Accountancy Futures

ACCOUNTANCY FUTURESCRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 04 I 2011

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29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom +44 (0)20 7059 5000 www.accaglobal.com

DIGITAL EXPOSUREHOW TECHNOLOGY IS CHANGING THE WORKFORCE

PLUS: SHELL CFO ON STRATEGY I TOP 10 RISKS I OUTSOURCING AND SKILLS I E-HEALTH I KPMG CHINA CHIEF I THE NEW DIVERSITY I HANS HOOGERVORST AND SIR DAVID TWEEDIE I THE IMPORTANCE OF FUTUREGAZING I MICROFINANCE IN AFRICA I INTEGRATED REPORTING

Editor Chris Quick

[email protected]

+44 (0)20 7059 5966

Managing editor Lesley Bolton

Sub-editors Adrian Arratoon, Dean Gurden, Peter Kernan, Eva Peaty, Vivienne Riddoch

Design manager Jackie Dollar

Designer Robert Mills

Production manager Anthony Kay

Head of publishing Adam Williams

Pictures Corbis

Printing Polestar Wheatons

Paper Antalis McNaughton Group. This magazine is produced on paper that contains certified

fibres sourced from forestry within 120km of the paper mill. The mill operates under ISO 14001

certified environmental management system and has its own biomass energy production.

ACCA

President Dean Westcott FCCA

Deputy president Barry Cooper FCCA

Vice president Martin Turner FCCA

Chief executive Helen Brand

ACCA Connect

Tel +44 (0)141 582 2000

[email protected]

[email protected]

[email protected]

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

ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 147,000 members and 424,000 students in 170 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of 83 offices and centres and more than 8,500 Approved Employers worldwide, which provide high standards of employee learning and development.

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 2011 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. Accountancy Futures Edition 4 was published in October 2011.

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ACCOUNTANCY FUTURESACCOUNTANCY FUTURES

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When was the last time you picked up a pen and wrote out something longer than a scribble on a Post-it note? Even to those of us who started our careers before the internet revolutionised our working lives, the idea seems quaintly old-fashioned. Digital technology has revolutionised every aspect of our working and personal lives, from shopping to socialising to business planning. Our cover feature in this edition tackles the impact of this on the training of finance professionals. The generation entering the workforce at the end of this decade will have grown up entirely in a technology-enabled world. For them, the idea of professional training assessed by writing answers with pen and paper will seem both anachronistic and irrelevant. Employers are likely to take a similar view. Future finance professionals will be working in increasingly technology-rich environments – the days of training and assessment in technology-free zones are surely numbered.

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

ACCOUNTANCY FUTURES

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John Davies head of [email protected]

Chiew Chun Wee head of policy, Asia [email protected]

Aziz Tayyebi head of international [email protected]

Dr Afra Sajjad head of education, [email protected]

Editorial board

ACCOUNTANTS

FOR BUSINESS

PG09 SHIFTING SANDS

The unrest in the Middle

East and North Africa is

shaking up the business

world as well as the political

PG12 TOUGHER AT THE

TOP The CFO’s role is

more pressurised than ever

PG16 SURVIVAL OF THE

FITTEST Business risk radar

The challenges facing CFOs have never been greater or more diverse, according to Royal Dutch Shell finance chief Simon Henry PG12

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PG04 EDITION 04

PG20 FREEING FINANCE

Outsourcing’s attractions

are compelling, but do you

have the skills in place?

PG24 TALENT TRAIL Grow

your own business partners

PG26 CHINA’S NEW PLAN

Sustainability comes first

PG30 GROWTH MARKET

China’s finance skills gap

PG32 SMALL IN

SINGAPORE SMPs can

deliver value

PG44 ETHICS The board

sets the corporate tone

PG46 FIND THE FLAWS

Checking for corruption

PG48 BRIBERY Drive it out

PG50 SMALLCOVILLE The

rise and rise of the limited

liability company

PG52 ROOM FOR

IMPROVEMENT

If corporate governance

is to aid our ailing

planet, there needs to

be fundamental change

COVER STORY

PG06 DIGITAL EXPOSURE

With technology

advancing irresistibly

on virtually every front

imaginable, accountants

and the accountancy

profession itself must also

adapt to meet the digital

expectations of employers

and future employees

Cover image: a shopper in

a Shanghai supermarket

uses a mobile phone to

scan the Quick Response

matrix barcodes of

products on display to

facilitate online ordering

and delivery

PG34 EURO VISION

Unlocking the potential

PG36 THE CRYSTAL BALL

Predicting tomorrow’s

business realities

PG38 FORUM FOCUS

ACCA’s new global forums

PG42 AN OPEN BOOK

Transparency and success

Accountancy in China will not come of age until the number of professionals has grown significantly, warns Stephen Yiu FCCA, chairman of KPMG China PG30

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CORPORATE REPORTING

PG54 HANDING

OVER THE BATON

New IASB chairman Hans

Hoogervorst in conversation

with his predecessor

Sir David Tweedie

PG57 GETTING CLOSER

Integrated reporting

framework delivered, and

HRH The Prince of Wales

PG60 HEAVY GOING?

Why the annual report

deserves better

PG62 A BIGGER PICTURE

Investors in Chinese

companies should look

beyond the numbers, says

Shanghai Stock Exchange’s

Zhou Qinye

DIVERSITY

PG84 DOORWAY TO

SUCCESS Diversity is not

merely about equal rights

– a varied workforce can

help leverage a business’s

real potential

PG90 FINDING A TRUE

LEVEL Social mobility

is the most effective

promoter of a free market

in skills, allowing the most

talented individuals to rise

to the top

PUBLIC SECTOR

PG93 THE LONG VIEW

Outcome-based budgeting

and policymaking is

becoming increasingly

popular in public sector

management

PG96 WIRELESS WARDS

Mobile telephony boost for

healthcare productivity

PG98 ROUND-UP A look

at recent and upcoming

research and events

ENVIRONMENTAL

ACCOUNTABILITY

PG65 BRAVE NEW WORLD

Could clean energy break

the toxic link between

economic growth and

environmental damage?

