulators and policymakers.
An integrated report aims to provide insight about the resources and relationships
used and affected by an organisation – collectively referred to as ‘the capitals’. It
seeks to explain how the organisation interacts with the external environment and
the capitals to create value over the short, medium and long term. The capitals are
categorised in the international framework as fi nancial, manufactured, intellectual,
human, social and relationship, and natural capital.
Edition 10 | 35
Integrated reporting | Sustainability | Accountancy Futures
contribution to the societies in which they operate. This
has been a repeated theme in debates following the
financial crisis. How boards report their performance and
their organisation’s impact on wider society is therefore
critical. The ACCA study, Understanding investors:
directions for corporate reporting, found that two-thirds
of investors surveyed had lost trust in company reports
since the onset of the global financial crisis.
Separately, research by public relations consultancy
Edelman, which conducts a substantial annual global
survey to develop a Trust Barometer, shows that the
factors seen as building trust in business have changed
since 2008. People now place greater importance on
engagement and integrity-based attributes such as
treating employees well, listening to customers and
exhibiting ethical and transparent practices. These
factors now carry more importance than operational-
based attributes, including financial performance.
Edelman’s research suggests that CEOs can build trust
in themselves and their companies by communicating
clearly and transparently, telling the truth regardless
of how unpopular it is, and engaging regularly with
employees. Clear and transparent communications
can be enabled by IR, and trust in the organisation
therefore supported.
Meeting investor needsEven if individual boards are not yet receiving routine
requests for integrated reports from investors, this
should not be a reason to delay starting the IR journey.
Investors say that they have more confidence in
management when they gain a clear picture of the
business from its reporting.
Research by PwC has shown that investors want the
benefits associated with the broader reporting focus
of IR. Its report, Corporate performance: What do
investors want to know?, found that 87% of investment
professionals surveyed felt that clear linkage between
a company’s strategic goals, risks, key performance
indicators and financial statements was helpful for their
analysis. In addition, 63% believed that the quality of
a company’s reporting – including information about
strategy, risks and other drivers of value – could have a
direct impact on its cost of capital.
However, substantial gaps were perceived between the
importance of these topics and the effectiveness with
which companies typically report on them. ‘Developing
more integrated reports could potentially better meet
the needs of investment professionals while also
encouraging more cohesive decision-making within
companies to support longer-term value creation,’ says
PwC assurance partner Zubair Wadee.
Mounting evidence shows the benefits that boards
can gain from adopting integrated reporting. IIRC
research conducted by corporate communications
consultancy Black Sun among organisations piloting
the framework identified both external and internal
benefits (see box). From an external perspective, many
companies found they had better engagement with
external stakeholders, including investors. Internally,
many companies felt they had better understanding
of how they created value, and that there was more
collaboration and integrated thinking taking place
between different parts of the business. Many
organisations found their decision-making improved
as a result.
A natural pathBoards are increasingly pursuing long-term strategies
that integrate wider sources of value creation. This
should incline them towards an IR approach; it will
become a natural part of boardroom thinking to report
organisational performance in relation to long-term
value creation – a need and intent that is aligned with
the international framework.
Integrated reporting is a sound board response to
the challenges of modern business life. Big data,
the internet and social media mean that we are now
living in an age of transparency. Integrated reporting
is a strategic response to the challenges of operating
successfully within modern society. It is also about
doing the right thing. Increasingly, boards are being
expected to recognise that they have a wider purpose
beyond delivering financial success for shareholders.
Many leading companies understand this and
are embracing IR as a practical means of telling a
compelling story about how they are creating long-
term value and so contributing to the greater good –
not only in pure business terms, but also for society at
large. Others will surely follow. ■
What benefits can boards expect from adopting IR?IIRC research conducted by Black Sun among 66 organisations that have already
started to implement IR found that:
* 91% have seen a positive impact on external engagement with stakeholders,
including investors
* 92% believe that they have increased understanding of value creation
* 79% report improvements in decision-making
* 78% see a current benefit of more collaborative thinking about goals and
targets by the board, executives and strategy departments.
Among organisations that have already issued an integrated report, Black Sun
found that:
* 84% believe that the process has had benefits for their board
* 84% have experienced benefits in collaboration between the board
and executives
* 87% believe that investors better understand their strategy
* 79% believe that financial capital providers have greater confidence in the
long-term viability of their business model.
Source: Realizing the benefits: the impact of integrated reporting, Black Sun, September 2014
CEOs can build trust by communicating clearly and transparently, telling the truth regardless of how unpopular it is
Read: Creating value:
value to the board
at http://tinyurl.com/
iirc-value
Read ACCA’s
Understanding
investors: directions for
corporate reporting at
www.accaglobal.com/
ab/160
Accountancy Futures | Sustainability | Integrated reporting
36 | Edition 10
Gathering evidenceWith integrated reporting gaining traction worldwide, traditional assurance methods face a challenge in adapting to this brave new world
Following the launch of the International Integrated
Reporting Council (IIRC) framework in December
2013, around 100 companies worldwide have
engaged in pilot projects, with some already embarking
on their first report. While this is a positive step, there
are some concerns – recognised by the IIRC – that
traditional assurance methods may fall short of what is
required for this groundbreaking approach.
Integrated reports are characterised by their concise
nature, focus on narrative storytelling alongside hard
figures, and projections of value creation over the
short, medium and long term. Information is reported
in line with the ‘six capitals’, the fundamental elements
that allow an organisation to create value. Companies
typically report on financial and manufactured capitals,
but IR seeks to expand this by including intellectual,
social and relationship, human and natural capitals.
Independent assurance should offer an independent
conclusion that an integrated report represents an
organisation’s strategy, governance, performance and
prospects in accordance with the IIRC’s framework.
However, this widens the scope of traditional
assurance, and concern is growing over whether
existing processes can cope in this brave new world.
‘Integrated reports are the future of reporting. They
provide a great opportunity for companies to be much
clearer about how they’re creating value and planning
for longevity,’ says Dr Helena Barton, partner, Deloitte
Sustainability. ‘Auditors can bring credibility by
examining the robustness of underlying management
processes. We must seek to understand how and to
what extent integrated thinking is being applied
throughout the business.’
The IIRC recently published two papers outlining the
current state of play and inviting feedback. In addition,
last October in Brussels it co-hosted roundtables on the
subject with the Federation of European Accountants.
In its introductory paper, the IIRC acknowledges
that, ‘just as IR is a new approach to reporting, a new
approach to assurance is needed, involving a rethink of
basic tenets such as independence, evidence-gathering
procedures, the subject matter of assurance »
Assurance | Sustainability | Accountancy Futures
Edition 10 | 37
and the content of the assurance report’. The IIRC has
highlighted the fact that integrated reports may contain
information not previously subject to assurance.
As a result, internal systems may not be sufficiently
robust to enable the assurance practitioner to gather
information effectively. Added to this is the complexity
of technical challenges, from ensuring connectivity
and completeness to interpreting narrative and future-
oriented information. The IIRC also acknowledges
that implementing assurance will have an attached
cost. However, the benefits of the process in ensuring
that integrated reports are ‘investment grade’ should
outweigh any additional costs.
Carol Adams, research professor at Monash
Sustainability Institute in Australia and a member of
ACCA’s Global Forum on Sustainability, believes that
IR could represent a real shift in reporting, helping to
build a clearer picture of how businesses create value
in society over time. She adds: ‘In establishing how to
assure for IR, it’s important to understand where users
want to see credibility added. Assurance must evolve to
meet users’ needs.’
David York, ACCA’s head of auditing practice, agrees.
‘In the early years, credibility for integrated reports will be
provided by a wide range of assurers, perhaps including
stakeholder panels,’ he says. ‘Businesses should consult
with their stakeholders on whether the assurance is
meeting their needs. As IR takes off and investors in
multinational companies demand assurance, a common
approach will develop that needs the resources of the
largest accountancy firms to provide it.’
In establishing an IR-ready assurance process,
participants at the Brussels roundtable suggested
that those responsible for a company’s governance
could also make statements to explain why they
believe the report to be credible and trustworthy.
Other suggestions include a combined assurance
model, through which management, internal auditors
and external auditors would act together to establish
credibility, as advocated by the 2009 King Report on
Governance for South Africa (King III).
‘Assurers will need to build an in-depth, robust
knowledge of the reporting organisation, from the top
down,’ says York. ‘In this way, they will be better equipped
to identify any cracks in the paintwork and offer insightful
commentary on the maturity of a reporter’s journey.’
Thinking outside the boxSince assurance for IR is uncharted territory, a whole new
approach is called for, says Adams: ‘Thinking outside the
box will be integral to developing an assurance process
that delivers value to both users and reporters. It’s no
good just looking at what seems technically desirable.
Assurers need to explore the whole context in which
companies are operating, and clarify to what extent an
organisation is working to maximise value creation in
line with its own definition.’
In terms of balancing numerical data with less tangible
narrative elements, auditors are already tackling similar
challenges in relation to the auditing of sustainability
reports, Barton confirms. It will be a matter of drawing
on their experience to assess whether processes are
robust and have been drawn up competently.
‘The technical assurance challenges are not
insurmountable, and the auditing profession must
conquer its fears and develop the capabilities to assure
these reports,’ she says. ‘In many ways, we’ll be doing
what we’ve always done – being professional sceptics,
guiding and challenging the client, looking in murky
corners and making tough judgment calls.’
In order to move forward, a regulatory and legal
environment conducive to assurance quality is
integral to ensure the ongoing quality of IR. From
there, the question of how to create consistency and
develop an assurance standard for IR is one that,
some believe, falls naturally within the remit of the
International Auditing and Assurance Standards
Board (IAASB), following its work on developing
ISAE 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information,
the recognised international standard used by
auditors to ensure the quality of assurance work on
non-financial audits.
‘The IIRC’s work to capture a diverse range of views
on assuring integrated reports is very valuable and
will be a good starting point for our work in this area,’
says Nancy Kamp-Roelands, IAASB’s deputy director.
‘Through our dedicated working group, we will
further explore the developments and continue the
discussion. Our focus will include the market demand
for assurance, the scope of the subject matter on which
‘In many ways auditors will be doing what we’ve always done – being professional sceptics, challenging the client’
Professor Carol Adams‘Significantly, users will want to have a good level of confidence in less quantifiable elements such as management
and governance processes, and whether the extent of social and environmental risks has been captured accurately.
Assurance providers must therefore start with a clean sheet and consider whether the reporter’s actions are really
changing the nature of the business, even providing advice on how their reports could be improved. Stakeholder
panels could also help establish the credibility of IR and determining whether the report responds to their needs.’
Carol Adams is director of Integrated Horizons consultancy and part-time research professor at Monash University
Accountancy Futures | Sustainability | Assurance
38 | Edition 10
assurance is obtained, the reporting criteria used by
preparers and the relevant assurance issues that need
to be addressed at the international level.’
Meanwhile, Kamp-Roelands believes that ISAE 3000,
which was updated in 2013 and addresses both
reasonable and limited assurance, provides guidance for
practitioners. In particular, greenhouse gas information
ISAE 3410, Assurance Engagements on Greenhouse Gas Statements, offers more detailed guidance.
‘Standards play an important role in uniting auditors
under a common set of guidelines,’ Barton says. ‘If
existing assurance standards such as ISAE 3000 cannot
be adapted to suit IR, a new standard will eventually
need to be developed. However, with companies
already working on their first integrated reports,
this shouldn’t stop us from getting on with the job
of assuring them in the meantime.’ For example,
companies listed on the Johannesburg Stock Exchange
have been required to use IR since 2010 on a ‘comply
or explain’ basis, in line with the King III report.
No shortcut‘South African companies have had a good few years
to practice IR, and have also been searching for a
suitable assurance model and process for longer than
most other countries,’ she explains. ‘This is not easy,
and few have yet managed to present full assurance
on the integrated report as a whole. Until there is
further clarity on how integrated assurance should be
conducted, some companies are opting for a combined
assurance approach. This takes time, and requires
greater involvement from boards of directors in both
the monitoring of strategic non-financial information
and report production. There is no shortcut, but
work is underway and we simply have to keep
experimenting until we find the most robust and
suitable criteria against which to provide assurance.’
‘Overall, as reporting frameworks evolve towards
drawing up more forward-looking, strategic analysis, it’s
important to consider to what extent future-oriented
information can be verified by a third party,’ she adds.
‘By joining the conversation at an earlier stage, auditors
will be in a better position to determine whether a
company is making progress on its reporting.’
However, it will be important to keep a balance, confirms
York. ‘If standard-setters begin to develop specific
standards for IR assurance too early, there’s a risk that
reporters will try to produce reports that are assurable
rather than continuing to innovate,’ he says. ‘This is
where credible, non-authoritative guidance could help.’
With the advent of increasing regulation, such as the
European Union’s non-financial reporting directive,
there can be no doubt that reporting robust social and
environmental data will become ever more important.
The EU’s new directive requires an initial 6,000 companies
with over 500 employees to report annually on their
social and environmental policies, risks and impacts.
Member states have two years to transpose the directive
into law, with the first reports set to appear in 2018.
Despite some of the inherent complexities of assuring
IR, there’s also a sense of optimism surrounding the
potential for IR to transform reporting and give reporters
and stakeholders, including investors, greater clarity on
the value companies bring to society.
Tackling the assurance challenge will require ongoing
dialogue between reporters, assurers, investors and
standard-setters, and may need to vary to cater for
different markets. Ultimately, assurance for IR should
be determined by market demand, ACCA and the IIRC
agree. ACCA sees a role for itself in helping to improve
user understanding and prevent ‘expectation gaps’ by
building capacity within the accountancy profession
and developing tailored education programmes.
‘We have some lofty aims for IR assurance, not least
the shift of focus to value creation, streamlining the
corporate reporting model, enhancing stewardship
and accountability for a broad range of capitals and
the more efficient allocation of financial capital,’
says Michael Nugent, the IIRC’s technical director.
‘We recognise that engendering trust in integrated
reports will be integral to achieving these aims,
and therefore it’s encouraging to see so much
innovation and discussion taking place around the
issue of assurance.’ ■
Katharine Earley, journalist
Assurance on IR: an introduction to the
discussion and Assurance on IR: an exploration
of issues are available at http://www.theiirc.org/
resources-2/assurance
Assurance | Sustainability | Accountancy Futures
Edition 10 | 39
From acorn to mighty oak Sustainability reporting has evolved from a need to report on companies’ environmental impacts to a transformation in corporate reporting, says Robert Bruce
Sustainability and accounting always used to be
firmly on different sides of a definite divide.
Sustainability folk busied themselves in one
silo; accountants hammered out the figures in another.
There was no real connection. And neither side ever
deigned much to talk to each other. Then, as the
stories of our childhood might have it, along came a
prince and transformed the world.
This was the founding of what is now the Prince of
Wales Accounting for Sustainability Project (A4S), back
in 2004.
And to confirm the transformation, the annual forum
of the project in December 2014 heard, for example,
the finance director of the UK’s National Grid, Andrew
Bonfield, telling the audience that 15 years ago he, as
a CFO, had been part of ‘a world chasing the bottom
line’, but that world had now gone.
‘We cannot remain immune,’ he said. The skills
and motivations of the accounting community
were changing and had to change more. Corporate
reporting now had to tell the full story and not just that
of the figures.
This new world, said Bonfield, ‘impacts our customers,
the public attitude towards us, and consumer
attitudes’. Even investors now wanted to be in there
for the long term.
It was a far cry from the early days of the project. The
prince has long argued that accountants needed to do
something about what he described at the forum as
‘the constraints of an increasingly crowded planet’. He
gave an interview on the subject for BBC’s Panorama
back in 1989.
ACCA set up an annual environmental reporting award
in 1991. Roger Adams, then ACCA technical director,
recalls sitting under the Natural History Museum’s blue
whale at the award ceremony. But the real change
came when the prince took aside his then principal
private secretary, Sir Michael Peat – of the family that
represent the ‘P’ in Big Four accounting firm KPMG
– and berated him about the ineffective nature of his
profession (see box, page 42).
The prince subsequently spoke at the annual dinner
of the ICAEW; shortly afterwards the then ICAEW
president, Paul Druckman, started to chair the small
group charged with putting the prince’s vision into
words and action.
In a small attic room (which had once been
Prince William’s bedroom) in Clarence House,
the committee got to work. ‘Sir Michael,’ recalls
Druckman, ‘brought it down to very simple language.
To him, company reporting had gone wrong and that
enabled us to go down the route of value creation
rather than just sustainability.’
That was the key to early deliberations and, in 2007,
the first report was published. This was where history
was made in creating a reporting model that brought
together financial, narrative and sustainability reporting
under one roof so that the combined effects of these
information streams could influence strategy and
decision-making directly.
By 2011 what became the International Integrated
Reporting Council (IIRC), with Druckman in command,
spun out of the project and rapidly went international.
‘Without A4S and the intervention of the prince, we
would not be having this conversation now,’ he said. ‘It
made things happen.’
The prince told Druckman that it felt like being a father
whose children were leaving but would always come
back for money. In the words of the project’s executive
chairman, Jessica Fries: ‘In an incredibly short time, »
History was made in creating a model that brought together financial, narrative and sustainability reporting under one roof
Prince of Wales exhorts‘Work to achieve the cultural shift required in
your own organisations to convince your board
and senior leadership of the importance of a truly
sustainable model. Reach out to your suppliers and
customers, and work with them to transform their
approaches alongside your own. Seek to convince
your peers. I understand that if every one of you
here manages to convince just five others to start
accounting for sustainability, and then each one
of them engages another five each year, in five
years’ time we could reach all of the three million
accountants in the world. For obvious reasons five
years is too long. So each of you needs to rush out
and convince 10. And then accountants really will
be helping to save the world!’
Prince of Wales’ advice for CFOs delivered
to his Accounting for Sustainability Forum in
December 2014.
Robert Bruce has been
involved as a journalist
and board and
committee member
of what is now the
Prince’s Accounting
For Sustainability
Project for most of the
past 10 years
Accountancy Futures | Sustainability | A4S project
40 | Edition 10
CFO network: commitment to actLaunched at the 2013 A4S Forum, the Chief Financial Officer Leadership Network
is the first grouping of its kind to focus on the role that CFOs play in integrating
environmental and social issues into financial decision-making. It was brought
together to demonstrate leadership on how companies should respond to
challenges including climate change, a rising and ageing global population, rapid
urbanisation, and increased consumption – all of which are putting unprecedented
pressure on natural resources and the fabric of society.
The network aims to focus on developing and sharing successful strategies so
that these become the ‘norm’ across all businesses. This will include improved
modelling of future risk and uncertainty, as well as engagement with investors and
other stakeholders to increase their understanding of the commercial benefits of
sustainable business models.
Members are committed to act as leaders in this area and to engage the wider
CFO community; to work to achieve tangible outcomes towards more sustainable
business models; to share experiences of ‘successful’ and ‘unsuccessful’ projects
in embedding sustainability within decision-making and accounting; to develop
guidance to improve transparency in decision-making, including ways to embed
sustainability into capital expenditure appraisal and to better model risk and
uncertainty; to contribute to the development of improved methodologies for
the measurement and valuation of natural and social capital in order that they
can be taken into account in decision-making processes; and to improve investor
engagement on the commercial benefits of sustainable business models.
A4S project | Sustainability | Accountancy Futures
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How the Prince of Wales’ project came aboutSir Michael Peat, then principal private secretary to the Prince of Wales, was not in
his bath when he had his ‘eureka’ moment. He was, he says, reclining in his office
when the phone rang. It was the prince, asking for an urgent meeting. He gave
me a look, he recalls, of ‘middling to heightened aggression’. ‘All you accountants
are useless,’ the prince apparently told him, and went on to point out that ‘climate
change was the biggest market failure ever’. That was in 2004. Ten years on, it
has all changed. As the prince recalled in his speech to the 2014 Accounting for
Sustainability Forum, which celebrated a decade of progress and transformation:
‘As a profession with such strong ethics, and with the link between sustainability and
financial success clear even at that time, it was evident that the way accounts were
prepared and decisions taken was a barrier to achieving the right results – right for
the bottom line, right for society and right for the environment which provides our
life support. As I said at the time, we need 21st-century tools to address 21st-century
challenges. With that challenge, my Accounting for Sustainability Project was born.’
Accountancy Futures | Sustainability | A4S project
42 | Edition 10
integrated reporting has gone from a few ideas in that
first report from the project that were tested by a few
companies, and been turned into global momentum,
transforming reporting now and in the future.’
Since then, the work and culture of the A4S project
have also been transformed.
‘If you look at the attendee list for the project’s
annual forum back in 2007, you see it had a lot of
people from the sustainability world,’ says Fries.
‘[With 2014’s] list, the culture has changed. The
finance community now takes a direct interest.
It is people from the finance teams, or heads of
investor relations – not sustainability experts – who
are there.’
The fostering of networks in the CFO community,
and building both understanding and enthusiasm
there has become the driving force for the A4S project.
‘One of A4S’ most powerful roles,’ says Neil Stevenson,
now managing director, global implementation, with
the IIRC, ‘is galvanising business leaders with the idea
that this is an important part of their role. They need
to understand that sustainability is part of their role
because it makes business success.’
That idea was at the heart of the 2014 forum, which
celebrated a decade of progress but focused on
building momentum within the CFO community.
‘Leadership, energising networks and ensuring that the
next generation of accountants are trained with all of
this at the heart of their role’ is the key for Stevenson.
And that was reflected at the forum.
Richard Mayfield, CFO for retail giant Walmart EMEA,
warned businesses that ‘in 10 years your supply chains
may have dried up’. And that sort of attitude deals with
the basics of power and other fundamental resources,
like water, as well as, for example, ensuring that
suppliers remain resilient and reliable.
As one CFO responding to the discussions pointed
out: ‘We ask all our suppliers to impose the living
wage.’ John Rogers, CFO of Sainsbury’s, said: ‘If we
don’t embrace sustainability, we won’t have a business
in 15 years’ time.’
ExpansionDecisions were taken. The CFO leadership network,
which has been nurtured and built by A4S, will be
expanded worldwide. ‘A4S needs to be a catalyst and
a contributor to CFOs and their world,’ says Druckman.
And the momentum is growing. As one seasoned
observer suggested, success would be measured by
having the majority of FTSE 100 companies’ CFOs on
board and contributing. ‘We are a good way down to
that mark,’ says Fries, ‘and it gives us a strong basis on
which to work.’
The world of the CFO and the finance leader is where
the culture is changing.
It makes the link to the board and it ensures reporting
is relevant to investors. The acorns planted in the
discussions back in that regal bedroom are growing
into mighty oaks. ■
A4S project | Sustainability | Accountancy Futures
Edition 10 | 43
Consider the childCompanies need to prove that no child exploitation is taking place within their supply chains. It’s not just a corporate governance issue – it’s a reputational one too
Just over one in 10 children around the world
– some 168 million – are currently working as
child labourers. This has now become a business
issue – one that has the potential to damage
corporate brands where companies are found to have
turned a blind eye to the exploitation of children in
their supply chains. For businesses, therefore, taking
action to protect the rights of children isn’t just
about philanthropy; it is increasingly part of essential
and expected corporate governance.
As highlighted in the recent ACCA report, Accounting
for children: implementing child rights for better
business, companies can have an impact on children’s
rights in numerous ways. Products and advertising can
have positive or negative effects, while exploitation of
children via the internet is a major concern.
The workplace is of particular importance when
considering business impacts on children’s rights,
not least as a result of child labour. UNICEF defines
child labour as ‘work that deprives children of their
childhood, their potential and their dignity, and that
is harmful to physical and mental development’.
Employing children under the legal minimum working
age – or requiring anyone under the age of 18 to
perform hazardous work – is child labour.
The problem is particularly widespread in sub-Saharan
Africa, where 21.4% of the region’s children (59 million)
are estimated to be involved. In Asia and the Pacific,
9.3% of the region’s children (78 million) are child
labourers. Given the increasingly long supply chains
involved in global business today, many Western-
based groups could be unknowingly exposed to the
risk of child labour. Many industries can be affected,
including agriculture and food production, retail,
mining, travel and tourism.
The workplace can have an impact in other ways, too.
Rachel Jackson is
ACCA’s head of
sustainability. She is
the staff expert on
ACCA’s Global Forum
for Sustainability, and
represents ACCA on
external committees
and working groups.
Accountancy Futures | Sustainability | Children’s rights
44 | Edition 10
staff retention and motivation. Many employees are
parents, for example, and appreciate employers who
pay a fair wage and offer good working conditions.
In general, businesses that play their part in
supporting the communities in which they operate
– including protecting the interests of children by
minimising pollution or supporting educational
opportunities – help to create a stable and sustainable
business environment.
If these are potential business benefits of protecting
children’s rights, so there are risks that arise from
ignoring them. These include increased risk exposure,
potential legal action, reputational and brand damage,
human resource challenges and an unstable social and
business environment. In effect, if business and finance
leaders fail to take account of children’s rights, they run
ethical, reputational and legal risks that will affect the
bottom line. »
In Bangladesh, more
than 650,000 children
live on the streets.
They are found
working in almost
all the sectors of the
economy. Many work
48 hours a week and
earn less than US$6
per month.
If parents are paid wages below the level that they
need to support their families, then their children
may be forced to earn an income. Every company
board should therefore be asking and addressing
a number of questions around children’s rights and
the workplace, encompassing child labour, working
conditions, migrant workers and discrimination.
Benefits and risksWhen boards ask such questions and take steps to
protect children’s rights, the benefits can extend
beyond enhanced risk management. Corporate
reputations can be strengthened when businesses are
perceived to behave responsibly, and the social licence
to operate is secured.
Businesses that take their responsibility towards
children seriously may also become more attractive
to prospective employees, and benefit from greater
Adrian Henriques‘Children’s rights are an issue for business – because children are important. And this is an issue for a wider range
of companies than you might think. Any company should ask itself how it might affect children’s rights, and what
those impacts on children are.
‘The workplace can have an impact in a range of ways – particularly in terms of levels of pay. One of the causes
of child labour is the low rate of wages paid to their parents. When parents are paid a poverty rate, they have no
choice but to get their children to work. So the default position for all companies should be that they probably do
have a significant impact on children. It is an issue they need to address.
‘This might not be an issue that comes across the desks of accountants every day. But what is the remit of the
accountancy profession? It’s not only to look after the money, but also to look after the public interest. Accountants
have a mandate to look at their business more broadly and consider children’s rights.
‘When children’s rights are not respected, that could create a risk for the business. Considering the business impact
on children’s rights ought to be part of any due diligence review of risk – which is a familiar activity to accountants.
‘Finally, we are seeing an increasing number of regulatory requirements around non-financial reporting, and these
include the reporting of issues related to human rights. So this is an issue that is only going to figure more strongly
in the lives of accountants in future.’
ACCA Global Sustainability Forum member
Samah Abbasi‘Children matter to business – as consumers, family members of employees, young workers, future employees and
business leaders. When businesses think of children’s rights they almost always refer to the risk of child labour in the
supply chain. But almost every business activity leaves a footprint of some kind on children’s lives.
‘More companies are beginning to recognise that protecting children’s rights is good for business as it leads to
better risk management, enhanced reputation and the social licence to operate, a motivated workforce and a
stable and sustainable business environment while also delivering long-term shareholder value.
‘The UN Guiding Principles on Business and Human Rights have changed the expectation of business. The growing
demand for corporate reporting on human rights from consumers, shareholders, investors and governments
increases the pressure on businesses to undertake due diligence. This process regularly identifies, prevents, mitigates
and accounts for how impacts on human rights, including those of children, are being addressed. It firmly moves
businesses away from a reactive approach to human rights and towards one whereby it is their responsibility to seek
out and address any actual or potential negative impact their activities may have on individuals and communities.
‘For businesses new to this concept, the process may seem daunting. That’s why UNICEF developed the Children’s
Rights and Business Principles, which guide companies on the actions they can take to respect and support children’s
rights. It has also created tools that help businesses integrate children’s rights into due diligence processes.
There’s much more to this approach than businesses just avoiding harm. The private sector can be an incredible
force for good in children’s lives and companies should consider how they can leverage their resources, skills and
innovative approaches to ensure that core business achieves transformational change for children.’
Policy and research officer on child rights and business, UNICEF
Children’s rights | Sustainability | Accountancy Futures
Edition 10 | 45
If businesses need any more persuasion to act, then
shareholders and governments may provide it. There
are signs that shareholder groups are becoming more
interested in the issue of children’s rights – for example,
by questioning whether companies’ advertising and
privacy policies adequately safeguard children. Some
investors are beginning to develop procedures for
integrating children’s rights into their investment
decision-making processes. Governments, too, have
been paying attention to the way that companies impact
on human rights, including children’s rights. Greater
transparency is also being expected, with UK quoted
companies now required to disclose information on
human rights that could affect the business.
Time to actOnce businesses acknowledge their responsibilities
in relation to children and their rights, the next
challenge is to act on those responsibilities across all
their operations. The Children’s Rights and Business
Principles, developed by Save the Children, UNICEF and
the UN Global Compact, provide an invaluable launch
pad. The principles build on previous international
conventions, and set out actions that businesses can
take to fulfil their corporate responsibility to respect
and support children’s rights in the widest sense: in the
workplace, marketplace and community.
Organisations such as UNICEF have also developed
a number of business toolkits. These are designed
to help businesses develop policies and codes of
conduct in relation to children’s rights, assess their
risks associated with children’s rights, take action
to address and mitigate those risks, and report on
their actions.
Dr Faiza Shaheen, head of inequality and sustainable
Boardroom watch listQuestions the board should ask:
* How do we know that we are not employing children under the legal minimum
working age?
* How do we know that our business partners, via the supply chain, are not
employing children illegitimately?
* How do we know we are not providing poor working conditions and pay, making
it impossible for parents to provide supportive environments for their children?
* How do we know we are not employing migrant workers who leave their children
when they move to new cities or countries in search of employment?
* How do we know we are not discriminating against certain groups of children,
such as those with disabilities, girls or ethnic minorities?
development at Save the Children, has no doubt that
such efforts by business are essential. ‘It is becoming
increasingly clear that respecting children’s rights is
not desirable but necessary if businesses are to have
a strong foundation,’ she says. ‘To fully recognise
children’s rights, companies must embark on thorough
investigations of their supply chains, core business and
sales activities.’
Childhood is a time of physical, mental and emotional
development – which can all be affected by the actions
of business. Yet children often lack a public voice: they
cannot vote or form trade unions; they cannot influence
companies through buying stocks and shares, and
attending shareholder meetings. Businesses thus have
an inescapable responsibility to consider their impacts
on children’s rights carefully. ■
You can download ACCA’s Accounting for children:
implementing child rights for better business report at
www.accaglobal.com/ab137
Syrian child refugees
attend a school funded
by the European Union
at Al Zaatri refugee
camp, in Mafraq,
Jordan, near the Syrian
border.
Accountancy Futures | Sustainability | Children’s rights
46 | Edition 10
Looking beyond profitBusinesses are becoming increasingly aware of corporate social responsibility, leading to a change in thinking about accounting, says Song Xianzhong
Since the Industrial Revolution, environmental
problems and other social issues have become
increasingly prominent. The public is becoming
aware of the side-effects of the traditional concept
of pure economic growth and the idea of sustainable
development is now commonly accepted all over
the world. Sustainable development includes three
areas: ecological, economic and social. It requires any
individual or group within the system to shoulder its
responsibility. Enterprises should show great concern
not only about the realisation of their economic
interests, but also about social and public benefits
of what they do.
An enterprise’s sustainable development is linked
to global sustainable development. There is no
conflict between an enterprise’s value targets and
its environmental objectives. One of the important
ways for an enterprise to develop its sustainable
development capacity is to pay overall attention to the
environment, the society and the interests of its different
stakeholders. By fulfilling its social responsibility, the
enterprise will meet the needs of stakeholders, and
establish and carry out its sustainable development
strategies. When the enterprise spends resources on
engaging in social responsibility activities, this will have
an impact on its stakeholders, changing the contract
benefits, and thus affecting their overall evaluation of
the enterprise. »
Song Xianzhong
is vice-president,
professor and doctoral
tutor of accounting at
Jinan University. He
is also vice-chairman
of the Chinese
Institute of Business
Administration, and
a member of the
Chinese Accounting
Association Advisory
Expert Group of the
Ministry of Finance on
accounting standards
and the National
Master Professional
Accounting Education
Steering Committee.
A woman wearing a
mask to protect her
from smog in Beijing,
where air pollution is a
huge problem.
Sustainable development | Corporate reporting | Accountancy Futures
Edition 10 | 47
Since the public is paying more and more attention
to corporate social responsibility, CSR reports
have become a new way for enterprises to release
information. They also enable the public to measure
and supervise an enterprise’s CSR performance. The
emergence of social responsibility accounting and
social responsibility reports has had a huge impact.
First, it has changed the thinking patterns of traditional
accounting, which tends to adopt a closed and one-
dimensional thinking pattern. That is, it regards a
company as an independent system and is only
concerned with the enterprise’s financial situations
and its operating results. The enterprise is simply a
subordinate unit of the economic system. However,
social responsibility accounting adopts an open
thinking pattern, placing the enterprise into the whole
society, taking it as not only a subordinate unit of
the economic system, but also a subordinate unit of
the political, environmental and social system. This
transformation has triggered a revolution in the field of
accounting academic ideology.
Social enterpriseSecond, CSR has helped to coordinate the relationship
between the enterprise and social environment. The
theoretical basis of traditional accounting is to treat
the enterprise as a pure economic organisation, or a
profit organisation, rather than a social one. Thus the
aim and mission of an enterprise is to make the biggest
profits. Profit is considered to be an enterprise’s only
contribution to the society. Under this view, when
making strategies, managers tend to focus on ways to
maximise profits and ignore social responsibility.
From the CSR point of view, however, the enterprise is
not only an economic organisation, but more
importantly, a social one. It is a basic cell of society.
Thus the aim and mission of the enterprise should
also place emphasis on social responsibility and legal
requirements, committing itself to improving society.