PG68 REPORTING FOR

DUTY Accountants are key

to sustainability reporting

ACCESS TO FINANCE

PG70 DIGITAL MARKET

Putting the ‘e’ into EU

PG72 SMALL IS BEAUTIFUL

… so cut compliance load

PG74 KEEPING IT CLEAN

Microfinance is the success

story of the developing

world, but can it maintain

its ethical integrity?

AUDIT AND SOCIETY

PG76 SHAKE-UP IS SURE

Brace yourself for reform

PG78 ALL CHANGE

It is vital that changes to

the role of the US public

auditor are holistic

PG80 WHAT INVESTORS

WANT Audit’s real value

PG83 EXTENDED AUDITS

Should they range further?

ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS E-PROFESSIONAL

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Digital exposureTechnology has changed the way we live. ACCA’s Helen Perkins takes a look at how it will change how accountants are made

It is clear that society is being transformed by technological developments – perhaps nowhere more so than through an increasingly rich and pervasive online

world – which is becoming as prevalent as the physical one we inhabit.Within the last decade, we have begun to see the true power of the internet. Not only does it transmit knowledge and information, but it can also bring people with common interests together across geographical boundaries, through social networking sites. The rapid engagement with these sites has

been one of the major transformational trends of recent years.It’s an oft-cited statistic that if Facebook – launched in 2004 – were a country, its 750 million inhabitants would make it the third most populous in the world, behind only China and India. In the corporate space, LinkedIn – the professional networking site created in 2003 – now has 120 million registered professionals and more than two million companies have LinkedIn company pages. These are not just places to ‘meet’ and exchange ideas – they are also effecting

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major change in the physical world, not least in shaping the sociopolitical landscape. In February 2011, an Egyptian baby was named Facebook to commemorate the role social media played in the Arab Spring uprisings.There is also now widespread use of immersive technologies. The rise of gaming devices (the Nintendo Wii had sold 87.5 million units worldwide as at the end of June 2011), and virtual environments like Second Life, mean that increasing numbers of people are used to interacting through digital representations of themselves. Gartner predicts that by 2013, the majority of under-18s entering tertiary education will have an avatar.

DIGITAL WORKFORCEAs a result, we are seeing a new global generation of technology-enabled workers.In its recent report The Rise of Generation C: Implications for the World of 2020, global management consulting firm Booz & Company states that, by 2020, an entire generation will have grown up in a primarily digital world. The first to be born into and brought up in this digital age, they see computers, the internet, mobile phones, PDAs, texting, tweeting and social networking as part and parcel of their daily lives. In many economies, a technology-enabled world is the only one they have ever experienced. Booz terms this Generation C – ‘connected, communicating, content-centric, computerised, community-oriented, always clicking’. What influence will this generation have on how becoming and remaining a professional will be viewed in the future?First, employers are responding by seeking to reflect the preferences of current and future hires in order to remain relevant and attractive.‘The generation of recruits joining us now are digital natives – they’ve been brought up with the latest technology,’ Richard Pollard, global development leader at PwC, told ACCA’s Research and Insights Conference 2011 recently. ‘They have multiple mobile devices on joining the firm and use many different applications and technologies. For people coming into our business now, it wouldn’t be credible to say, “You can’t use that technology.” We have to adapt and anticipate what they will be using.’ Similarly, learning providers are also changing how they work to respond to these evolving needs. ‘One driver for us using e-learning now is a demand from customers that we put as much online as possible,’ explained Martin Taylor, CEO of BPP Business School, also speaking at the conference.

For both employers and educators, there is also an imperative to help connect an international network of aspiring and existing professionals. As the globalisation of business continues, more companies are made up of highly dispersed workforces, including growing numbers of remote workers. The ability to connect these groups of learners through virtual classrooms and enable them to collaborate is highly valuable, due to the rich exchange of ideas and experiences.Technology allows organisations to cater for and connect this raft of talent in a consistent way – while also affording many more opportunities for moulding learning to individual needs. One of the past criticisms of online learning has been that is does not provide a sufficiently tailored experience for the learner. But now, technological advances are arguably providing opportunities for much greater personalisation than other means of learning.The range of data that can be analysed via the internet enables learning providers to build a detailed picture of a learner’s strengths and weaknesses, their knowledge gaps and learning styles, allowing them to build bespoke learning plans and outcomes. ‘As a result, we could start to put together people with similar learning needs and at similar points in their learning journeys together as a group. That would mean you can get much more focus,’ explained Taylor.

EVOLUTION OF LEARNING Within the professions – where acquiring high-level skills and knowledge is an integral part of development – what technological developments mean for how education and training can be merged is also being exploited. The type of training traditionally experienced by professionals effectively compartmentalises assessment (normally by means of a written examination), learning (face-to-face course) and practical experience (work) into discrete areas.But, with the increasing use of virtual learning environments (VLEs), the worlds of learning and assessment can be brought closer together. The obvious benefit of this is that what and how people learn can be more closely replicated in an assessment situation. What is particularly powerful for professional bodies is the opportunity technology provides to blur the artificial divide between learning, assessment and the practical application of the skills and knowledge gained in the workplace.Online methods offer the capacity to ‘blend’ forms of learning and assessment in a way

Helen Perkins has over 20 years’ experience in the accountancy education and training sector having worked for Coopers & Lybrand, Accountancy Tutors and in various roles for ACCA in the UK and North America. She is now leading ACCA’s new stream of research and insights work on the e-professional.