An accountant should properly recognise, measure
‘If accountants only provide information on an enterprise’s profits, they exclude the interests of most people’
and report information on how the enterprise achieves
this aim and mission. If they only provide information
on the enterprise’s profit objective, accountants
exclude the interests of most people in society, which
may induce the enterprise to ignore social benefits and
go against the direction of social development. Social
responsibility accounting can use its own mechanism
to report social responsibility performance, reflect
social benefits and operating costs, and hence
coordinate the relationship between the accounting
unit and society.
In the 21st century, China’s State-owned Assets
Supervision and Administration Commission (SASAC)
and the Stock Exchange have respectively required
enterprises to disclose their social responsibility
information. External environmental pressure and
greater public awareness of social impacts have
urged enterprises to consciously choose the road
of sustainable development. In 2013, nearly 800
enterprises in China published CSR reports. Such
reports will develop in a more comprehensive way
in the future through an organic combination of
financial and non-financial indicators as well as
an organic unity of economic, environmental and
social performance. ■
Papier mache pandas
in Hong Kong as part
of a world tour to
highlight the fact that
there are only 1,600
living pandas left in
the wild.
Demonstrators
wearing masks of
world leaders at the
recent UN Climate
Change Conference in
Lima, Peru.
Accountancy Futures | Corporate reporting | Sustainable development
48 | Edition 10
P rofessor Michael Mainelli FCCA, along with his
colleague, Ian Harris, wrote an award-winning
book based on his 2005 to 2009 Gresham College
lectures. The Price of Fish: A New Approach to Wicked
Economics and Better Decisions explored economics,
systems theory, decision-making and evolution as four
intertwined streams people needed to understand
in order to make big decisions about commerce. In
the book, they put forward an intriguing idea, that
accountants should recognise that accountancy is a
measurement science. Such recognition would mean
that accountants should move from discrete numbers
to ranges and confidence intervals. They encouraged
all business people to use ranges where appropriate,
suggesting the mnemonic BET% – Bottom, Expected,
Top, % likelihood in range. This suggestion grew
into a structured proposal: Confidence accounting: a
proposal by Ian Harris, Michael Mainelli and Jan-Peter
Onstwedder of Z/Yen Group published by ACCA, Long
Finance and the Chartered Institute for Securities &
Investment (CISI) in July 2012.
Luminaries such as Sir David Tweedie, former head of the
International Accounting Standards Board, and Andy
Haldane, chief economist at the Bank of England, »
How much?Michael Mainelli and Ian Harris explain why they believe that accountancy should be seen as a measurement science
Edition 10 | 49
Confidence accounting | Audit | Accountancy Futures
have come out in support. Confidence accounting
suggests the use of distributions, rather than discrete
values, where appropriate in auditing and accounting.
The authors claim that in a world of confidence
accounting, the end results of audits would be
presentations of distributions for major entries in the
profit & loss, balance sheet and cashflow statements.
The proposed benefits of confidence accounting
include a fairer representation of financial results,
reduced footnotes, more measurable audit quality and
a mitigation of mark-to-market perturbations. So how
did this begin? The following is an extract from The
Price of Fish:
Numbers, numbers...take one fundamental and universal area of commercial
measurement, financial accounts. Accounting measures
are presented as specific numbers, not ranges, despite
their inherent uncertainties.
When Global Megacorp states its turnover as
$71,393,224,326.73, you know this number is a fiction.
This is typically an estimate of the mean of turnover,
but you don’t actually have the distribution of values
to know more. Accountants grapple with significant
uncertainties when computing turnover. Auditors
have materiality issues with the consequences of
that uncertainty. Realising the obvious absurdity and
statistical improbability of purporting to know a huge
corporation’s turnover to the penny, accountants laugh
and happily round things off, but still neglect to give us
any idea of the range of the distribution. One number
alone is sought to describe complex distributions,
typically the mean.
The three frequency charts (shown below) show the
same mean turnover, $71,393,224,326.73 under today’s
deterministic ‘one number’ paradigm. However,
that mean turnover has a very different meaning
in each case. Scenario A is the least of anyone’s
problems. The differences in values across the
range $71,393,224,325.75 to $71,393,224,328.50 are
infinitesimal, each of the potential individual differences
making up that range amounting to pennies. Scenario
B has an alarmingly wide range ($50bn to $90bn),
normally distributed around the same mean turnover
figure. In fact, there is a 90% chance that the turnover
will fall between $61bn and $84bn, which doesn’t
exactly increase confidence in the mean value. In
Scenario C, the distribution is heavily skewed, with the
most likely outcomes being significantly lower turnover
than the mean outcome (median turnover is $50bn).
There are possible outcomes at significantly higher
turnover than the mean. All that we can say with 90%
likelihood is that turnover falls within the range $0bn to
$172bn. Much like Scenario B, Scenario C is a dream
for the accountant who is being asked ‘just give me the
figure’, but a nightmare for the auditor trying to work
out whether that figure is justifiable.
As in all accounting statements, too many measurable
items that end up in a profit figure are ranges, from
the estimate of gains in freehold land value to the
likely profit on individual contracts to the value of
insurances. To ensure total clarity, we litter accounts
with explanatory footnotes to the point that only highly
sophisticated financial analysts can understand them.
When the accounts are presented, these financial
analysts tear them apart in order to try to rebuild
estimates based on ranges.
Audit is all about measurement, yet in practice
financial audit is virtually bereft of all the usual
scientific terminology one finds around measurement:
Professor Michael
Mainelli FCCA is
co-founder of City of
London think-tank
Z/Yen and a member
of ACCA’s Global
Forum for Governance,
Risk and Performance.
Ian Harris is co-founder
of Z/Yen, which has
created award-winning
statistical systems.
‘The overreliance on single numbers ensures that auditors get off very, very lightly, practically skipping away’
Accountancy Futures | Audit | Confidence accounting
50 | Edition 10
confi dence intervals, range estimates, sampling
techniques, probability distributions. In short, we
believe that fi nancial audits need to be more scientifi c.
If auditors do practice risk-based auditing, then why
can’t we see the odds they face? This simple question
raises a number of concerns about the approach to
fi nancial statements in auditing by today’s accountants.
Balancing the odds might well give a truer and fairer
picture of accounting than traditional ways of balancing
the books. We call this probabilistic or confi dence
accounting.
Much like the Soviet era, there is a surfeit of old jokes in
which an accountant delivers the punch line: ‘What do
you want the number to be?’ The uncomfortable truth
is that accountants have quite a bit of infl uence over
the fi nal number. Indeed, accountants and auditors
throw away tremendous amounts of information, as
they principally use fi xed numbers in almost all their
calculations. The fi nancial community knows that the
annual report is subject to tremendous uncertainty, but
will fi nd little evidence therein. The key community for
the annual report, investors, spend more of their time
on reconstruction of the underlying ranges or guessing
other investors’ sentiments than worrying about the »
71,393,224,325.75
Scenario A: the sure thing
71,393,224,328.50
Freq
uenc
y
50,000,000,000
Scenario B: the wide range
90,000,000,000
Freq
uenc
y
0
Scenario C: skew you, auditor
275,000,000,000
Freq
uenc
y
The three frequency
charts on the right
show the same
mean turnover under
today’s ‘one number’
approach, but the
mean turnover has a
very different meaning
in each case.
Confi dence accounting | Audit | Accountancy Futures
Edition 10 | 51
See also the paper by Michael Mainelli
and co-published by ACCA, the Chartered
Institute for Securities & Investment and Long
Finance, Confi dence accounting: a proposal,
at www.accaglobal.com/ab96.
annual report’s singular guess at what reality might be.
Surely no theory of measurement has wasted so much
effort ignoring the real world.
Intriguingly, the overreliance on single numbers
ensures that auditors get off very, very lightly, practically
skipping away. How do you hold an auditor to account?
If you can prove that the profi t fi gure is incorrect by $1,
is that enough to claim that the accounts are invalid?
Certainly not. $100? Well, when? In fact, auditors have
cleverly avoided giving us anything substantive to go
on, such as ‘The auditors are 95% certain that profi ts
were between $X and $Y.’ We believe that the auditing
profession would benefi t from such disciplines and that
audit failures (of which there are far too many) would
then become that much rarer. We advocate forcing
auditors to lay these ranges out clearly and to provide
indemnities to support their ranged opinions.
The term we use to describe this approach, confi dence
accounting, has an intriguing double meaning. It uses
confi dence intervals rather than absolute numbers,
plus we believe that the approach should cause
people to have more confi dence in accounts. For
example, once profi ts are expressed as ranges after
allowing for doubt, users of those accounts should
have more confi dence in the profi ts thus recognised.
We also believe that the approach introduces useful
feedback and control loops into the regulatory
system. Regulators could, in changing circumstances,
change the confi dence limits to be applied to certain
accounting factors. For example, following a banking
crisis, confi dence intervals used by banking regulators
to determine reserve levels could be tightened or
loosened in order to restore market confi dence and/
or vary liquidity.
We use the acronym BET% to describe this approach:
Bottom, Expected, Top, and % likelihood. We have
talked about overreliance on single numbers in the
context of fi nancial accounting measures, but the
principle of using ranges instead of discrete numbers
applies to all manner of measures. In fact, we advocate
pinning down all commercial measurers to their
estimates using BET%. ■
This extract in this
article is from The
Price of Fish: A New
Approach to Wicked
Economics and Better
Decisions (Nicholas
Brealey Publishing).
Accountancy Futures | Audit | Confi dence accounting
52 | Edition 10
Binning the boilerplateWith new-style audit reporting due to begin next year, auditors are bracing themselves for the accompanying challenges. Audit will never be the same again
Audit reporting is changing forever. The brief,
binary, clean or qualified boilerplate auditor
report known to generations of auditors and
readers of accounts is being consigned to history.
Extended auditor reporting, which is about to be
introduced across the globe, can trace its roots back to
the financial crisis.
The International Auditing and Assurance Standards
Board (IAASB) has published its finished work on
extended auditor reporting, with implementation
slated for year-ends December 2016. The US is working
on its own standard but the two are closely aligned,
with similar concepts and much discussion between
the standard-setters.
Sue Almond, ACCA’s external affairs director, says
that extended reporting is ‘one of the most exciting
developments in audit reporting in my whole
professional career. There have been no significant
changes in auditor reporting – certainly on a global
basis – in 30 or 40 years. This is the standard-setter
trying to be responsive and make a major step forward.’
Providing colourAn extended audit report is all about responding to the
demands for more information. The idea is to enhance
the information value of the binary nature of the pass/
fail audit report and to provide users of accounts with
colour around what happened in the audit and where
some of the key audit judgments were made.
Brendan Murtagh FCCA, former ACCA president and
founding partner at LHM Casey McGrath in Dublin,
joined the IAASB in 2012. He is one of 18 board
members responsible for developing and revising the
auditor reporting standards over the past three years.
‘Following the financial crisis, it became clear the level of
information in the audit report needed to be improved
and there needed to be greater transparency,’ he says.
‘As we worked through the project, what became
clearer was that it was not an expectation gap but an
information gap that we needed to bridge.’
The principal change facing auditors is reporting on key
audit matters: those issues that have taken up the time
and effort during the audit. ‘It is a judgment piece »
In the UK, the Financial
Reporting Council
decided to move
ahead and take a lead
before the IAASB had
completed its work.
The result is a glimpse
into the future of
audit reports. Notable
examples include
KPMG’s report on
Rolls-Royce (above)
– which runs to five
pages – which detailed
the risks that had the
greatest effect on the
audit, the procedures
it undertook and
its findings.
Extended reporting | Audit | Accountancy Futures
Edition 10 | 53
for the auditor who is required to discuss the issues
with those charged with governance and then disclose
in the audit report why it is of significance, how the
auditor has responded and how sufficient comfort has
been achieved to be able to give the audit opinion,’
Murtagh says. So while the audit opinion (clean or
qualified) will be at the top of the report, the detailed
context for that opinion will be presented – and that
represents a fundamental change. The result, Murtagh
says, ‘is intended to put information in the hands of
the users so they can make a more informed decision’.
‘Game changer’Diana Hillier, PwC partner for international standards,
says: ‘These new standards give us an opportunity to
deliver innovation and insight in a way not previously
permitted. We can demonstrate publicly the relevance
of the audit, rebuild trust in auditors and, crucially,
underpin confidence in reported financial information.
This a game changer for all stakeholders.‘
And game changers are never universally welcome.
There is bound to be nervousness, with questions raised
over issues such as liability. But once an audit is subject
to a legal challenge, anything becomes discoverable.
Almond points out: ‘There is nothing in the extended
audit report which shouldn’t be in the audit file anyway.’
Indeed, the extended auditor report is an opportunity
for auditors to show off their stuff. ‘Audit partners will
be wary of significant change but the other side is it
opens up opportunities,’ Almond says. ‘The debate
about competition and concentration underlines there
is very little that allows firms to differentiate themselves.
There is an opportunity for firms to look at the way they
report in the audit report – the final product – and the
quality insights they give. There is an opportunity for
more to be in the public domain which reflects on the
quality of what they do.’
Robert Stenhouse FCCA, chair of the ACCA Global
Forum for Audit and Assurance and director of UK
national accounting and audit at Deloitte, agrees,
describing himself as a huge fan of extended auditor
reporting. ‘I encourage ACCA auditors around the
world to grasp this opportunity and use their audit
reports to showcase what fantastic work they do,’ he
says. Through the reports, auditors will be seen to
respond to challenges in a way that should resonate
with stakeholders, Stenhouse adds. ‘We need more
transparency about what auditors do and how they
do it. We should no longer live with the pretence that
everyone knows what a bland audit report means.’
Such a major step forward will not be without its
problems in practice. The IAASB has tried to limit the
degree of specificity in the standard to allow practice
to develop and evolve. Almond says: ‘Only when you
come to write some of these things do you uncover
some of the practical challenges from both the
company perspective and the auditor perspective.’
Too bright a light?But is there a danger that the light shining could be
too bright in some circumstances? When the economy
is benign an extended audit report may not worry
management but when times get tough then Stenhouse
warns that ‘these audit reports will become trickier’. If
the entity does not value external audit, then they won’t
value an extended audit report. ‘However, the best
boards will know that there is comfort from, and value
in, the fact that stakeholders and investors get an audit
report which shows that auditors have looked at the
right thing, know their business, and are engaging and
challenging the entity appropriately,’ Stenhouse adds.
There may well be some questions raised over specific,
heavily regulated sectors. ‘For systemically important
sectors such as banking, the regulators are already
alive to the impact on the market if auditors were to
say something that could cause a run on a bank or
provoke some sort of economic contagion,’ Stenhouse
says. ‘As extended reporting spreads around the world,
there needs to be appropriate recognition that this is a
powerful communication mechanism.’
So far, feedback from a pilot suggested that auditors
were confident that they would be able to identify the
right key matters. ‘We see implementation bringing both
opportunities and challenges,’ Hillier says. ‘The new
reports will be as new to management, audit committees
and users as they are to auditors; we will all be on a
learning curve. The aim is audit reports that are insightful
and tailored to the company. It would be a setback if this
just becomes a boilerplate exercise. That said, there will
be a certain degree of similarity when auditors address
similar facts, circumstances and outcomes, both for the
same company over time and across industries. But that,
in and of itself, provides insight.’
The point of extended auditor reporting is that it
is set to allow auditors to enhance audit quality,
improve transparency and alter their engagement with
stakeholders. Audit, never mind the audit report, will
never be the same again. ■
Peter Williams, accountant and journalist
‘The regulators are already alive to the impact on the market if auditors were to say something that could cause a run on a bank or provoke some sort of economic contagion’
Accountancy Futures | Audit | Extended reporting
54 | Edition 10
Core truths IFAC president Olivia Kirtley reveals her take on the accountancy profession and its challenges globally, and how her organisation is leading the way
IFAC | Public value | Accountancy Futures
Edition 10 | 55
Olivia Kirtley, the president of the International
Federation of Accountants (IFAC), believes
that, to develop and prosper, every country
needs the core skills of professional accountants.
Take the war-torn central African state of Rwanda.
According to a World Bank estimate, in 2008 the
country possessed just 45 qualified accountants and no
professional organisation to support them. Such scarcity
makes it nigh-on impossible to access funding from
donors and others to finance national reconstruction.
‘Those core accountancy skills are needed to build
transparency and accountability for strong, sustainable
government, companies and societies in general,’
says Kirtley. ‘Accountants have ethical standards and
competencies, they ask the right questions and they
know how to put the information together.’
Thanks to IFAC’s work, Rwanda now has 285 qualified
accountants, supported by a growing national
accountancy body. Kirtley describes it as a great
capacity-building success story. She hopes the work will
continue, with IFAC’s Memorandum of Understanding
to Strengthen Accountancy and Improve Collaboration
(Mosaic) website helping improve cooperation and
collaboration between IFAC, international donors and
the development community.
Building relationshipsCooperation and collaboration are the touchstones
of Kirtley’s own career success. Sharing and building
professional networks outside the formal workplace
has helped take her to the presidency of IFAC – a two-
year position. And she acknowledges ACCA as ‘one of
the largest and most important partners in IFAC and
a huge supporter’. In her speech to the International
Assembly in November 2014 she noted ACCA’s large
student membership and said ACCA often identified
talent in locations around the world where IFAC itself
has trouble finding representation. Looking ahead,
she is seeking to build stronger understanding and
relationships between the accountancy profession and
interest groups such as legislators, regulators, investors
and the business community.