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that is much more efficient and effective. This can provide an experience so close to that of the real world that it is effectively moving beyond simulation to what is termed ‘emulation’ – an experience which mimics the real-world challenges that professionals face. It is this synthesis that many professions are already embracing.Simulations have long been used in education and training, through role plays and interviews.

The first computer-aided flight simulators were developed in the 1960s and are a well-established means of training both military and commercial pilots. With developments in VLEs, simulations/emulations are now coming of age in a range of professions.For example, computer-based simulations are used as part of the US Medical Licensing Examination, designed to test trainee doctors’ ability to treat patients in a practical setting. Candidates are presented with authentic problems and treat a simulated patient on screen. They receive information, conduct examinations, order tests and treatments, to which the electronic patient will respond. A candidate’s performance is assessed against model responses using a regression-based, automatic scoring procedure.

HEALTHY OPTIONSThe School of Pharmacy at Keele University uses a similar methodology for its students. Traditionally, pharmacy students were assessed on their diagnostic and prescription skills by role plays with tutors and actors, posing as patients. Today, pharmacy students are presented with a series of scenarios on screen and they interact with a number of virtual patients through free text questions, interrogating the patient to reach a diagnosis and suggest treatment. The virtual patients can be accessed on laptops and mobile devices, so learning can be done anywhere.But is technology-enabled learning and assessment a concept that can really take off globally, and be replicated in a variety of environments, given the current inequalities in IT infrastructures that exist around the world?Many point to the adoption of mobile technologies – leapfrogging fixed line means of connection – as a likely solution. A recent McKinsey report, Can India Lead the Mobile-

Internet Revolution?, suggests that India could become the first mobile digital society. The report points out that, although just 7% of the population has access to the web, users in India consume an average of 4.5 hours of digital content, offline per day. If the demand for this content could be harnessed through the mobile internet, McKinsey forecasts that the number of consumers could reach 450 million by 2015 and lead the way for widespread mobile internet adoption by developing markets. Looking globally, Cisco predicts that – by 2015 – the majority of those accessing the internet will do so through mobile devices.

DIGITAL CONSUMERSThe online world has given people a new way of consuming information and accessing services – one which is immediate, constantly available and increasingly personalised and immersive. It is building an expectation that we can get everything – including the skills we need to compete in the employment market – when and how we want. There will be an inevitable shift towards more sophisticated and customised learning and development interventions to meet these demands.From the point of view of professional bodies, the growing sophistication in assessment methodology has significant quality advantages. Technology has the capability to provide more roundly and robustly assessed professionals, with the real-world skills employers value.At the same time, entrepreneurship is being fuelled by digital advances, with barriers to entry in the business world fast disappearing. There is no longer a need for physical infrastructure to start a business – practically any good product or service idea can be rapidly taken to market, through a web of online partners and suppliers.All this poses a real challenge to the concept of what it means to become and remain a professional in the digital age. It’s a challenge to which the accountancy profession needs to rise to – if it is to keep pace with developments in other professions and appeal to the coming generation of worker. For its part, ACCA will be moving into a new technological space to meet the needs of employers for work-ready professional accountants, while maintaining the high reputation of the ACCA brand.

‘For people coming into our business now, it wouldn’t be credible to say, “You can’t use that technology.” We have to adapt’ Richard Pollard, PwC

‘One driver for us using e-learning now is a demand from customers that we put as much online as possible’ Martin Taylor, BPP

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ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS GLOBAL ECONOMY

‘In a sense, our business has become more resilient.’ On its face, this is an unexpected assertion for a finance chief in the Middle East to make.

Waves of political unrest have sown instability throughout the region, in some cases toppling unpopular regimes and in others generating violent clashes between factions that remain unresolved. But for Richard Turner FCCA, CFO of Abu Dhabi Ship Building (ADSB), the upshot of the regional turmoil is that ‘defence is an increasing imperative’.This is not to say that it is smooth sailing for the defence contractor. Sales of vessels in some countries affected by unrest have been cancelled. So even if the general outlook for the regional defence industry is positive, for the foreseeable future the CFO’s watchword is flexibility. ‘You always need a Plan B,’ he says. A similar pattern is playing out for other companies in the region. According to a recent survey of CFOs in the Middle East by Deloitte, rising optimism is mixed with a decidedly defensive approach to growth, with cutting costs and boosting cashflow top priorities.

CFOs in the Middle East are in an ‘invidious position,’ according to Stuart Dunlop, head of ACCA Middle East. The turmoil ‘impacted investment decisions profoundly,’ he adds. This varies significantly by country, of course, but in general major spending plans are on hold until conditions are more settled. On a recent conference call with investors, Jan Frykhammar, CFO of Swedish telecoms equipment maker Ericsson, noted that for the firm’s customers in the Middle East, ‘investment decisions are postponed and becoming slower and slower’. The company’s ‘big focus’ was freeing up capital from the worst affected markets and thus ‘lowering the country risk’. Aside from the obvious impact on business climate, further complications can be expected from shifting regional alliances in the wake of the turmoil. The new regime in Egypt, for example, turned down financial assistance from the International Monetary Fund and World Bank in favour of a mix of loans, investments and grants from Saudi Arabia, Qatar and the UAE. In a region where the state plays a heavy role in the economy, the implications

CFOs will play a crucial role in the economic future of Middle East and North African trouble spots, says the Economist Intelligence Unit’s Jason Karaian