Describing how she entered the profession 40 years
ago, ‘a simple girl from a farming community’ in the
US, she was looking for a job to fund her husband
through medical school. She got her break in what was
then overwhelmingly a man’s profession when a senior
partner hired her on the spot – without consulting his
partners – after she drove 100 miles for an interview
two days before her wedding. ‘It only takes one person
to make a difference,’ she says, and believes that we all
have to show ourselves worthy of the trust that others
place in us.
Global representationOne of IFAC’s key tasks is to represent the profession
globally. Kirtley says: ‘We do advocate on behalf of
the profession where we see it is serving the public
interest; we have to tell the public what we do and how
we make a difference, and why we are important to
society in general.’ She says the profession does not
always appreciate the views of regulators because it is
too busy defending its position and that of its clients,
but even-handedly points out: ‘Regulators don’t listen
because they think they already have the solution
or at least a political soundbite. Through building
relationships you build trust and, when it comes to the
next inflection point or crisis, there is a greater chance
both sides will reach out and talk.’
While acknowledging the importance of improving
standards, she is clear that the process should be
evidence-based. One of the problems that she
perceives is regulatory fragmentation at a regional and
global level. She points to the European Union setting
out a broad framework of mandatory audit firm rotation
but then leaving individual countries to implement it,
with the result that each EU country ends up having its
own rules. Kirtley adds that she has heard of whole audit
teams moving from one firm to another to comply with
the rules on rotation of firms. ‘It sounds good in theory
until you start working through the detail,’ she says.
She reiterates that IFAC is a member body whose
purpose is to serve its members. Power comes, she
says, from leveraging what each member body does
well and the work they have already done. ‘There is a
tendency to be insular. We are all doing great work but
we’re not aware of what others are doing. IFAC is there
to spearhead initiatives where the member bodies
think that we can be uniquely effective in terms of
reach or relationship.’
Olivia KirtleyOlivia Kirtley brings a breadth of experience to the role of IFAC president. The only
gap in the CV is that she hasn’t been a regulator, although she has met plenty in
her time. A business consultant, she is also a non-executive director of three public
companies: US Bancorp, Papa John’s International and Rescare.
She was previously vice president of finance and CFO of a global manufacturer
and a joint venture of Emerson Electric and Robert Bosch. She spent the first
decade of her career with Ernst & Ernst/Ernst & Whinney (now EY) in both
audit and tax.
What’s on the mind of global accountants?Integrated thinking and fighting fraud were top of the agenda at the ‘Olympics
of the accountancy profession’ in Rome in November 2014. Watch our World
Congress video to hear the views of leading accountants from around the world on
the big issues and challenges facing the profession.
Visit www.accaglobal.com/ab139
‘We have to tell the public what we do and how we make a difference, and why we are important to society in general’
Accountancy Futures | Public value | IFAC
56 | Edition 10
to be sceptical and not too trusting; to keep digging
until you get satisfactory answers; to avoid group-think
and not be afraid to ask questions even if no one else
seems to think they are worth asking. ‘Our duty as
management and auditors is not to take things at face
value,’ she says.
With that sort of outlook – and her confession that she
loves finding solutions to challenging problems – IFAC
looks set to take an ever greater role in the global
leadership of the profession. ■
Peter Williams, accountant and journalist
See our interview with Olivia Kirtley at the
World Congress of Accountants at
www.accaglobal.com/ab140
African accountants in the spotlightIFAC president Olivia Kirtley championed the capacity-building work of the global accountancy profession,
particularly for the benefit of emerging economies and their populations, when speaking at the World Congress of
Accountants in Rome in November 2014.
She told delegates of the Memorandum of Understanding to Strengthen Accountancy and Improve Collaboration
(Mosaic) that IFAC has signed with key groups in the international donor community.
‘Out of this agreement we have launched the Mosaic website, which will provide a “marketplace” to match the
developmental needs identified by national professional accountancy organisations with the funding interests of
potential donors,’ she said.
IFAC also underlined the importance of building capacity in accountancy skills by awarding this Congress’s Sempier
Award – recognising outstanding contributions to the accountancy profession – to ACCA member Ndung’u
Gathinji FCCA of Kenya.
‘Gathinji’s pioneering efforts to launch the Pan African Federation of Accountants, Institute of Certified Public
Accountants of Kenya, and the former Eastern, Central and Southern African Federation of Accountants have
ensured that the value of the profession has been understood and embraced in Africa in a way that would have
been otherwise impossible,’ she said.
In a compelling acceptance speech, Gathinji charted his career from boyhood in colonial Kenya, his training in
the UK and rapid return to Africa, and the subsequent decades spent developing both his own career and the
accountancy profession, including the IFAC committees he served on that worked to increase focus on the need to
support the profession in emerging economies. He thanked many, including ACCA, naming chief executive Helen
Brand for the support he had received.
‘Africa is on the rise. If you need convincing, just look around the hall,’ he said.
The three PsAs a former CFO Kirtley identifies three challenges for
today’s finance heads: people, process and pace of
change. In terms of people, she cites internal audit –
does it have the right people with the right skills for
areas such as cybersecurity?
Likewise with processes, companies must get to grips
with issues such as big data. ‘As the finance function
you can’t keep producing the same reports and be
effective; you have got to go out and ask people what
they need to do the job better.’
And then there is the pace of change. Kirtley asks
whether accountants are moving fast enough to provide
the reporting information that investors really want.
She says the key lessons of the past crisis are not to allow
controls imposed for a good reason to be overridden;
Ndung’u Gathinji
receives IFAC’s
Sempier Award at the
World Congress of
Accountants in Rome.
IFAC | Public value | Accountancy Futures
Edition 10 | 57
Cracking the skills mineOne of the key challenges facing the finance sector in Botswana is the lack of qualified accountancy professionals, says ODC’s CFO Susanne Swaniker-Tettey
Accountancy Futures | Global economy | Africa
58 | Edition 10
While Africa can be a tough place to work,
it offers key opportunities for skilled
financial professionals who can develop
an understanding of how African business operates.
Susanne Swaniker-Tettey FCCA, chief financial officer
at Okavango Diamond Company (ODC), is one such
specialist. ODC is a Botswana-based rough diamond
distribution company established in 2012 and wholly
owned by the government – the diamond sector is
critical for the national economy.
Swaniker-Tettey, who has more than a decade of
experience working in Africa, says: ‘Working in the
finance sector in Southern Africa, especially Botswana,
can be very challenging.’ Her daily routine is based on
the corporate reporting, audit and business planning
regime typical in sub-Saharan Africa, where finance
personnel often take an active management role and
may act as thinktanks for other departments.
Skills driveOne of the key challenges facing the sector in Botswana
is the lack of qualified accountancy professionals.
‘Getting the right skills with depth and experience is
still relatively difficult, because Botswana historically
has not had its own accounting qualification.’
Part of the problem, she says, is that while many local
colleges are training accountants, they are doing so
with full-time accounting programmes. ‘So most of
the trainees, when they finish, have qualified on paper,
but they do not have the depth of experience of
someone who has gone through a formal [work-based]
training,’ she says. Reforms are in the pipeline, notably
those authorised by the Botswana Accountants Act of
2010, which requires qualified accountants to have a
minimum of three years’ hands-on training.
Swaniker-Tettey also fears that financial professionals
in Botswana are inadequately trained to handle money
laundering, and ignorant of the risks. ‘Most accountants
believe that money laundering is for the banks and
banks should deal with it,’ she says. ‘Not enough is
being done to educate the people who are supposed
to be the custodians of companies’ finances. Money
is moving under their nose and some of them are not
cognisant of things happening in their companies that
could be deemed money laundering.’
She urges companies and industry associations to
partner with the country’s recently formed Financial
Susanne Swaniker-Tettey FCCASusanne Swaniker-Tettey began her career as an audit trainee with Deloitte & Touche
in Ghana. From there she moved to Deloitte & Touche Gaborone in Botswana,
where she gained her ACCA Qualification and became a senior audit manager. In
1999, she spent five months in the US on secondment as an audit trainee at Deloitte
& Touche. In 2004 she joined mining and smelting company BCL (Selebi Phikwe)
as finance manager, after which she moved to the Tati Nickel Mining Company
(Botswana) as commercial manager. In 2008 she gained an MBA at Oxford Brookes
University in the UK, after which she joined Boteti Mining (Botswana) as CFO,
before moving to Okavango Diamond Company in January 2013.
‘Doing business in Africa is no more difficult than in any other part of the world. Yet people think Africa is risky’
Intelligence Agency (FIA) to raise awareness about
anti-money laundering policies and controls. This is
a particular concern in the diamond industry, where
Swaniker-Tettey fears diamond cash purchases could
offer a way to move dirty money in and out of the
country. ODC, for instance, insists on knowing the
identity of all buyers of diamonds in any deal. ‘If we allow
the industry to be tainted, the negative consequences
not only affect ODC but the country as well.’
Diverse continentThis is especially important internationally, given
Africa’s poor reputation for business probity – one that
Swaniker-Tettey believes is not necessarily deserved.
‘Doing business in Africa is no more difficult than in
any other part of the world,’ she says. ‘Yet people think
Africa is risky. Africa is an incredibly diverse continent.
If you understand Africa, I do not think working here is
an impediment to doing business.’
Indeed, regional economic integration within Africa,
increasing regional tourism and a booming mobile
money industry are all helping open up the continent to
business, notably in East Africa. However, she is quick
to point out that the Southern African Development
Community (SADC) region is lagging behind West
and East Africa. ‘SADC has made progress around
customs, but in trade there is a lot that needs to be
done.’ She adds that the region needs a common
currency and an end to the cumbersome, multiple
visa applications that are required for those travelling
within the region.
At home, she believes the Botswana government
should promote IT, data integration and online
services. She acknowledges there has been progress
on the latter – for instance the country’s laws are
now available online – but says: ‘There is too much
paperwork in Botswana. We need to have the
processes streamlined.’
Meanwhile, Swaniker-Tettey believes more women
can and should rise professionally in Africa, as she has,
through the financial industry. ‘We need more females
at senior finance positions, especially at the board level,
but I do not think there needs to be any discrimination
in favour of women. Women must be treated fairly and
given the same opportunities as men. We need to do
more as women to ensure that we get into positions, put
up our hands, and when opportunities come to make
ourselves available and also to be more aggressive.’ ■
Andrew Maramwidze, journalist based in Gaborone
Africa | Global economy | Accountancy Futures
Edition 10 | 59
Expansion and ethics Targeting market share is the best way to drive corporate growth, and is best underpinned by ethical values, finance chiefs heard at the recent CFO European Summit
G iven today’s uncertain global economic
environment, it is up to CFOs to manage
expectations and push for their companies’
long-term growth through clear planning and a
responsible corporate culture. Business leaders
from across the globe discussed how to navigate
these issues at the seventh CFO European Summit,
organised by ACCA Poland and staged in Warsaw at
the end of last year.
Whatever the economic conditions, companies are
always looking for growth. But today, although the
global economy is looking up in general, the European
economy is still sluggish. And with instability in the
Middle East rearing its head again, a simmering war
in eastern Ukraine adding to geopolitical worries,
and continuing fears over a potential Ebola crisis,
investment risk remains high globally.
How then should CFOs focus and manage their growth
strategies to maximise returns, while staying ahead of
potential risks?
Marcin Sojda, central Europe group finance manager
at Procter & Gamble (P&G), told the summit:
‘Growth doesn’t always mean more. Sometimes it can
mean less.’ He explained to the audience that P&G was
in the process of spinning off more than 100 brands,
many peripheral to its core business of personal care
products; for instance, it is selling its Duracell battery
division. This strategy has enabled the company to
focus on its core businesses, he said, enabling it to
build valuable market share in its key segments.
Market share was a major theme at the conference,
with speakers time and again declaring that while
achieving good top and bottom-line figures is
important, increasing market share is the real key to
sustainable growth.
For example Scotland-based Clyde Blowers Capital,
an investor in industrial businesses, significantly grew its
market share even while the global economic crisis was
continuing. The company’s CFO Allan Dowie said this
had been achieved by investing in sales and entering new
markets just as others were scaling back in 2008. Sales
have subsequently increased from the wider client base.
But when looking to enter new markets, businesses
need to have a clear strategy. John Rendall, CEO
of HSBC Bank Polska, said that companies need
to set out explicit financial parameters. ‘When you
understand your business and those parameters, then
Left to right: Daniel
Thorniley, president
of DT-Global Business
Consulting; John
Rendall, CEO of HSBC
Bank Polska; Jarosław
Gugała, journalist and
broadcaster; and Allan
Dowie, CFO of Clyde
Blowers Capital IM.
‘My experience is that whenever we focused on defining values, we generated value’
60 | Edition 10
Accountancy Futures | Global economy | Europe
it enables you to act decisively when an opportunity
arises. The better prepared you are, the more able you
are to make a decision,’ he said.
Tomasz Suchanski, deputy CFO at Jeronimo Martins
Group, said that expansion strategies need to take into
account the differences in the markets a business might
be considering entering. Outside its home country
of Portugal, Jeronimo Martins has retail businesses
in Poland and Colombia, and adopted very different
strategies to enter them. It took the acquisition route
into the Polish market, and the greenfield investment
route into the Colombian market.
Expanding into new markets is never a quick fix.
Daniel Thorniley, president of Austria-based DT-Global
Business Consulting, said that businesses too often see
emerging markets, especially Africa, as places where
they can come in, make huge sums of money quickly,
and fix their financial problems. In practice, it rarely
happens like that. Effective investment in emerging
markets requires planning for the long haul.
Mark Vale, CFO for international operations at UPS,
echoed Thorniley’s view: ‘We expanded a long time
ago in Europe. It took many years to pay off, but it has
now paid off significantly.’
Corporate cultureAs companies pursue growth, they should not
forget about corporate culture, said speakers at the
conference. In fact, following the right corporate
values can supplement growth: ‘My experience is that
whenever we focused on defining values, we generated
value,’ said Ramin Khabirpour, a management
consultant and a member of the supervisory board at
Agros-Nova, a Polish fruit-and-vegetable processor.
But how should companies go about defining their
values? Ewan Willars, ACCA director of policy, presented
a report, Culture and channelling corporate behaviour
(see page 6), that sets out a methodology for doing just
that. The report says that values can differ even within an
organisation, and provides a simple, logical assessment
tool to help company leaders determine what their
values are, what they should be, and what they can do
to get from the actual to the desirable.
Panellists discussing the issue welcomed this approach,
and said the initiative is necessary, especially since
issues of corporate culture and values seem to come
up only in times of economic downturn. But mature
organisations are always measuring and reassessing
their corporate values, said Izabela Jagosz-Kuchta,
CFO for IBM Poland and the Baltic countries. However,
she added, a company’s values can evolve as it
develops and changes.
Leaders must act as role models for a company’s
values, but it is often impossible for a single person to
be a role model for every aspect within a company.
‘The diversity of our organisation is so great that it is
difficult to point to a single role model,’ said Gavin Flook,
executive committee member for talent at Deloitte
Central Europe. ‘In various contexts you can point to
one person as a role model for certain attributes, but in
other situations someone else is a model. Some things
are non-negotiable – ethical behaviour, results to our
clients – but one-size-fits-all does not work.’
Professor Bolesław Rok, director of the Business Ethics
Centre at Kozminski University in Poland, said that
corporate values are not just a code of conduct for
individuals, but for the actions of the company itself. If
a business behaves responsibly, its employees become
more engaged, and this leads to better performance.
No contradictionFor that reason, there is not necessarily any opposition
between following the right values and generating
profit, although Khabirpour said there does need to
be a change in how businesses prioritise the chase for
profit and the maintenance of ethical standards: ‘The
question is, do we need more profit every year or is a
stable profit good enough? Do we need to increase
our profit margin at the expense of the environment,
at the expense of the ecosystem, at the expense of
paying taxes? The world will dissolve if we don’t realise
we are in a paradigm shift.’ ■
Andrew Kureth, journalist based in Warsaw
Culture and channelling corporate behaviour is
available at www.accaglobal.com/ab/156
The Polish exceptionIn his keynote address, former Polish finance minister Jan Vincent-Rostowski set
out several key reasons why Poland is an ideal investment location within Europe:
* over 20% growth between 2008 and 2013, and further outperformance expected
* debt-to-GDP ratio rose 13% between 2008 and 2013 – fourth-slowest in the EU
* government expenditure-to-GDP ratio seventh-lowest in the EU
* current government expenditure about 36.6% of GDP, its lowest ever figure
* 32% corporate tax rate – the seventh-lowest in the EU
* expected to grow around 3% annually, compared with 0% for the EU as a whole.
Daniel Thorniley, president of DT-Global Business Consulting, set out six major
reasons why Europe’s economy may continue to underperform over the next
three to five years. His comments reflected general concern that the global
economy is currently exposed to some significant risks.
* SMEs still have problems accessing finance – Thorniley described the
situation as ‘a financing cancer that goes up to the corporates and down to
the consumer’, and with no cure in sight.
* Consumer confidence has been weak for the past five years, especially in Europe.
* Austerity programmes have crippled the eurozone economy, with countries
that have implemented them now drifting away from such policies.
* Aside from a few recent M&A deals in the US, companies are holding back on
investment because of the difficult global risk environment.
* The rise in trade worldwide that happened early in 2014 has proven unsustainable,
and exports are not rising as expected, hurting the EU’s big exporters.
* Exchange rates have remained volatile, which hurts the bottom line for
companies that may be seeing significant growth in particular countries but
still have to translate their profits into dollars for head office.
Jan Vincent-Rostowski
championed Poland’s
counter-trend
economic success.
Six barriers to European growth
Europe | Global economy | Accountancy Futures
Edition 10 | 61
Power of innovationAs Malaysia aspires to become a high-income economy, it is banking on the transformative power of innovation to boost competitiveness and spur growth
According to Prime Minister Datuk Seri Najib
Razak, speaking at the Innovating Malaysia
Conference 2014 organised by Agensi Inovasi
Malaysia (AIM), innovation is the fuel that powers
developed economies; indeed, two-thirds of the UK’s
growth is derived from innovation.
Since Malaysia’s national strategy is to create a more
knowledge-intensive economy, ‘there is a clear need
for traditional and non-traditional businesses to
innovate to create significant impact on GNI and
GDP’, he said.
Malaysia currently ranks 33rd out of 143 countries in
the Global Innovation Index 2014 and in the top two
among 40 upper-middle income countries.
The new National Corporate Innovation Index (NCII)
is one key initiative to drive innovation in Malaysia.
AIM is collaborating with Nesta, the UK’s innovation
foundation, and other expert partners on the NCII,
which has been three years in the making.
The NCII has been developed with the support and
involvement of a wide range of leading Malaysian
public listed companies. While Phase I focused
on companies’ innovation strategies, culture and
processes, Phase 2 brings in a range of financial
measures to help companies more accurately track
their return on innovation.
The NCII aims to help companies embed and
systematise innovation by identifying tools and
mechanisms for corporations to measure, value and
benchmark their innovation investments. The eventual
goal is to enhance innovation management and to
commercialise innovations to generate revenue.
What is innovation?The prime minister warned businesses not to associate
innovation strictly with R&D, high technology or patents.
This would be ‘sorely misguided and counterintuitive’
because the bulk of Malaysian businesses are in the
services sector. Rather, innovation is ‘about turning a
new idea into something profitable or that creates new
value’, he added.
‘For Malaysian businesses to fully benefit from the
government’s initiatives to boost innovation in their
sector, they must be able to identify and measure
the investments made towards both tangible and
intangible assets, which contribute to innovation
outcomes,’ said Chiew Chun Wee, ACCA’s head of
policy, Asia Pacific.
ACCA played a central role in supporting the NCII by
undertaking research with Nesta, Inngot – a specialist
in intangible asset identification, rating and valuation
– and Alpha Catalyst Consulting to gain insights into
small and medium-sized enterprises’ (SMEs) attitudes
to innovation and its return on investment.
The significance of intangiblesInvestments in intangibles are increasingly driving
innovation and business. According to Dr Benjamin
Reid, principal researcher in international innovation
at Nesta, the key intangible investments in innovation
today are: design, R&D, process improvement, training,
software and innovation-related elements of branding
and marketing.
These investments translate into certain core outputs
and gains such as new products and services, efficiency
savings, intellectual property licensing – which offer
huge potential for new revenue streams – and grants
and incentives to spur future investments, thus
sustaining the virtuous cycle of innovation.
In today’s business environment, intangible assets
are clearly gaining dominance in the value-creation
process. Chiew noted that, based on research carried
out by Ocean Tomo, an intellectual property specialist,
on the S&P 500 companies in 1975, 83% of market
value could be traced to recorded and physical assets.
By 2010, however, more than 80% of market value was
based on intangibles.
During the event, delegates discussed the need for
businesses to broaden their definition of innovation to
encompass intangibles and ‘hidden assets’, and take
innovation beyond conventional perceptions of R&D.
Impact of the NCIIThe NCII will help boost innovation in four ways,
said Reid. One, companies will better understand,
and therefore be able to improve, their innovation
processes. Two, they can uncover their hidden
innovations and identify innovation strengths and
weaknesses. Three, they will have better data to
convince internal and external stakeholders of the
importance of innovation. Four, they can use NCII
Chiew Chun Wee,
ACCA’s head of
policy, Asia Pacific,
told delegates that
bright ideas are just
the beginning – it is
also vital to enlist top
management support
in nurturing and
sustaining innovation.
‘Business needs to broaden its definition of innovation to include intangibles and hidden assets’
Accountancy Futures | Global economy | Innovation
62 | Edition 10
tools to calculate the return on innovation
investments – something many Malaysian firms
struggle to do.
‘The NCII framework will allow management to
have a much clearer picture of their internal
investment practices, especially those which result
in longer-term returns, as is often the case with
innovation activities,’ said Chiew. ‘The data-collection
process itself will also enable companies to take a hard
look at the information system and address any
gaps, so that the necessary useful data can be
collected on a going-forward basis to better guide
investment decisions.
‘In addition, NCII enables organisations to benchmark
themselves against FTSE companies, as well as against
each other – giving them a better understanding of
where they stand, enabling management to conduct
more strategic, intelligent investment planning based
on market realities.’
NCII tools can be used to help drive acquisition and
growth strategies based on intangibles.
‘It’s tough for accounting and management systems
to measure investments in innovation, but the NCII
will help companies tell the narrative of innovation-led
growth,’ said Reid.
Currently, accounting treatments may hinder innovation
investments. ‘Under accounting standards, intangible
investments in innovation are expensed and cannot be
capitalised, so strong board buy-in will be necessary
to get companies to change how they account for
innovation,’ Reid added.
Enlisting top management support will be critical to
nurturing and sustaining innovation. ‘All too often,
management want to see results fast, and if they
are not convinced that the project will be profitable,
they cut off the funds and in the process kill off the
innovation,’ said Chiew.
‘Innovation is not just about bright ideas. It is clearly
about execution as well. It’s about having an internal
decision-making structure that supports innovation. It’s
about having the right information.’
Boosting IRTracking and consolidation of information through
NCII will also facilitate an organisation’s adoption
of integrated reporting (IR), which is encouraged
by the Malaysian government and the Securities
Commission. ‘As the first professional accountancy
body to introduce IR into its qualification, ACCA is
interested in any tools that will better equip companies
to adopt IR, which requires organisations to provide
information material to the business beyond the
traditional financial numbers under accounting
standards – giving a much more comprehensive and
strategic picture to current and potential providers
of financial capital and other key stakeholders,’
said Chiew. ■
Nazatul Izma Abdullah, journalist
Innovation | Global economy | Accountancy Futures
Edition 10 | 63
While Cambodia’s accountancy sector is moving towards greater clarity and standardisation, more training is required to boost numbers of professionals
Work in progress
While Cambodia’s GDP growth over the
past two decades has been tremendous,
averaging 7.6% per year since 1995, the
country remains a developing market and its accounting
industry is still very much a work in progress.
One person who is at the forefront of Cambodia’s
drive to develop the accountancy sector is 40-year-
old Kimleng Khoy FCCA. Recently named country
director of Deloitte Cambodia, Khoy is responsible
for setting up operations for the latest Big Four
firm to enter the country. Having worked in the
profession since 1997, first at EY and then at PwC, he
is also helping to advance industry-wide accounting
practices and implement standards as president
of the Kampuchea Institute of Certified Public
Accountants and Auditors (KICPAA) and as a member
of the board of the National Accounting Council of
Cambodia (NAC).
While there is much room for improvement in
Cambodia, Khoy points out that the country is actually
ahead of many of its South-east Asian neighbours in
terms of its use of accounting frameworks. In 2010, the
country adopted in their entirety International Financial
Reporting Standards (IFRS) and the related IFRS for
SMEs (known as Cambodian IFRS and Cambodian IFRS
for SMEs locally.)
‘If I compare Cambodia to other countries – for
example, Thailand and Vietnam – many around ASEAN
haven’t adopted fully,’ he says. ‘In terms of adopting
frameworks, I think we are quite advanced.’
The problem, however, comes in the implementation
of these accounting systems, particularly some
of the more complex standards found in IFRS
such as IAS 32 or IAS 39, which deal with financial
instruments. This, says Khoy, is caused primarily by
lack of exposure.
‘In terms of commercial transactions, even banks or
microfinance don’t have all these derivatives, so you
don’t have these contracts used by those standards.
Therefore, you don’t have exposure and you don’t
have a lot of knowledge.’
On a more fundamental level, most businesses in
Cambodia are simply not experienced in utilising
basic accounting practices. The informal sector is still
a major part of the Cambodian economy, employing
nearly 60% of the country’s workers, according to
the National Institute of Statistics’ Cambodia Socio-
Economic Survey 2013. And most formal businesses
remain extremely small – well below the country’s
current legal threshold for an audit. Companies are
required to audit only when they meet two out of
three of the following criteria:
* 100 staff
* turnover of approximately US$750,000
* assets of US$500,000.
How many companies meet those requirements
remains a grey area. The NAC is working to gather
accurate statistics; Khoy puts forth a rough estimate at
5,000 companies. And, of these, an estimate culled from
the major accountancy firms in Cambodia finds that only
around 450 companies were actually audited in 2013.
Khoy has worked with the NAC on a draft law that
will give the agency more power to work with companies
that do not prepare their accounts and submit them
for audit. He is also working with the council on an
accounting template that will simplify the process for the
many companies that do not meet the auditing criteria.
Modernise and diversifyThese efforts to boost financial clarity and standardised
practices are becoming increasingly important as
Cambodia attempts to modernise and diversify its
economy. As with many developing countries, much
of Cambodia’s growth has come on the back of
inexpensive labour, with 80% of its exports from the
garment industry alone.
As a November 2014 report from the Asian
Development Bank (ADB) puts it: ‘Moving into higher-
value-added production and climbing the global
value chain will require sustained improvements in
infrastructure, human capital, governance and other
economic factors.’ The ADB report cites the need for
increased fiscal spending to attain a number of these
goals; however, revenues from taxes remain extremely
limited. In 2013, national tax revenues were a small
US$881m, out of a GDP of US$15.24bn. The figure
actually represents an increase of 16.1% on the previous
year as the Cambodia government has bolstered its
efforts to enforce tax laws.
Lack of qualified accountantsKhoy says the overwhelming majority of taxpayers file
under an estimated regime. ‘They pay a lump sum per
year,’ he says, ‘which is very small compared to the real
regime where they pay taxes on salary, withholding
tax, VAT, profit tax and so forth.’ Here, he notes, the
simplified accounting template being developed by
the NAC will help in terms of tax collection.
One of the other major issues facing the accountancy
sector is a lack of qualified accountants. Khoy was
64 | Edition 10
Accountancy Futures | Global economy | Cambodia
While Cambodia’s
accounting sector is
still developing, the
country is ahead of
some of its neighbours
in terms of adoption
of international
standards, says Khoy.
one of the first Cambodians to qualify for ACCA
membership, back in 2004. The government has
increased spending on education, but it remains the
lowest share of government expenditure in South-east
Asia, at less than 2% of GDP between 1995 and 2013,
according to the ADB.
However, Khoy is optimistic about the potential of
young Cambodians to enter the accounting field.
He points out that when he began studying for his
ACCA Qualification, he was required to travel to
Vietnam to complete much of the course work. Now,
ACCA courses are widely available, with thousands
of students enrolled. In addition, many young
Cambodians also begin learning English much earlier
than those of Khoy’s generation, removing another
barrier to qualification.
Another difference Khoy sees are the opportunities
available to women in the workforce. ‘More and more
women are going to study at university or starting their
own businesses,’ he says. ‘I’ve been happy to see that
many are enrolling in ACCA qualifications.’
Khoy notes that he faced some of these challenges
setting up Deloitte’s operations in Cambodia: ‘There
are a very limited number of qualified candidates
who match the needs of the firm, so to get the pool
of talent was a challenge. I managed to bring in
good people with me, but we still have to continue
to develop people. In terms of dealing with other
agencies, like the government, tax [agencies] and
banks, I guess we are on the same playing field as the
other firms.‘
Nonetheless, Cambodia has come a long way in
just two decades, with professional accountants
like Khoy playing an increasingly important role in
how far and how fast the country continues
to develop. ■
Thomas Maresca, journalist based in Phnom Penh
Kimleng Khoy FCCASince September 2014, Kimleng Khoy has been the country director for Deloitte Cambodia. Prior to joining
Deloitte, he was a director at PwC in Phnom Penh, where he worked first as an auditor and then headed up advisory
services in Cambodia, and was seconded to PwC’s office in Birmingham, UK, from 2006 to 2008. Prior to working at
PwC, Khoy was a senior auditor at EY in Phnom Penh. In 2004, Khoy became one of the first Cambodians to attain
the ACCA Qualification. He is president of the Kampuchea Institute of Certified Public Accountants and Auditors
and a member of the board of the National Accounting Council of Cambodia.
Edition 10 | 65
Cambodia | Global economy | Accountancy Futures
Turning the tideSkilled accountants are having a positive impact on the fi nancial management standards of Latin American and Caribbean public bodies
In the 1970s and 1980s, the governments of Latin
America and the Caribbean were not noted for their
sound fi nancial management. Many Caribbean
island states had newly emerged from colonialism and
were fi nding their way as independent countries, while
many Latin American countries were riven by social
discord, even civil war, and military rule was common.
Fast-forward to 2014 and not only is democracy the
norm, but many governments have taken the tough
decisions required to make their states effi cient and
fi nancially watertight. This progress was welcomed in
a recent report from the Organisation for Economic
Cooperation and Development (OECD) and the Inter-
American Development Bank (IDB), which notes that
half the countries examined have recently introduced
new budget tools.
The OECD and IDB were particularly keen on
countries that had introduced fi scal rules, medium-
term budgeting, stabilisation funds and performance
budgeting systems. The report highlights Chile,
Colombia, Mexico and Peru as having adapted ‘best
practices in fi scal and budgeting reforms of [wealthier]
OECD countries to the political and institutional reality
of Latin American and Caribbean (LAC) countries’.
The result has been the creation of fi scal and budget
institutions with a structural view targeting long-term
fi scal stability.
The report says that the integrated application of these
reforms should serve as a guide for the more vulnerable
LAC countries in how to fi nd a relevant local formula
to ensure stable fi scal income that meets government
demands. It adds, however, that many still have to
‘improve their budget management, tax collection and
public sector pay equality to bring their governments
to the level of more advanced economies’. An OECD-
IDB communiqué adds that successful initiatives on
these issues ‘could help raise living standards and
mitigate risks in future economic shocks’.
Mozammal Hoque, senior fi nancial management specialist
at the World Bank, agrees that this holds true for the
Caribbean. But, he adds: ‘Most countries are embracing
integrated fi nancial management, which means things are
more transparent; people can read budget reports and see
how public money is being spent.’
Hoque says that while much progress has been made
by nations that have implemented integrated fi nancial
management systems in recent years, others are
hampered by tardy, and often non-existent, formal
public accounts, uncoordinated government spending
and inadequate foreign exchange reserves.
Limited oversight of procurement means corruption
remains a serious problem, he adds: ‘Politicians need
money to get elected and one way of doing that is from
local businesses. More laws governing campaign fi nancing
Accountancy Futures | Global economy | Latin America and Caribbean
66 | Edition 10
are needed or it’s impossible to control anything.’
According to Hoque, risk-based audit training in 2014,
organised through the World Bank and the UN, has
improved capacity in Jamaica and is being extended to
other countries. ‘Jamaica has done a lot to strengthen
the capacity of the auditor general and make her
more independent,’ he adds, pointing out that the
government has begun to overhaul the way it prepares
budgets, levies taxes and procures goods and services.
A US$35m scheduled World Bank loan will also help
strengthen public investment management systems
and property tax compliance administration in
Jamaica. Work under way includes putting in place an
effective fiscal rule to entrench financial discipline, with
authorities working to amalgamate fiscal consolidation
gains in the medium term. The aim is to eliminate
annual budget deficits and slash debt to 60% of GDP
by 2025 from its current 140%. Bank strategies include
staging performance audits of public bodies to make
them more accountable.
Hoque adds that some countries have recently taken
steps to alleviate foreign currency shortages to ease
tightness in the market. The Trinidad and Tobago
central bank sold more than US$600m to authorised
dealers between January and May 2014 in a bid to
‘restore normalcy’ to national foreign currency liquidity.
Antigua-based accountant Laura Lyn says that better
skilled accountants are having a positive impact on the
financial management standards of Caribbean public
bodies and government departments. In Antigua and
Barbuda, for example, ‘the Commissioner of Inland
Revenue has become much stricter at enforcing audited
financial statements and up-to-date tax returns prior to
the importation of goods and licensing,’ she says.
She adds that more banks are demanding up-to-date
financial statements and, in some situations, up-to-date
tax returns in the issuance of loans, bank overdrafts and
other business activities, while the Financial Services
Regulatory Commission and its Office of National Drug
and Money Laundering Control Policy are also providing
more training to financial regulators and officials.
Mixed assessmentA similarly mixed assessment is heard about Latin
America. Mario Pessoa, deputy division chief of the
International Monetary Fund’s (IMF) fiscal affairs
department, says: ‘Countries in [Latin America] have
good coverage of the budget and good information
on budget execution but have room for improving the
capacity to identify and measure fiscal risks.’