Shifting sands

Jason Karaian is a senior editor at the Economist Intelligence Unit in London. He covers financial services for Industry Briefing & Forecasts (www.eiu.com/financialservices). Previously, he was deputy editor of the European edition of CFO magazine.

free-market economic policies as a result. The financial aid provided by richer countries to conflict-ridden economies – as with Saudi aid to Egypt, Bahrain and Oman – also lacks the stringent conditions on economic reforms that financing from multilateral organisations such as the IMF insist on. As a result, businesses operating in the Middle East and North Africa will find conditions less liberal than before. In some ways, state-led financing is less of a choice than it seems. Banks across the region are reluctant to lend, for reasons that predate the outbreak of political unrest. The global crisis hit financial firms in the Middle East hard, nowhere more so than in Dubai. The emirate’s borrowing binge saddled it with daunting debts when the flow of cheap credit slowed and the global economy stumbled. As Dubai’s property market plunged, in late 2009 the government announced a ‘standstill’ on repayments of more than US$20bn in debt issued by state-owned investment firm Dubai World.


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of these allegiances will be felt by companies, particularly those operating across borders.The Economist Intelligence Unit (EIU) believes that the likely outcome is ‘gridlock politics’, with a degree of reform taking place across the Arab world as most countries move from autocracies to hybrid regimes (somewhere between democracy and authoritarianism). However changes are brought about, they are likely to fall short of introducing genuine democratic accountability in decision-making.

BENEFITS BOOSTThe meagre democratic harvest of the so-called Arab Spring will nonetheless yield potential economic opportunities for businesses. The turmoil pushed up oil prices significantly, a timely windfall for the region’s major producers. To pacify restive populations, oil-rich states have announced massive new spending programmes intended to boost incomes, improve social benefits and upgrade infrastructure. Saudi Arabia, for example, plans to spend some US$130bn, or around 30% of gross domestic product (GDP), on a range of such measures. In countries like Saudi Arabia, Qatar and the UAE, where there has been little or no political upheaval, this amounts to significant stimulus for markets already considered the most attractive in the region when it comes to growth prospects. ‘The areas where growth was expected haven’t fundamentally changed,’ notes the regional finance director of a western multinational firm in the business-to-business industry. ‘We had strategic concerns in the countries where we’ve seen unrest. They were already areas that were difficult to do business in.’ An exception to this rule is Bahrain. Already losing ground to Dubai as a regional financial centre, the violent conflict that erupted in February and March 2011 spooked the foreign investors and tourists that the small, open country relies on to diversify its economy away from oil. Staff at international financial firms moved elsewhere – often Dubai – and it is unclear whether they will return in the same numbers as before. Dubai’s strength in banking and Qatar’s renewed focus on asset management and insurance look likely to erode Bahrain’s position as an international financial hub, especially considering the country’s political risk and damaged reputation. A common response to the Arab uprisings has been to boost state control of the economy. Part of protesters’ motivation stems from the wealth amassed by elites with ties to officialdom, perceived as evidence of the flaws of economic liberalisation. Governments across the region have generally scrapped

15.8%9.5%6.7%4.7%4.6%4.4%4.3%3.3%3.3%2.2%2.0%1.3%1.2%1.1%0.8%

-5.5%-28.2%

ESTIMATED REAL GDP GROWTH IN 2011

QATARIRAQSAUDI ARABIAOMANALGERIAKUWAITMOROCCO UAE JORDAN BAHRAINIRAN LEBANON EGYPT SYRIA TUNISIA YEMENLIBYASource: Economist

Intelligence Unit

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Businesses operating in the Middle East and North Africa will find conditions less liberal than before

With help from oil-rich Abu Dhabi, Dubai eventually avoided a full-blown debt crisis. It has since benefited from popular uprisings elsewhere in the region, particularly in Bahrain, as investors shift funds away from states experiencing turmoil. But with government-related entities facing more than US$30bn in debt repayments due in 2011 and 2012, prominent risks remain on Dubai’s balance sheet. The EIU expects bank lending in the UAE to grow by only around 2% per year through 2015. Banks elsewhere in the Gulf are hardly more generous, many remaining skittish after suffering losses following defaults stemming from a 2009 dispute between two large, leveraged Saudi conglomerates, Saad Group and Ahmad Hamad Algosaibi & Brothers.

GETTING TO KNOW YOUAs the state steps in and banks step out, relationship-building will become even more important. Companies looking to participate

Unrest in the Middle East has made cutting costs and boosting cashflow top priorities for CFOs, as major spending plans are put on hold.

in new spending programmes will need to deal with potentially unfamiliar government-related entities whose motivations can differ significantly from purely commercial partners. If local financing is needed, gaining trust from wary lenders will also require close contact with bankers. Finally, lines of communication with key trading partners need to be open. ‘In the Middle East, liberties are taken by some customers in terms of payment periods,’ according to the regional finance director mentioned earlier. ‘The finance community is not great at being friends with counterparts on the other side of the table, but if you build those relationships you find that you can manage your exposures better.’ It may be more relevant now that the risks of doing business rise, but this applies equally in markets seen as safe havens. The economy of resource-rich Qatar is expected to grow by nearly 16% in 2011, helping fund more than US$100bn in infrastructure spending in the coming years. ‘A lot of people are moving from Dubai to Qatar,’ says Sabbah Rahooja, who recently left the State Bank of Pakistan to relocate to Dubai. A ‘general level of unease’ in the financial sector in Dubai has made hiring slow, she says, so many in the emirate’s large expat community are looking elsewhere. Although the headline GDP growth in Qatar is stronger than anywhere else in the Middle East (see panel), for finance professionals this doesn’t mean that planning and budgeting are any easier there than in countries facing more instability. In February, for example, an abrupt announcement by the Qatar Central Bank directed all conventional banks in the country to shut their Islamic banking operations by the end of the year. It was a timely reminder of the risks that companies face in the Middle East. ‘Increasingly, we need to be forward-looking,’ says Turner of ADSB. ‘The balance is moving towards insight rather than foresight.’Unfortunately, this mandate clashes with the fitful turbulence shaking economies in the Middle East and North Africa. Although finance chiefs need to prepare their companies for anything, feasible time horizons for forecasting these days are unusually short. For Turner, this means keeping an eye on cash and costs more closely than ever: ‘Manage the “now”,’ he says. ‘Five- and 10-year plans don’t float my boat.’