He picks out Brazil, Chile, Peru and Mexico as countries
that over the past decade have implemented or are
now implementing reforms to exert more control over
public expenditure through improved fiscal rules or
fiscal responsibility laws. He welcomes the stabilisation
funds that have been created in Chile and Mexico, and
notes that Argentina, Bolivia, Brazil, Colombia, Costa
Rica, Mexico and Peru have all created single treasury
accounts to centralise cash resources and manage
cash better. Brazil, Chile, Costa Rica and Uruguay have
also expanded the coverage of their fiscal reports and
financial accounts, while Argentina, Brazil, Mexico and
Peru have implemented programme budgeting or
medium-term budget frameworks.
While nearly all Latin American countries are
implementing reforms to strengthen their public financial
management systems, Pessoa points to the successes of
Brazil and Chile in particular. ‘As a result, Latin America
countries have been more resilient to the 2008-2010
financial crisis than in that of the 1990s,’ he says.
Andreas Bergmann, chair of the International Public
Sector Accounting Standards Board, adds: ‘I think the
overarching topic in the region is the strengthening of
the institutions and the implementation of international
standards in accounting, auditing and government
financial statistics.’
Bergmann points out that in Latin America the
focus has shifted from year-to-year budget
management to medium-term planning, balance sheet
management and risk orientation. ‘For this, strong
institutions and rigorous statutory frameworks are
needed,’ he says. ‘Additionally, high-quality financial
information provided by accrual accounting is a
critical ingredient.’
He notes that countries such as Chile, Colombia and
Peru have benefited from the global trade boom
in natural resources and introduced fiscal rules and
stabilisation funds to capitalise on this. Progress is also
being made in Costa Rica and Panama, while Chile has
introduced sophisticated risk management.
‘I can observe that the early birds of the reforms
are now aiming for further steps, achieving global
standards,’ Bergmann says. ‘Recently achieved or
future membership in the OECD is often a driver of
these reforms, but most urgently needed are reforms
in those countries which have not undertaken any,
like Venezuela, or have been stagnant for prolonged
periods of time, like Argentina and many central
American countries.’ ■
Pacifica Goddard, Gemma Handy and Keith Nuthall,
journalists
The OECD-IDB report, Government at a glance: Latin
America and the Caribbean 2014 – towards innovative
public financial management, is available at tinyurl.
com/LAC14-PFM
‘The early birds of the reforms are now aiming for further steps, achieving global standards’
Latin America and Caribbean | Global economy | Accountancy Futures
Edition 10 | 67
The Ebola effectThe fear spread by the Ebola epidemic stretches far beyond the actual geographic reach of the disease, which has devastated the economies of the three countries hardest hit
Africa’s economic future is looking bright, as
illustrated by a Deloitte survey released last
November that concludes this is the optimum
time to invest in the continent. In 2013 the gross domestic
product of sub-Saharan Africa grew at a blistering 4.9%,
outpacing all of the BRIC nations (Brazil, Russia, India
and China) with the exception of China. And this was no
one-year wonder. The average 5.5% growth rate over the
past decade has been more than double the 1990s rate.
But, as global headlines make only too clear, two
ominous clouds currently hang over the continent. The
first is a slide in commodity prices, which account for
the lion’s share of African countries’ export revenues.
And the second is a widespread outbreak of Ebola, a
gruesome haemorrhagic fever.
Aside from the obvious human impact of the disease,
any epidemic can have an extremely damaging effect
on an economy. At the height of the panic over severe
acute respiratory syndrome (SARS), for example, retail
sales plunged around 15% in Hong Kong, even though
the disease resulted in no more than around 300 deaths
in a province with a population of 7.2 million.
Africa may be even more vulnerable to the panic
caused by the spread of a contagious disease, worries
Edouard Messou, PwC’s senior partner for francophone
Africa. ‘Many outsiders see Africa as a single country
rather than a continent,’ he says. ‘So even though
Ebola has so far been contained in a tiny part of West
Africa it risks scaring off the foreign visitors and foreign
investors who have become a key driver of economic
growth for many nations.’
Economic tollThe fear that Ebola engenders extends far beyond the
disease’s actual geographical reach and may linger
long after Ebola fades from the headlines. The main
question for economists is whether this could be
sufficient to slow Africa’s promising growth spurt.
There can be no doubt as to the devastating toll on
the three nations hardest hit by Ebola – Guinea, Sierra
Leone and Liberia. Worst off of all is Liberia, one of
Africa’s poorest countries, with a per-capita income
of just US$410. As of November 2014, the tiny nation
accounted for about 3,000 of the 5,700 deaths from the
disease. The resulting panic has been a hammer blow to
a nation that had been struggling to recover from a long
and bloody civil war. However, Liberia seems to have
reached a turning-point, with only eight new cases a
week in January compared with 550 a week in December.
A World Bank report, The economic impact of the
2014 Ebola epidemic, concluded that the biggest
economic consequences were not the direct effects of
death, surging health spending or loss of workers, but
rather ‘changes in behaviour – driven by fear – which
have resulted in generally lower levels of employment,
income and demand for goods and services’.
Investments in vital sectors such as mining, which
accounts for 17% of GDP, have also been put on hold.
As recently as June 2014, the World Bank had expected
Liberia’s economy to expand by 5.9% in 2014. By October
it was forecasting just 2.5%. Few Africa experts would
be surprised if the outcome turns out to be even worse.
Extra healthcare spending and lower tax revenues for
Liberia alone have been estimated to amount to more
than US$100m – 5.1% of the country’s GDP. Add in Sierra
Leone and Guinea, and the short-term hit measured in
lost GDP for 2014 alone is likely to add up to US$359m,
the World Bank has estimated.
Part of the damage comes through lower productivity
and higher costs for businesses. PwC, which has
operations in the most affected countries, offers one
example of this. ‘To keep our staff as safe as possible
we have been restricting their travel to the worst-
hit areas for assignments,’ says Messou. ‘Since using
public transport can increase the risks of infection, we
have arranged a minibus to take some staff to work.
The extra travel time means that instead of working
In numbers* The World Bank has estimated that if the Ebola virus is left unchecked, it could
cost West Africa as much as US$32.6bn.
* The US spends US$8,895 per person on healthcare, Guinea US$32 per person,
Liberia US$66 and Sierra Leone US$96.
* As of January 2015 Ebola had killed 8,641 people.
* The number of deaths as a result of road accidents worldwide is 1.24 million,
according to the World Health Organisation.
* The Ebola epidemic could slash up to 12% off the GDP of Liberia – more than
twice what the US economy lost during the global financial crisis.
* The International Monetary Fund expects sub-Saharan Africa to grow by 5.8% in
2015 compared with 5% for all emerging markets and 2.3% for rich nations.
‘Ebola risks scaring off the foreign visitors and investors who have become a key driver of growth for many nations’
Accountancy Futures | Global economy | Epidemics
68 | Edition 10
eight hours a day, some employees are now able to be
in the office just five or six.’
Of course, Guinea, Sierra Leone and Liberia are three
of Africa’s smallest economies, with a combined GDP
of just US$14bn in 2014. That is a mere 0.8% of sub-
Saharan Africa’s US$1.7 trillion economy, according to
data from the International Monetary Fund. Whether
Ebola harms the entire African economy will depend
on several factors: how far afield the disease spreads,
how quickly it can be contained, and how far it is
possible to convince wealthy outsiders not to punish
Africa as a whole for a regional outbreak.
In terms of the spread of the disease there are some
grounds for cautious optimism. True, the outbreak
is already the deadliest by far since the disease was
first identified in Zaire almost 40 years ago. Fatalities
from previous Ebola epidemics have never risen
much above 300. The US Center for Disease Control
estimated in September last year that up to 1.4 million
people could be infected by Ebola by early 2015 if
the response did not improve. Since the disease has
been killing about 70% of those who get infected, that
is a terrifying prospect. Meanwhile, the World Bank
has projected that if the epidemic spreads into »
The World Bank
has warned that the
Liberian economy
will contract this year
unless the Ebola
outbreak is quickly
contained.
Epidemics | Global economy | Accountancy Futures
Edition 10 | 69
neighbouring countries the total cost by the end of
2015 could reach US$32.5bn – more than twice the
GDP of the three nations at the heart of the epidemic.
But most experts agree that the response has already
improved. The nations that border Guinea, Liberia and
Sierra Leone have been strikingly successful at containing
the outbreak. Officials in Nigeria and Senegal meticulously
tracked down anyone who could have been exposed to
the disease and monitored them for signs of the illness.
As a result, the disease has so far been contained in these
countries. ‘This is extremely encouraging,’ says Amadou
Sy, a senior fellow at Brookings Institution’s Africa Growth
Initiative. ‘The first step is to prevent this from becoming
a continent-wide problem.’
For nations with functioning healthcare systems,
Ebola should be relatively easy to stop. The virus is
not airborne and sufferers are contagious only once
they start to exhibit the conspicuous symptoms of the
disease. As a result, the average sick person will infect
no more than two others. That compares with four
for HIV and SARS, 10 for mumps and 18 for measles.
‘I believe that within a year the issue with the disease
itself will be largely fixed,’ says Messou.
Back in businessIf the disease does die down, the affected economies
can start to get back to some semblance of
normality, says Mead Over, a former World Bank
health economist and now a researcher at the Center
for Global Development in Washington. ‘The main
worry over the disease is that it stops people going
about their normal economic business,’ he says. ‘A
lot of people have been less willing to go into work,
potentially hollowing out companies and government
bureaucracies. Gradually that fear will subside as the
epidemic is brought under control.’
Unfortunately, outside perceptions may be harder to
shift. The tourism industry accounts for about 10%
of sub-Saharan Africa GDP, including indirect wealth
creation. Until the Ebola outbreak, visitor numbers had
been growing fast, hitting 36 million in 2013. There are
already signs that this burgeoning sector is being hit –
even thousands of kilometres from the affected areas.
Bookings are down for safari trips to Kenya, which is
about as far from Liberia as London is. ‘I was talking to
somebody recently who said they planned to cancel a
trip to Papua New Guinea,’ laments Sy. ‘The mere fact
that Guinea was in the country’s name seems to have
been enough, despite the fact that it is located on a
remote island north of Australia and obviously has no
reported cases of Ebola.’
‘The trouble with Ebola,’ says Over, ‘is that it plays into
the idea that Africa is a dangerous place, associated
with famine, war and exotic diseases.’
Such aversion will almost certainly create strong
headwinds for Africa during this year. In addition,
many African nations will have to cope with some self-
inflicted woes during 2015, predicts William Jackson,
an analyst for Capital Economics: ‘Many countries in
Africa squandered the windfalls they received from a
decade of high commodity prices,’ he says. ‘We see a lot
of countries with high budget deficits that will be hard to
sustain if raw material prices remain weak.’ Some African
nations, Ghana and Zambia in particular, boosted
government payrolls and subsidies instead of investing
in productivity-boosting infrastructure projects.
Despite such additional impediments, Messou of PwC
believes that Africa will overcome the Ebola epidemic.
‘This is not going to dramatically slow the continent’s
economic momentum,’ he argues. He points to several
grounds for optimism. ‘The main drivers for growth still
exist,’ he says, adding that the latest commodity price
slump is unlikely to last. ‘A growing global population
will need to be fed and Africa has a disproportionate
share of the world’s arable land.’
Large-scale investors interested in Africa’s mineral
wealth may respond more rationally to the outbreak than
international tourists – especially if the disease is kept
under control. ‘Africa also boasts a burgeoning middle
class and a youthful population, standard ingredients
for fast economic growth,’ says Messou. ‘Democracy
and the rule of law are also spreading and the level of
corruption is starting to decline in many places.’
Ebola may be dominating the continent’s headlines,
but it could be a speed bump that Africa will soon
get over. ■
Christopher Fitzgerald and Fernando Florez,
journalists
Deloitte’s Africa on the cusp of a consumer boom
report is at http://tinyurl.com/Africa-boom
It is as far from Liberia
as London is, but Kenya
reports that holiday
bookings are down due
to the Ebola epidemic
in West Africa.
Accountancy Futures | Global economy | Epidemics
70 | Edition 10
Taking the temperatureWith austerity measures looming large over hospitals around the world, can we still somehow build a sustainable future for healthcare, asks ACCA’s Gillian Fawcett
Healthcare is rarely out of the headlines. It could be
the temporary closure of accident and emergency
departments in the UK, political fights over Medicare
and Medicaid in the US, or health systems in a
developing country stretched to breaking point
following the outbreak of a devastating disease such
as Ebola. There will always be passionate debate on
whether the right resources are being committed
to the right areas at the right time in health systems
around the world. »
Indian tobacco factory
workers wait to get
their medicines at a
hospital in Madhya
Pradesh.
Healthcare | Public sector | Accountancy Futures
Edition 10 | 71
Below: A radiotherapy
department in Accra,
Ghana. Sub-Saharan
Africa is predicted to
see two million new
cancer cases a year
in the next decade.
Right: Emergency
department at St
Mary´s Hospital,
London. The NHS
is under pressure as
waiting time figures
have hit their worst
level in a decade.
The healthcare systems themselves can vary greatly
between countries. There can be differences between
the size and role of both the public and private sectors,
the balance between preventative services, acute
care and longer-term care, as well as administrative
structures and mechanisms – the glue behind the
scenes that holds the systems together.
However, these systems, no matter in which country
they are, face very similar challenges: changing
populations and demographics, the rise of preventable
illnesses, financial constraints and political scrutiny.
Yet it is clear that possible solutions to these challenges
will vary from one country to the next: there is no ‘one-
size-fits-all’ answer.
Funding needBut answers need to be found, as it is becoming
increasingly clear that the existing healthcare systems
are unlikely to remain sustainable in the longer term in
the absence of either additional funding or innovative
approaches to delivering health services.
This is one of the key conclusions of Sustainable
healthcare systems: an international study, a detailed
report by Nottingham Trent University and ACCA.
Its authors, Professor Malcolm Prowle and Dr Don
Harradine, have examined the current healthcare
systems in 11 countries across several continents,
looking at how they are coping with their various
challenges, and drawing out examples of best practice.
And as with so many other public policy matters,
much of the challenge comes down to money and
politics. The study elicits some revealing attitudes
and observations. Nearly two-thirds of the healthcare
professionals interviewed for the study say that they
feel it is unlikely or even impossible that their country’s
system is financially sustainable in the long run. Less
than one in 10 think that it definitely is sustainable.
But when asked whether it is likely that more money
from their governments would be forthcoming, a
similar two-thirds say such a likelihood is low. Instead,
eight out of 10 believe that there will be a drive for
efficiency improvements to secure the long-term future
of their healthcare system. More than half believe
there is a medium prospect of the introduction or
extension of charges to users, while a slightly smaller
proportion accept there will be the introduction of an
insurance system.
Unfortunately, austerity looms large over many of the
healthcare systems around the world. We see it here
in the UK, and it is evident elsewhere. As the study
observes, the impact of the economic recession led
many governments to borrow money to fund budget
deficits. But this was untenable and so they were faced
with the need to cut public spending.
Attempts may have been made to ring-fence crucial
services, such as health, but there have been subtler
impacts of austerity as well. Rising unemployment,
reduced incomes and increasing taxation have an
indirect impact on the demand for healthcare and
the ability to pay for it. Developing countries, which
rely on overseas financial aid to supplement their
own healthcare finances, have suffered as donating
countries cut back on their aid budgets.
For these reasons perhaps it is not then surprising
that governments around the world are looking to
reorganise how healthcare is provided, whether that is
at the hospital level or at a primary care level through
doctors’ surgeries. And this is where Prowle and
Harradine hit the nail on the head.
Gillian Fawcett is head
of public sector at
ACCA.
Accountancy Futures | Public sector | Healthcare
72 | Edition 10
It has become increasingly clear that existing healthcare systems are unlikely to remain sustainable in the longer term
They highlight the comments made by Nigel Lawson, a
former UK chancellor of the Exchequer, who described
the UK’s National Health Service as the nearest thing
the British have to a national religion. And as one
interviewee for the study says: ‘I think health is a very
politically sensitive issue for any country… health is
something that everyone is concerned about and so
this is the nature of the sector. So I think we can’t get
away from all these bad headlines. What we hopefully
will get away from is politicians making changes to the
health sector without helping the sector.’
But as all those that work in the public sector will be only
too aware, public opinion matters and can unfortunately
act as a brake on any attempts to reorganise or refinance
our public institutions. This is amply demonstrated
by the study’s finding that, apart from the lack of
financial resources, public opinion is seen as one of the
most significant factors posing resistance to change,
supported by resistance from health professionals and
the media. How many times have we seen our health
services used as a political football?
Change in behaviourBut perhaps it is just as difficult to change the
politicians’ behaviour as it is to change the lifestyle
choices that people make that can have considerable
consequences for healthcare priorities further down
the road. Both are equally challenging, but both need
to be resolved to ensure any form of sustainability in
healthcare systems.
The study also uncovered other resistors to change: a
lack of consensus among politicians about the nature
of change required, the influence of private economic
interests, and bureaucratic interests in maintaining the
status quo.
The second of these, the influence of the private sector,
is worth investigating further. As the study rightly
notes, in virtually every country there is some form
of private healthcare services to private individuals
in return for payment, either directly or through a
private health insurance scheme. Inevitably, there will
always be political discussion on the appropriate size
of the private healthcare sector, but of more interest
to policymakers is the role the sector can play in the
provision of healthcare to non-private patients.