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Royal Dutch Shell CFO Simon Henry looks at how the CFO’s role is evolving to include a broader range of pressures than ever before

Tougher at the top

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From the late 1970s until fairly recently the world economy experienced what history may show to be a benign environment, with

steady growth, low inflation and commodity prices supporting emerging economy growth. That has now changed. Greater economic uncertainty and volatility will be the norm. Recent events in the Middle East and North Africa have sent oil prices sharply higher and weakened risk appetites among investors, providing an uncomfortable reminder that political instability will go hand in hand with stronger macro-economic volatility – and that energy and commodity prices remain prime drivers of the macro economy. Over the next 40 years, global demand for energy could double or even triple, on the back of growth in the developing economies and the rising global population. Keeping pace with this will be no easy task. According to the International Energy Agency, the world must invest some US$1 trillion a year in new energy projects to meet demand to 2030. So, whether because of surging demand or supply disruptions, energy price volatility will be a risk that remains with us throughout this decade and beyond.

There are, of course, other threats to macro-economic stability. To address huge public deficits, more governments are making deep cuts in expenditure, with uncertain consequences for a fragile recovery. Inflationary pressures are now building in many countries. At the same time, high rates of unemployment and rapid fiscal cuts raise the spectre of deflation. Another key feature of the next decade will be the continuing rise of the emerging economies. They will provide an increasing share of the world’s growth, just as they have provided much of the impetus in the global recovery. The world’s economic centre of gravity is moving inexorably East. China could account for more than half of the world’s increase in oil demand before 2035, with India driving much of the rest. While such growth brings enormous opportunities, it also spurs more intense competition as world-class companies emerge in China, India, Brazil and elsewhere.Simultaneously, governments in the West seem intent on introducing swathes of new

regulations. After the internet bubble and the events of 2008, this is perhaps understandable. But there is a case that prescriptive legislation typically aims to punish the drivers of the last crisis, not to prevent the next one. For example, a lesson from Sarbanes-Oxley is that it added to complexity and cost for businesses, but failed to even identify – let alone prevent – the credit crunch.Lastly, events in the Gulf of Mexico in the energy industry have shown how reputational damage can have a far greater impact on a business than its underlying economic impact.

GREAT EXPECTATIONSAll this means that CFOs’ jobs have got much tougher. Our core tasks of accountancy and capital-raising are already more challenging. And CFOs will also have to deliver on a much broader range of fronts as their job descriptions continue their rapid evolution.A decade ago, the focus of most CFOs was on getting the basic financial processes and control frameworks right, and ensuring the businesses had access to capital. Most spent relatively little time developing corporate strategy and mergers and acquisitions (M&A) deals, or dealing with the media and policymakers. Fast forward a decade and CFOs face sharply raised expectations among their colleagues. As well as their traditional responsibilities, many must now oversee more proactive and rigorous risk management, while ensuring that strategic decisions create lasting value, not least in emerging markets. In short, they must impose the professional rigour of the finance department across all areas of business activity.External expectations are also mounting. Accounting standards face a prolonged period of upheaval. We’ve already seen the backlash against mark-to-market accounting. Standards are changing in other areas, including pensions, leases and revenue accounting, all of which will add to the complexity of company accounts and financial statements and widen the gap between financial accounting and the information that actually supports sound business decision-making. So CFOs must spend even more time explaining complicated standards to business colleagues, investors and others.The regulatory landscape will be equally unforgiving. In the US, the passing of the Dodd-Frank Act in July 2010 heralded the biggest shake-up of financial services in 80 years. Complying with complex new regulations could produce many thousands of hours of work for finance departments. That, at least, was a lesson of Sarbanes-Oxley.

This article is an abridged version of a speech Simon Henry gave at the Economist CFO Summit in March 2011. Shell employs more than 300 ACCA members worldwide and has a similar number of students. For more information, visit www.shell.com

CFOs must deliver on a broader range of fronts and against a more complex backdrop

The wave of financial regulation also means that CFOs must spend more time engaging with policymakers, to ensure that legislation produces real improvements, rather than unintended consequences. But, in the eyes of many, companies like Shell tread a fine line between acting in the public interest on regulatory issues and protecting our own narrow concerns. For CFOs, this involvement will deepen as governments press on with ambitious financial reforms. So in all these ways, CFOs must deliver on a broader range of fronts, and against a more complex backdrop.

TACKLING THE CHALLENGES So how am I tackling these challenges at Shell? My first priority has been to build a competitive and smooth-running finance function. In an era of uncertainty, businesses need confidence in the integrity of their financial information, controls and transaction processing. And with a swathe of new regulations on the way our compliance procedures will be tested, as will our ability to adapt to changing accounting standards and enhanced reporting requirements. Moreover, without a smooth-running function, I would be unable to satisfy the growing demands on my diary. I spend over one-third of my time on external engagements, meeting investors, customers and other key stakeholders. That would be impossible without the transformation of Shell’s finance function over the past five years. Back in 2005, our financial operations were spread across more than 100 countries, all with their own processes and controls. As much as two-thirds of costs were generated by basic processes like reporting controls and providing management information. Less than 10% of staff were located in dedicated operations centres. We adopted an ambitious plan to transform the function by the end of 2010. Among our goals was a 40% reduction in costs – the equivalent of some US$800m – shifting half our roles to operations centres by 2010, and setting well-defined targets for our business support activities. I’m delighted to say that we brought the plan to an official close at the end of last year having delivered on our major targets.We are now placing a stronger emphasis on talent development, to reflect the challenges of the next decade. In particular, this means equipping staff with the broader range of skills needed to generate value across all areas of business activity. A particular focus has been developing the powers of persuasion, negotiation and influence of our emerging finance leaders, as well as other ‘softer’ skills. It will take more than our professional skills to

Simon Henry became CFO and an executive director of Royal Dutch Shell in May 2009. He is responsible for all aspects of finance and information technology management, for global business strategy development, and has oversight responsibility within the executive committee for Shell’s business activities in the Asia-Pacific region. He joined Shell in 1982 after obtaining a degree in mathematics from the UK’s Cambridge University, starting as an engineer at the Stanlow refinery. After qualifying as a professional accountant in 1989, he has held a wide variety of finance posts at Shell.


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CFOs need to engage more deeply in developing strategy, beyond simply providing the capital

carve out an influential voice in business units run, for example, by more technically focused engineers or in joint ventures where Shell lacks a controlling interest. Access to capital markets will remain an urgent priority. Despite the financial crisis, the underlying goal remains unchanged: striking the right balance between debt and equity, at competitive rates, while offering a competitive return on both. Because of Shell’s long-term investment horizons, what constitutes the right return and the appropriate balance changes as our investments, portfolio and exposure to risk shift and fluctuate. What is clearer now is that the pricing of risk can be transformed in an instant, thanks to the pace at which political and economic events – and rumours about them – reverberate through the markets. Billions can be wiped off a company’s value in minutes.I am fortunate to be the CFO of a large and successful international energy company, benefiting from relatively open access to the world’s capital markets. Amid all the disruption, there have been very few days when the markets have been closed to issuers like Shell. So from my point of view, the major challenge of the next decade will be balancing the risks and returns to Shell’s equity and debt holders, as we invest for long-term growth. But I appreciate the challenges some companies are seeing in access to capital; this affects all businesses indirectly.We must balance heavy investment – up to US$30bn every year until at least 2014 – with a prudent financial framework, generating cash to repay debt and providing shareholders with an attractive return. The nature of that return is changing, mainly because the time horizons of our investments have broadened. As access to resources gets harder, more of our projects are based on new technologies and innovative project models, whose risk parameters are, as yet, unclear.Amid all the current upheavals, we must not forget the positive story of the next decade, with the liberalisation of Asia’s capital markets. Most importantly, the Chinese government has encouraged the growth of the offshore renminbi market in Hong Kong. And it has signalled that it may open up the mainland’s capital markets, too, offering a wealth of new opportunities to Chinese companies and investors, and foreign companies, thus expanding – and potentially transforming – the global financial system.A third challenge for CFOs is meeting raised expectations on risk management. There is much I could talk about here, from our relentless focus on safety to delivering multi-

billion-dollar projects on time and on budget.But after the recession, many CFOs will be under pressure from sceptical board members and investors to ensure that growth plans deliver long-term value and capital efficiency. If the crisis highlighted anything, it’s the risk of pursuing plans that are financially unsustainable.To meet raised expectations, CFOs need to engage more deeply in developing strategy, beyond simply providing the capital to fund it. I was fortunate to assume responsibility for Shell’s strategy development in 2009 as part of our company-wide reorganisation.I also chair our strategy and growth forum, which oversees the development of strategy across Shell’s businesses, and assesses the big-picture risks and opportunities. With our growth plans spanning the globe and the emerging markets, this is a critical activity.Increased formal requirements on directors such as the UK’s Corporate Governance Code have, I believe, changed the nature of boardroom discussions over the past decade. I have seen a significant improvement in the quality of understanding of business risks and revenue streams, encompassing all aspects of the business, from financial controls through environmental performance to corporate social responsibility. This is an overall positive development, and good for shareholders. It has placed even greater demands on the CFO, who is increasingly seen as an independent counterweight to the CEO and other executive directors, particularly in terms of risk management and assurance processes. The relationship between audit committee

and CFO, and the existence of transparent and direct communication between CFO and chairman, are key to good governance. Increased accountability for all directors is one way we can help to recreate some of the trust in businesses that has been lost.While the next decade will be stretching, we must also remember that there has never been such an exciting or stimulating time to be a CFO. We have the opportunity to use our full array of skills – in financial analysis and strategy, in risk management, and in information technology – to help our businesses achieve sustainable growth in an era of historic change and uncertainty.