In theory, there are advantages in using the private
healthcare sector for this purpose, including
the use of spare capacity in the private sector at
lower cost and the exposure of public healthcare
providers to market competition. There can also be
disadvantages, however, not least problems that
arise when profit motives conflict with public service
equity considerations. In some countries, such as the
UK, there is a significant involvement of the private
healthcare sector in publicly financed healthcare, and
other countries are experimenting with this idea. In
some countries such an approach is strongly resisted,
possibly on political grounds. It is important that the
approach to be adopted is considered on its merits
and not on the basis of an ideological position.
So what are the implications for finance professionals
working in the healthcare sector and so often closely
involved in the negotiations over resource allocation
and change management? As the authors say, the
problem is that in non-authoritarian democratic
countries there is likely to be much resistance to
change. So the key message for politicians and
healthcare managers and professionals, including
those in finance, is they need to devise ways of
communicating the essential need for changes and
the means by which they should be implemented.
Only then will we be able to ensure that healthcare is
in the headlines for the right reasons, not the wrong, in
the future. ■
Read the report Sustainable healthcare systems:
an international study at www.accaglobal.com/
ab/public-sector
Nantes hospital CHU
Hotel Dieu in France.
The French healthcare
system is often cited
as one of the best
healthcare services in
the world.
Healthcare | Public sector | Accountancy Futures
Edition 10 | 73
There has been a quiet revolution in the way
governments account for themselves. Amid
intense scrutiny of public finances, and a drive
for more transparency, the need to produce a single
bottom-line figure for consolidated debt and public
assets has never been greater. In short, governments
are trying to work out what they owe and what they own.
This process is known as whole of government accounts
(WGA), and has been under development in a number
of countries, including the UK, Australia, New Zealand,
Canada and Sweden, for two decades. Cash-based
or budget-centric accounts have been reformed, with
accruals accounting extended to cover consolidation.
Significant public resources have been invested in
this process, but until now, there has been no real
investigation into the use and usefulness of WGA.
To gain greater understanding of how governments
are handling the shift in accounts, and to match the
claims against reality, ACCA is partway through a study
on this important aspect of public sector finances.
Gillian Fawcett, ACCA’s head of the public sector, says:
‘Governments are focusing on producing consolidated
reports for users they assume will be interested. But to
date, there has not been any research into who really
uses the reports and what information they actually
need. Equally, nobody can be sure whether the end-
users of government accounts are able to understand
and interpret them and are therefore able to demand
change where it is needed.’
Fawcett’s comments go to the very heart of the
investigation. A great deal of time has already been
spent on looking at how WGA can be used, rather
than whether they are actually of any use. So while
governments believe that consolidated accounts will
be of benefit, they have yet to convince potential
users, including many within government.
For instance, the ACCA study found that in Australia
the financial markets, credit ratings agencies and
analysts make little use of WGA. But in New Zealand,
which has a long history of consolidated accrual-
based WGA, interest is high in the current shift from
International Financial Reporting Standards (IFRS)
to International Public Sector Accounting Standards
(IPSAS) for WGA. In the UK the available literature
focuses on how WGA can be used, rather than on their
usefulness. In Canada, ACCA found that WGA are
mainly used for accountability reporting to parliament
and are not used, or perceived as useful, for managerial
planning, decision-making and control.
It is a subject close to the heart of ACCA president
Anthony Harbinson. As director of Safer Communities
for the Northern Ireland Department of Justice, he is
responsible for the resourcing, policy and legislative
framework for reducing offending, as well as policing
and community safety within Northern Ireland.
He says: ‘My view of WGA is that they are pretty labour-
intensive for around six weeks following the completion
of the year-end accounts and while the systems are
fairly well structured to deliver the WGA they don’t
actually produce any meaningful information or benefit
for individual government departments.’
However, Harbinson believes that the UK Treasury
finds WGA helpful for strategic decision-making and
it is at that macro-economic level that they come into
their own. But he adds: ‘I have no idea who uses them
outside of government other than a few academics
who specialise in some very specific areas of research.‘
Following the second stage of the study a final report on
who is using WGA will be published as we go to press. ■
Philip Smith, journalist
ACCA is partway through a study that will shed light on an important aspect of public sector finances: whole of government accounts
The whole story
Read Whole of government accounts: who is
using them? at www.accaglobal.com/ab/159
‘Nobody can be sure whether the end-users of government accounts are able to understand and interpret them’
Anthony Harbinson,
ACCA president
and director of Safer
Communities for
the Northern Ireland
Department of Justice:
‘The UK Treasury
finds WGA helpful
for strategic
decision-making.’
74 | Edition 10
Accountancy Futures | Public sector | Accounts
In July 2014, Australia became the first
country in the world to repeal a carbon tax.
Two years after it was introduced, a change
in government saw the scheme scrapped, to
be replaced by the (now mandated) Emissions
Reduction Fund, whereby businesses would
compete to win tenders, and be paid to undertake
emission reduction projects.
While maintaining that Australia was still on track
to meet its carbon reduction targets (5% by 2020),
new prime minister Tony Abbott cheered the
demise of the ‘useless, destructive tax’, which he
also called an ‘international aberration’. The world
media didn’t quite see it that way. Australia had
gone from being a climate change leader ‘to no
plan at all’, said The Guardian. Reuters described
it as a ‘major setback for CO2 trading’. The BBC
included a link to the Climate Institute think-
tank’s statement that Australia was now ‘bereft »
A paler shade of greenIn 2014 Australia became the first country to repeal its carbon tax. So where does this leave a country which was once seen as a climate change leader?
Edition 10 | 75
Australia | Tax | Accountancy Futures
of credible climate policy’, just as the international
community focuses on deeper reduction targets.
So, where to from here for the country which trumpets
its clean, green environment, but is in fact the world’s
worst polluter per head of population, according to
the latest data from the Organisation of Economic
Cooperation and Development (OECD)?
New research by Melbourne’s Deakin University
attempts to find out. The Carbon Risk Management: In
an Era of Changing Regulations survey asked Australia’s
biggest polluting companies including energy,
manufacturing, mining and construction, what they
were doing to reduce risks associated with managing
pollution, and the associated costs. The survey was
part of a larger research project between Deakin
University’s Centre for Sustainable and Responsible
Organisations (CSaRO) and Macquarie University, co-
funded by ACCA and the Australian Research Council.
Overall, it found a business community ‘in limbo’. Most
didn’t believe that their energy bills would fall as a
result of the carbon tax repeal, but they have ‘lingering
concerns’ about the new carbon pricing regulations.
CSaRO director Professor Nava Subramaniam said the
survey found half the respondents felt they had little
or no choice but to continue to invest in management
systems that would lead to better risk controls and
measures to reduce pollution levels. ‘However,
the majority did not agree that the new Emissions
Reduction Fund would benefit their company,’ she
said. An overwhelming 80% believed the carbon tax
would be replaced in some form in the future anyway.
‘To stop the good work that many of them have started
on setting carbon management systems would be
unwise,’ Subramaniam said. ‘Such investments need to
be viewed from a mid to long-term stance. A bundle of
complementary policies are needed including energy
efficiency initiatives, low carbon electricity generation
and regulatory sanctions.’
Nevertheless, Mathew Nelson, EY’s managing partner,
Asia Pacific Climate Change and Sustainability Services,
says businesses have been holding back on emission
reduction activity given the policy uncertainty. Nelson’s
team provides advisory and assurance services to
large corporates and government around climate
change and carbon policy, so was heavily involved in
the implementation of both versions of carbon pricing.
Lately, the focus has been on how businesses can
benefit from the Emissions Reduction Fund, passed by
parliament on 31 October 2014.
‘We’re starting to see a bit of momentum coming
back into the debate,’ Nelson said, adding that what’s
happening internationally in relation to climate change
and carbon policy – the historic deal between the US
and China, and new targets set for Europe – emphasises
the need for Australian businesses to take a long-term
view. ‘They realise that some form of carbon pricing is
inevitable; it’s something they are definitely focused on.’
Australia does need meaningful carbon policy, Nelson
added, but the current uncertainty is hampering
progress. A lot of the investments that are required by
businesses to make significant emissions reductions are
costly, he pointed out. ‘A changing policy environment
makes it very difficult for them to make change, look
to the future, and make sure they are undertaking
projects that will be rewarded.’
There is ‘no question’ the international market will
continue to put pressure on Australia to ramp up its
emissions targets, and the sooner the nation gets to
that point, the better, Nelson says.
‘The critical next step is the development of the
safeguard mechanism for the Emissions Reduction
Fund. The first auction under the fund (expected in
76 | Edition 10
Accountancy Futures | Tax | Australia
early 2015) will give us some pricing info about what
the government might be willing to pay for emission
reductions – an important step in the journey.
Hopefully this will push the needle for businesses
to take advantage of the fund through government
funding for projects to help them transition to and
future-proof their businesses for pricing on carbon that
will inevitably come in the not too distant future.’
This view is supported by the Deakin University
survey, which found that 67% of respondents consider
themselves to be proactive in carbon emissions
reduction, while 35% see their firm as an industry leader
in the field. Almost half (48%) believe they have little
choice but to continue investing in carbon emissions
management, the majority seeing this as integral to
their corporate social responsibility.
Yet Paul Dobson, national lead partner for sustainability
services at Deloitte, says it’s ‘too early to tell’ how
effective the new carbon pricing mechanism will be. ‘It
all depends on the uptake by the business community
on abatement projects. You (also) need a crystal ball to
predict the policy position post the 2020 target.’
Regardless, says Dobson, there will be some implicit
price on carbon, and companies should be factoring
that into their planning. ‘This issue is not going away:
we still need to reduce carbon over time, and energy
prices are going up even without a carbon price,
because of other factors.’
Dobson’s advice to his clients is to focus on efficiency:
‘This will reduce your carbon emissions going forward,
and your potential liabilities down the track.’
The bottom line from the Deakin University research
is that most companies do not see the repeal of the
carbon tax as the last word on Australia’s carbon policy,
but a prelude to an unknown future where some form
of carbon impost is reintroduced.
‘Businesses are waiting to find out what they need to
do, how much they need to spend, when and on what,
in order to be eligible for the incentives to flow from
the Emissions Reduction Fund,’ Subramaniam said. But
they risk lagging behind.
‘The world’s powerhouse economies of China,
Korea and the US are certainly not waiting; they are
all preparing to lower their countries’ own carbon
emissions and if Australia wants to compete on a
global scale they’d better be doing the same – carbon
tax or no carbon tax,’ she said.
‘Australia has moved into an era where it considers
environmental taxes as a bogey figure. Such taxes
need to be a part of a basket of tools but they certainly
have a part to play in effective carbon reduction,’ says
Chas Roy-Chowdhury, head of tax at ACCA. ‘Revenue
from them can be recycled (hypothecated) to help
provide incentives or subsidies for emissions reduction. ‘
ACCA has long sought to highlight the importance of
climate change and sustainability to business through its
research. Sam Bell, policy and communications manager
at ACCA Australia and New Zealand, said: ‘This research
is a call to action on both governments and corporations
to be accountable and transparent for their impacts on
the environment and society.’ ■
Peta Tomlinson, journalist
‘If Australia wants to compete on a global scale it had better lower its carbon emissions – carbon tax or no carbon tax’
Loy Yang Power
Station in the Latrobe
Valley is Victoria’s
newest and most
efficient brown
coal-fired power
station.
Edition 10 | 77
Australia | Tax | Accountancy Futures
Time for actionAs international tax avoidance hits the headlines, the OECD has made swift progress in its programme to tackle the issue, says ACCA’s Chas Roy-Chowdhury
In a flurry of activity just as 2014 was drawing to a
close, the Organisation for Economic Cooperation
and Development’s Base Erosion and Profit Shifting
team released a number of draft discussion papers
as the organisation’s programme on international tax
avoidance notched up a gear. And it couldn’t come
sooner, given the current spotlight on tax evasion and
avoidance. On the face of it, there has been remarkably
swift progress in the BEPS project, but 2015 will
prove pivotal in the fight for greater international tax
transparency and cooperation.
The publication of the drafts followed on from an update
webcast by the BEPS team at the OECD. This update in
turn came after the G20 meeting in Brisbane, which had
welcomed the ‘significant progress’ that has been made
so far. The G20 communique added that the group
remained ‘committed to finalising this work in 2015’.
So by the end of 2015 we will have a large number of
suggestions and policies from the OECD group, but
how much action will there be? And in the meantime,
will 2015 see unilateral action as jurisdictions seek to
stake their own claims over revenue protection?
However, first it would be helpful to look at where we
are now. The BEPS team produced a 15-point action
plan back in 2013. This covered, among other things,
the tax challenges of the digital economy (Action 1),
hybrid mismatch arrangements (Action 2), treaty abuse
(Action 6), permanent establishments (Action 7) and the
development of a multilateral instrument (Action 15).
The OECD believes these 15 actions (see box opposite)
will result in fundamental changes to international tax
standards, based on three core principles: coherence,
substance and transparency. It adds that addressing
BEPS is critical for most countries and must be done in
a timely manner so that actions can be delivered before
the existing consensus-based framework unravels.
At the same time, the OECD says that governments
need time to complete the necessary technical work
and achieve widespread consensus. Against this
background, it is expected that the action plan will largely
be completed within two years of its adoption. Indeed,
the first set of measures and reports was released in
September 2014, just 12 months after the BEPS project’s
launch. Work on the reports to be delivered in 2015
has already started, and will continue quickly to ensure
the rapid development of concrete measures to allow
countries to end double non-taxation and artificial
profit-shifting. Since the launch of the Action Points,
we have seen the publication of a number of draft
discussion papers, followed by public consultations. The
latest batch, cover Action Points 4, 8, 9, 10 and 14, will
be subject to public consultations in early 2015, and the
OECD team admitted that the discussion documents
would have provided plenty of holiday reading.
Indeed, throughout this process, the OECD team has
recognised that it is dealing with an incredibly complex
subject and said at the last webcast update that the
highly technical nature of the actions requires careful
implementation. That could easily be taken to read that
the process will take a long time to come to fruition,
though Pascal Saint-Amans, director of the OECD’s
Centre for Tax Policy and Administration, said during
the webcast that the team recognised the importance
of getting guidance out as quickly as possible. He
also recognised that the European Union was moving
quickly in the wake of the G20 summits.
Balancing actAnd he noted the moves made in the UK following
the Autumn Statement announcement of a diverted
profits tax. Saint-Amans said that the UK initiative was
‘extremely interesting’ as it showed both the relevance
of the BEPS plan, and a highly political concern about
tax avoidance. It also showed that governments are
taking action unilaterally, but he hoped that the UK
view would be compatible with Action 1 on the digital
economy, enabling a coordinated approach that was not
detrimental to investment and government revenues.
And this perhaps drives at the heart of the debate – even
though the project is moving quickly, it is important that
moves to protect revenue are made in a coordinated
fashion. The UK has shown that it can go its own way and
one only needs to look at the example of International
Financial Reporting Standards to understand the ineed
to have everyone on side. Governments face a tricky
balancing act – while facing political pressure at home
to protect or raise revenue, they need to be mindful of
the impact their moves will have on other countries.
This is particularly important for developing countries,
which arguably stand to benefit the most from a number
of the action points, especially when it comes to country-
Chas Roy-Chowdhury
FCCA is head of
taxation at ACCA.
He is the staff expert
on ACCA’s Global
Forum for Taxation
and worked in public
practice before joining
ACCA.
‘Even though the project is moving quickly, it is important that moves to protect revenue are made in a coordinated way’
Accountancy Futures | Tax | BEPS
78 | Edition 10
by-country reporting. The OECD has vowed to increase
the involvement of these countries during 2015, so we
wait to see whether this commitment is translated into
action in the future, but again the signs are encouraging.
A strategy of deepening the engagement of developing
countries was launched last November, followed by a
workshop that brought together officials from 14 such
countries the following month. Participants agreed on
the pressing need to reform the international tax rules ‘as
soon as possible’ and considered how to most effectively
participate in the debate, as well as the support required
to ensure effective implementation of the BEPS measures.
The officials requested that outputs would be practical
and easy to implement, with support required to ensure
increased awareness at all levels. Capacity building
should focus on practical guidance and participants
welcomed the preparation of toolkits in a number of
areas of the BEPS project, as well as related issues that
developing countries have identified as significant,
such as wasteful tax incentives and availability of quality
comparability data for transfer pricing purposes.
So there is a lot to get through in 2015. Further webcasts
will update us on progress over the year, together with
the launch of more discussion documents and public
consultations on areas such as disclosure rules, controlled
foreign companies and cost contribution arrangements.
But above all we must see the standards translated into
practical tools in 2015. The future of the BEPS project
depends on the ability of tax authorities to deliver,
otherwise we will be left with more heat than light. ■
EC president Jean-
Claude Juncker at
the G20 summit in
Brisbane, November
2014. In the summit’s
wake, the EU is moving
fast on tax avoidance.
The 15-point BEPS Action PlanAction 1 Address the tax challenges of the digital economy.
Action 2 Neutralise the effects of hybrid mismatch arrangements.