Turning risks into resultsThe future will favour the fast and lean in the fight for market share. Ernst & Young’s Andy Embury examines the firm’s risks and opportunities report


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Many economies and markets are feeling the effects of fiscal consolidation, tighter credit policies, weaker consumer

demand and real inflation. Other economies – Germany, Sweden, India and Russia, to name just a few – offer businesses attractive growth opportunities. But even within these growth economies, important regulatory changes in some industries may represent a real challenge to those companies that are ill prepared or slow to change. In ‘no growth’ economies, too, clear opportunities to outperform competitors exist for those businesses nimble enough to avoid looming risks, refocus on higher growth segments, get ahead of the competitive cost curve, find and keep more of the best people, and execute faster. In short, whatever the market conditions may be, the fast and the lean will do best. This is one of the main findings from recent Ernst & Young research, which charts the global top 10 business risks and opportunities. We gathered opinions from leading industry-based and academic commentators across seven global sector groups. And we conducted a large-sample survey of companies and governments in 15 countries to rank the risks and opportunities, to obtain forecasts on whether these challenges would be more or less important in 2013, and to discover how leading organisations in each of the seven sectors are responding to these challenges.Over the next three years, global businesses see their greatest opportunities coming from improving operational agility and ‘optimising’ cost competitiveness, according to the research report, Turn Risks and Opportunities into Results. While the past couple of years have been characterised by intense cost-cutting, we’re now seeing companies responding to competition by improving execution of their strategies and by investing to boost operational agility and competitiveness.To present a snapshot of the 10 top risks in the seven sectors covered, we created a ‘risk radar’ (see diagram overleaf). The radar screen is divided into four quadrants that categorise the type of risk:

*compliance (originating in politics, law, regulation, governance)

*financial (stemming from volatility in the market and real economy)

*strategic (related to customers, competitors and investors)

*operations (affecting the processes, systems, people and overall value chain of a business).

Andy Embury is managing partner for Ernst & Young’s Advisory Service Line in EMEIA (Europe, Middle East, India, Africa) and has been a member of the EMEIA Executive Board since November 2009. He advises clients – which are principally in the utilities and telco sectors – on performance improvement, cost reduction and business change. Before joining EY, Embury spent more than 20 years in consulting and in managing professional services organisations.

Sparkling opportunity: while many western economies are still struggling, Russia offers companies attractive growth prospects.

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Those risks that the 700-plus executives we interviewed thought posed the biggest challenges in the years ahead are placed nearest the radar screen’s crosshair intersection, with an arrow to indicate whether respondents thought the risk would rise or fall in importance by 2013. According to our research, regulation/compliance continues to pose the biggest overall risk to global businesses irrespective of market. Regulation and compliance risks

are of greatest concern to banking and life sciences businesses, and of least concern to retail, but in every sector, regulation/compliance ranks among the top four risks. Looking ahead to 2013, both banking and life sciences – the sectors that currently rank this risk highest – see risk in this area continuing to rise in the years ahead. Companies in the most rapid growth markets, including China,

India, Russia and the Middle East/North Africa (MENA), report that the impact of regulation and compliance risks is expected to diminish by 2013. To manage this risk, 59% of organisations are looking to strengthen their risk management functions.After two years as the sixth ranked risk, the challenges associated with cost control have surged to second place. Even though our survey respondents assess the impact of this risk as high, measures to respond are still just a work in progress in many of their organisations. Government sector respondents, grappling with national austerity measures, have assigned this risk the highest average rating of any risk across all the sectors. In contrast, banking executives gave lower priority to challenges relating to cost-cutting than any other sector.Respondents in most sectors expect cost-cutting challenges to decline in importance as 2013 approaches. These expectations are at odds with forecasts from the panellists we interviewed, that challenges associated with both public debt and healthcare costs will continue to grow.Risks associated with the war for talent continue to rise. Talent management ranks among the top four challenges for almost all sectors and is expected to escalate in importance as 2013 approaches. Many of the geographies where this risk is of particular concern are in the emerging markets. Respondents are evenly divided in citing internal problems, such as weakness in HR processes, and external pressures, such as rising competition for talent, as responsible for pushing this risk up the league table.

GOING UPThe graphic opposite shows an opportunity ladder based on our research. Opportunities at the top of the ladder are those that the executives we interviewed thought would have the greatest impact on their organisation in the years ahead. Arrows indicate whether the executives thought the potential performance impact of the opportunity would rise or fall by 2013.The ladder is divided into four sections. These represent the four drivers of competitive success (represented by businesses in the top quartile in both revenue and EBITA growth) identified in our Competing for Growth research:

*customer reach

*operational agility

*cost competitiveness

*stakeholder confidence.

The top four global business opportunities focus on investing in areas such as processes,

RISK RADAR: TOP 10 RISKS

FINANCIA

L COM

PLIANCE

STRATEGIC OPERATIO

NS

Risk to rise by 2013

No change expected

Risk to fall by 2013

Access to credit

Regulation and compliance

Cost-cutting

Emerging technologies

Market risks

Expansion of government’s role

Pricing pressures

Slow recovery/ double-dip

recession

Managing talent

Social acceptance risk and corporate social responsibility

Risks thought to be the biggest challenges are nearest the crosshair intersection.

Businesses see opportunities coming from improving operational agility and ‘optimising’ cost competitiveness

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tools, training, IT, innovation and strategic execution. Improving execution of strategy across business functions is ranked number one overall, with organisations seeking to improve how they communicate the business vision, goals and strategy, involving all business functions in the strategic planning process, including budgeting and forecasting. Traditionally, businesses have sought market opportunities at a much earlier stage, but today we are seeing businesses focusing on making sure they have the capability and innovative strengths to make a real impact in their chosen markets.The research shows a high degree of consistency across both countries and industries, with a common focus on operational agility and cost competitiveness. This consistency applies across markets, although there are signs that organisations

in emerging markets are sensitive to the need to adopt more mature operating models, structures, processes and business controls, as well as respond to competitive threats.Surprisingly, emerging market demand growth is ranked only as the fifth top opportunity. Indeed, one in five organisations reported they had limited their Asia focus, following setbacks there, in favour of their home market. Nevertheless, the emerging market demand growth opportunity is predicted to rise by 2013. Every organisation has its own unique set of risks and opportunities, but this research provides some insight into how other organisations are thinking and how that thinking is evolving. As we know, fortune also favours the prepared mind…

Turn Risks and Opportunities into Results can be viewed at www2.accaglobal.com/tror

OPP

OR

TUN

ITY

RA

NK

CUSTOMER REACH

OPERATIONAL AGILITY

COST COMPETITIVENESS

STAKEHOLDER CONFIDENCE

Innovating in products, services

and operations

Emerging market demand growth

New marketing channels

Public-private partnership

Investing in cleantech

Excellence in investor relations

Investing in process, tools and training for greater productivity

Investing in IT

Improving execution of strategy across business functions

Mergers and acquisitions

1

2

3

4

5

6

7

8

9

10

Impact to increase No change in impact Impact to fall

Opportunities at the top of the ladder are those thought to have the greatest impact on the organisation.