Action 3 Strengthen CFC (controlled foreign companies) rules.
Action 4 Limit base erosion via interest deductions and other
financial payments.
Action 5 Counter harmful tax practices more effectively, taking into
account transparency and substance.
Action 6 Prevent treaty abuse.
Action 7 Prevent the artificial avoidance of PE (permanent
establishment) status.
Actions 8-10 Assure that transfer pricing outcomes are in line with value
creation (8: Intangibles, 9: Risks and capital, 10: Other
high-risk transactions.
Action 11 Establish methodologies to collect and analyse data on BEPS and
the actions to address it.
Action 12 Require taxpayers to disclose their aggressive tax planning
arrangements.
Action 13 Re-examine transfer pricing documentation.
Action 14 Make dispute resolution mechanisms more effective.
Action 15 Develop a multilateral instrument.
BEPS | Tax | Accountancy Futures
Edition 10 | 79
A diverse role for fi nance
Regulators around the world are increasingly taking
action to encourage greater diversity within
corporate entities. The European Commission,
for example, has proposed a directive that will require
companies to have a minimum of 40% of either gender
among their non-executive directors by 2020.
As well as setting targets, governments are requiring
companies to report diversity data. In Australia, for
example, all non-public organisations with 100 or
more employees must now provide standardised data
relating to a set of gender equality indicators. And in
the UK, the corporate governance code now requires
listed companies to set out their diversity policy in
their annual report and disclose progress against any
measurable objectives they have set themselves.
Businesses need to take action in response, but not just
to avoid breaching regulatory requirements. A number
of research studies have shown the business benefi ts
of diversity – not only intangibles such as greater
innovation, but also bottom-line benefi ts. For example,
a September 2014 study by the Credit Suisse Research
Institute (based on 3,000 international companies)
found that companies where women accounted for
over 15% of senior management achieved an average
return on equity of 14.7% in 2013, compared with 9.7%
by companies where women accounted for under 10%
of senior managers.
Diversity is a fi nance issue – one that requires all the analytical, governance and management skills the fi nance function has to offer
In response to regulatory pressure and the mounting
evidence for diversity benefi ts, companies are starting
to set their own targets. Lloyds Banking Group,
for example, has set itself the goal of 40% female
representation at all levels of management by 2020.
Many organisations like Lloyds see benefi ts from
having a workforce – including senior personnel – that
refl ects their customer base.
But diversity isn’t only about gender. A recent report
by ACCA and the Economic and Social Research
Council, Towards better diversity management, shows
that diversity relates to many different attributes –
gender, age, ethnicity, disability, sexual orientation, and
educational and socio-economic background. Even
where organisations appear to have a mix of nationalities
or genders in senior roles, those individuals often share a
similar background, so true diversity can still be lacking.
Role of fi nanceWithin individual businesses, making the case for
diversity action remains a challenge. Line managers have
other priorities and are often under pressure to deliver
short-term results – diversity initiatives generally require
a medium to long-term timeframe to have an effect.
Part of the challenge is to demonstrate the bottom-
line impact. This is where fi nance functions need
to be proactive. ‘The expertise of the fi nance team
How fi nance can help manage diversity* Approach HR and diversity colleagues to propose working together in order to assess diversity within the
organisation and its interaction with management strategy.
* With HR, identify the best measures for analysing diversity impacts – fi nancial measures and softer metrics such
as employee or customer satisfaction.
* Assess the quality and extent of current diversity data and whether this needs to be improved.
* Consider including shareholder value, wider stakeholder value, regulatory costs and the global value chain in
the scope of the business case.
* Consider the fi nancial impact of lost business, as well as the potential for increased turnover and profi t from
improved customer understanding.
* Tailor the business case and its presentation for specifi c audiences, whether HR, line managers or C-level executives.
* Establish governance around diversity actions. For example, include diversity KPIs in management reporting.
* Examine the standard methodologies and reporting practices used by fi nance to ensure these are not acting as
a blocker to diversity initiatives.
Accountancy Futures | Diversity | Business benefi ts
80 | Edition 10
can demonstrate linkages between good diversity
management and business performance,’ says Claudia
Chapman, head of policy and campaigns at ACCA.
‘The fi nance function could help diversity managers
overcome some of the hurdles to success such as the
pressure for short-term business results and lack of
support within the business.’
Finance teams can bring their analytical skills to bear on
performance data – for example, looking at sales data
to determine whether particular attributes are linked
to increased revenue. Nikki Walker, a diversity and
inclusion (D&I) expert from consultancy More2Gain,
uses her own fi nance and operations experience to
help companies build a business case for change. She
recalls one client fi nding that slightly older, female
employees were getting the best customer satisfaction
scores and taking the highest spend. ‘This analysis
caused the company to step back and think about
the need to recruit slightly different people – perhaps
older, perhaps different genders and perhaps different
ethnicities – in order to be able to connect with their
customers and drive more value to the bottom line,’
she says. ‘That’s the kind of analysis that makes business
leaders understand why they need to invest in D&I.’
But making the business case isn’t only about valuing
the upside of action – it should also consider the
potential negative impacts of inaction. Walker has
seen the fi rst signs of major companies demanding
D&I progress from their suppliers – or threatening to
remove their business. ‘Finance can show the impact of
losing a customer on the bottom line,’ she says. ‘That’s
what drives change.’ Similarly, failure to meet regulatory
targets could generate bad press, damage corporate
reputation and ultimately reduce shareholder value.
Governance and methodologyAs well as helping to make the business case, fi nance
can ensure there is appropriate accountability and
governance attached to D&I initiatives. For example, two
or three key performance indicators could be included
in the monthly management pack sent to the board to
report on business performance. This helps integrate D&I
management with mainstream business management. ‘It
needs to be part of the way the business is run,’ Walker
says. ‘Finance can help with mainstreaming it.’
Finance functions also need to examine their
own practices, including the standard reporting
methodologies they require business units to use, to
make sure that these aren’t impeding policies that could
support greater diversity. For example, requiring business
units to report performance data based on basic physical
headcounts rather than full-time equivalent employees
could deter the spread of part-time working.
What’s next?Looking ahead, the case for diversity is beginning to
encompass the concept of the ‘global value chain’. As
the ACCA and ESRC report highlights, this approach
involves ‘seeking to redress disparities of power across
a company’s operations in different parts of the world’.
It also refl ects the shift in business and economic
power towards emerging markets and away from the
mature economies of the West.
Alison Maitland, a writer on leadership and diversity
topics, says leading organisations are already moving
their diversity initiatives to the next level with a greater
focus on ‘inclusion’. ‘Among more experienced
companies, there is a clear shift of emphasis in the search
for what works,’ she says. ‘Instead of, or alongside,
programmes focusing on categories of employee –
women, ethnic minorities, people with disabilities, etc –
these organisations are investing in developing leaders
and creating inclusive cultures in which everyone feels
valued and able to achieve their potential.’
Some companies have renamed their strategy
‘inclusion and diversity’ or dropped the word diversity
altogether. ‘Others have renamed such programmes
to refl ect their emphasis on culture change,’ Maitland
says. ‘As many of these companies operate globally,
they attribute increasing importance to managers’ and
leaders’ possession of cross-cultural skills.’ ■
Sarah Perrin, journalist
Towards better diversity management is at
www.accaglobal.com/ab134
Business benefi ts | Diversity | Accountancy Futures
Edition 10 | 81
Celebrating 110 yearsACCA celebrated its 110th birthday on 30 November
2014. Founded in 1904 with core values of opportunity,
diversity, innovation, integrity and accountability, the
body has been developing professional accountants
ever since. Significant expansion in the past four
decades has seen membership grow from 12,500 in
1970 to 170,000 in 180 countries in 2014.
‘There has never been a greater or more urgent
need to develop sustainable economies,’ says Helen
Brand, ACCA chief executive. ‘A well-coordinated
international accountancy profession, which demands
the highest ethical and technical standards of the
world’s professional accountants, is key to positive
economic development.’
ACCA has continued to support new markets and
launched its 91st office last year, in Myanmar. In many
parts of the world, ACCA is the only international
body working hand-in-hand with national bodies,
governments, employers and education providers to
help build the financial capacity needed to underpin
economic development.
ACCA and IMA focus on futureACCA and IMA (Institute of Management Accountants)
have renewed their long-term commitment to their
global strategic partnership with the announcement of
a multi-year ‘signature’ research programme, which will
focus on futures-related topics.
As well as research projects, this new signature
programme includes the development of a broader
suite of outputs, learning resources, joint events and
enhanced digital engagement.
‘ACCA is pleased to announce the next step of its
successful strategic partnership with IMA, which has
already reaped huge dividends for CFOs, aspiring
finance and accounting professionals, and the profession
at large,’ said Helen Brand, ACCA chief executive.
Jeff Thomson, IMA president and CEO, said: ‘IMA and
ACCA have a shared commitment to serving the public
interest and enhancing organisational capability, given
the evolving and challenging role of the CFO team.’
Further details of the futures research programme were
announced by both bodies at the World Congress of
Accountants in Rome last November.
For more on ACCA and IMA, go to www.accaglobal.
com/ab/173
Afghanistan moveACCA and the Afghanistan Ministry of Finance have
signed an agreement to develop the accountancy
profession in Afghanistan.
The memorandum of understanding will see the
Afghan government and the global accountancy body
establish the infrastructure for long-term development
of the finance profession.
The memorandum sets out the objectives for the
partners to work together to build capacity within the
profession in Afghanistan, with ACCA providing expert
advice and guidance on a broad range of areas, such as
the establishment of a national professional accounting
organisation, including qualification development,
professional regulation and membership issues.
For more on ACCA and the MoU, go to www.
accaglobal.com/ab/174
New breed of adviserRecommendations on how entrepreneurs, enterprises
and finance professionals can achieve success
together have been set out by ACCA’s Global Forum
for SMEs. The paper, A new breed of adviser for the
modern-day enterprise, emphasises the importance of
communicative ‘soft’ skills to the role of business adviser.
It also considers the potential of Massive Online Open
Courses (MOOCs) in enterprise education, in the light
of ACCA’s 2014-launched course with the University of
Exeter, Discovering Business in Society. ■
The report is available at www.accaglobal.com/ab/175
ACCA chief executive
Helen Brand: ‘There
has never been a
greater or more
urgent need to
develop sustainable
economies.’
(Right) Stephen
Heathcote, ACCA’s
executive director,
markets, with Naim
Sadat, treasury
program coordinator
at the Afghanistan
Ministry of Finance.
Accountancy Futures | News | In brief
82 | Edition 10
Editor Lesley Bolton [email protected] +44 (0)20 7059 5965
Contributing editors Jo Malvern, Chris Quick, Colette Steckel
Sub-editors Dean Gurden, Peter Kernan, Jenny Mill, Eva Peaty, Vivienne Riddoch
Design manager Jackie Dollar
Designers Bob Cree, Robert Mills
Production manager Anthony Kay
Head of ACCA Media Chris Quick
Pictures Corbis Printing Wyndeham Group Paper Antalis Ltd.
This magazine is produced on paper that contains certified fibres and is manufactured under strict conditions that allow the grade to carry the EU Eco-label. The mill operates under the ISO 14001 certified environmental management system.
ACCA President Anthony Harbinson FCCA Deputy president Alexandra Chin FCCA Vice president Brian McEnery FCCA Chief executive Helen Brand OBE
ACCA Connect Tel +44 (0)141 582 2000 [email protected] [email protected] [email protected]
A list of ACCA offices can be found on the back cover.
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 170,000 members and 436,000 students in 180 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of over 91 offices and centres and more than 8,500 Approved Employers worldwide, which provide high standards of employee learning and development.
Accountancy Futures Edition 10 was published in March 2015.
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 2015 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.
29 Lincoln’s Inn Fields, London WC2A 3EE United Kingdom +44 (0)20 7059 5000
Chiew Chun Wee
Head of policy, Asia Pacific
Ewan Willars
Director of policy, ACCA
Sue Almond
External affairs director
Arif Mirza
Regional head of policy, MENASA
Think Ahead
The London Tube
system is a good
example of corporate
culture (see page 6).
Editorial board
Accountancy Futures
2 | Edition 10 Edition 10 | 83
Accountancy Futures
AccountAncy FuturescriticAl issues For tomorrow’s proFession i edition 08 i 2014
Ac
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un
tAn
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ditio
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29 lincoln’s inn Fields london wc2A 3ee united Kingdom +44 (0)20 7059 5000 www.accaglobal.com
FROM ALGORITHMS TO ACTIVISTScorporAte reportinG And tHe diVerGinG demAnds oF inVestors
plus: inteGrAted reportinG pioneers i peArson cFo interView i BiG dAtA i diVersity i tim HArFord i stAndArd cHArtered AsiA FinAnce cHieF i sme FundinG i tAx And trust i tomorrow’s cFo cAreer pAtHs i stocK mArKets And sustAinABility i Future oF Audit
AF8_Cover.indd 1 08/01/2014 14:41
ncy Futuresdition 08 i 2014
FROM ALGORITHMS TO ACTIVISTSestors
ersity i nd trust i
uture oF Audit
ACCOUNTANCY FUTURESCRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 09 I 2014
AC
CO
UN
TAN
CY FU
TURES I E
DITIO
N 09 I 2014
POLITICS, PROTEST AND PILLAGEA NEW WORLD OF RISK FOR MULTINATIONAL BUSINESS
PLUS: KPMG GLOBAL CHAIRMAN I MINT ECONOMIST I SIR DAVID TWEEDIE I NATURAL CAPITAL I THE NEW SPACE RACE I CONFIDENCE ACCOUNTING I CEO/CFO RELATIONSHIP I PUBLIC AUDIT IAFRICAN SUSTAINABILITY REPORTING I DAWN OF THE MOOC I CHINA FINANCE INNOVATION
ACCA offi cesAUSTRALIA AND NEW ZEALAND SYDNEY +61 2 8999 9080 [email protected] *BANGLADESH Dhaka
+88 02 882 4672 [email protected]*BOTSWANA GABORONE +267 318 8756 [email protected].
com*CAMBODIA PHNOM PENH +855 (23) 991 676 [email protected]*CANADA TORONTO
+1 416 966 2225 [email protected]*CARIBBEAN PORT OF SPAIN +1 868 662 4777 [email protected].
com*CHINA BEIJING +86 10 6526 9776 [email protected] CHENGDU +86 28 8620 2085 vivian.wang@
cn.accaglobal.com GUANGZHOU +86 20 8755 7932 [email protected] HONG KONG +852 2524 4988
[email protected] MACAU +853 8294 6708 [email protected] SHANGHAI +86 21 6391 6777
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+420 226 223 000 [email protected]*ETHIOPIA ADDIS ABABA +251 115 159533 [email protected].
com*EU BRUSSELS +32 (0) 2 286 11 37 [email protected]*GHANA ACCRA +233 (0)302 731 735
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com*UNITED ARAB EMIRATES DUBAI +971 (0)4 391 5451 [email protected]*VIETNAM HANOI
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com*ZIMBABWE HARARE +263 (4) 304 436 [email protected]
*ACCA HEADQUARTERS 29 Lincoln’s Inn Fields, London, WC2A 3EE, UK +44 (0) 20 7059 5000
Stephen Heathcote Executive director – markets [email protected]
Jamil Ampomah Market director – Sub-Saharan Africa [email protected]
Mark Cornell Market director – Americas and Western Europe [email protected]
Stuart Dunlop Market director – MENASA [email protected]
May Law Market director – Asia Pacifi [email protected]
Lucia Real-Martin Market director – emerging markets [email protected]
Stephen Shields Director of global employer relationships [email protected]
Andrew Steele Market director – partnerships & recognition [email protected]
Electronic and iPad versions of Accountancy Futures are available at www.accaglobal.com/futuresjournal
AF_Cover_Final.indd 1 03/09/2014 16:09
Accou
ntan
cy Futu
res | Ed
ition 10
Plus: IFAC president | Robin Cosgrove Prize | Governance |Funding | SMPs | Shared services | Integrated thinking | Ebola effect | Healthcare | Sustainability | Children’s rights | Whole of government accounts | Carbon taxes | Cambodia profession
Critical issues for tomorrow’s profession Edition 10 | 2015
Corporate cultureGetting your organisation on the right track
ACCA offi cesAustralia and New Zealand Sydney +61 2 8999 9080 [email protected] | Bangladesh Dhaka +88 02 882 4672 [email protected] | Botswana
Gaborone +267 318 8756 [email protected] | Cambodia Phnom Penh +855 (23) 991 676 [email protected] | Canada Toronto +1 416 966 2225
[email protected] | Caribbean Port of Spain +1 868 662 4777 [email protected] | China Beijing +86 10 6526 9776 [email protected]
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| ACCA headquarters 29 Lincoln’s Inn Fields, London, WC2A 3EE, UK +44 (0) 20 7059 5000
Electronic and iPad versions of Accountancy Futures are available at www.accaglobal.com/futuresjournal
Stephen Heathcote
Executive director – markets
Jamil Ampomah
Market director – Sub-Saharan Africa
Mark Cornell
Market director – Americas and Western Europe
Stuart Dunlop
Market director – MENASA
Lucia Real-Martin
Market director – emerging markets
Andrew Steele
Market director – partnerships & recognition
Think Ahead
Accountancy Futures