THE BEST BUSINESS OPPORTUNITIES TO 2013

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Breaking freeAs more organisations look to outsource their finance functions, how do they ensure that they have the right accountancy skills in the right place?

ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS TALENT

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For many years, the key driver in the trend towards outsourcing business processes has been cost reduction. But as outsourcing in all its forms

– business process, shared service centres (SSCs), offshore, nearshore, multishore or hybrids – have developed, so the demands placed on functions have grown and evolved. So has the development of skillsets within those functions kept pace? According to HfS Research, finance and accounting is the function that enterprises are most likely to want to outsource in the next year, and the second most likely area for increased outsourcing. In addition, the finance and accounting business process outsourcing (F&A BPO) market has great potential for growth, particularly in high-end, value-added services such as financial planning and analysis.Deloitte also confirms the trend. In its latest global survey on SSCs, finance continues to be the process area most frequently transferred. The survey reveals that cost reduction is the area where organisations saw either a positive or significantly positive impact (91%). Interestingly, 63% also saw either a positive or significantly positive impact on developing new talents. Some 35% of the business units within these organisations had opted in to an SSC to achieve higher quality, while a quarter said they did so for improved talent. But of those that opted out of such an arrangement, 28% said it was because of poor quality. So while there are indications that outsourcing can improve access to talent and quality services, concerns still remain over standards.

EXPECTATION GAPAccording to Tony Osude, ACCA head of global relationships and services, demands for cost reduction and increased levels of quality are creating an expectation gap for ‘buyers’ of such services. ‘A CFO is looking for greater efficiency, but set off against this, they are looking for a greater degree of insight,’ Osude says. ‘And despite the fact that they are looking to reduce costs, they are also looking for a certain level of quality.’To resolve this conflict, Osude believes there is a need to invest heavily in staff, creating a strong employee value proposition that will facilitate mobility and enhance career choices.He points out that it is entirely possible that the major outsource providers could become the next big accountancy training and career ground, alongside the traditional role played by the Big Four accountancy firms. ‘Practice firms are typically the biggest employers [of accountancy trained staff], and the outsource sector is going to become number two. There

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is the need to ensure the work is challenging, rewarding, well recognised and provides people with the right breadth and depth of experience.’

SOFT APPROACHBut such developments will require investment – not just in technical skills but in the softer skills of communication, management and business partnering. ‘Competency is “I know how to pay a bill”, but capability is much broader,’ says Deborah Kops, managing principal of consultancy Sourcing Change. According to Kops, capabilities include service orientation, process mastery, knowledge and career management, commercial understanding, risk and relationship management. ‘There is a clear correlation between customer satisfaction and capability,’ she says. But there is always the risk that an outsourced function becomes ‘out of sight, out of mind’ as far as the training budget is concerned. ‘If you have a good contract, the only way that a service provider can deliver is to make sure

there is proper training and development of their people,’ says Pascal Henssen, senior vice president and chief operating officer of business process outsourcer Genpact Europe. Henssen describes how Genpact works jointly with clients on the development of their people, operating as a ‘virtual captive’ organisation. ‘We encourage the client to treat the team very much as an extended team of their own,’ he says. ‘Many of our clients involve the teams in reviews and we look to work on issues together. We even have clients sponsoring MBA courses for some of our associates.’ So what will be the future trends for skill developments? ‘We already have clients for which we do up to 90% of their Sarbanes-Oxley compliance work, we do management accounting and other high-end activities,’ explains Henssen. ‘That is great because it gives good career progression for our people. We make sure that we proactively invest in our people, because we know we will need them at a different level in the future.’

Philip Smith, journalist

It is entirely possible that the major outsource providers could become the next big accountancy training and career ground, alongside the traditional role played by the Big Four firms

View from: Sri LankaJEHAN PERINPANAYAGAM FCCA, JOHN KEELLS

Sri Lanka’s largest listed conglomerate, the John Keells Group has interests in many sectors and, in 2005, set up InfoMate, a captive financial SSC. The initial objectives were to optimise the use of SAP, implement best practices across multiple entities, standardise processes, and enhance corporate governance and controls, while the long-term vision was to provide business process outsourcing to other organisations. InfoMate now provides payroll services to several external companies in Sri Lanka, and accounting services to external companies in Sri Lanka and Europe. Jehan Perinpanayagam FCCA became the centre’s chief operating officer in 2006 and was subsequently promoted to CEO in 2009. ‘The technical skills of our 90-strong team have increased, even as InfoMate’s range of services and clients has increased,’ he says. ‘We have gradually moved into more high-end accounting functions and this exposes our staff to the higher end of the spectrum. Typically, we start with very basic accounts payable transactions, but over time our people are exposed to the full range of accounting functions.’In terms of soft skills, the team has been trained in client handling, migration of new services, project management and continuous process improvements. ‘Importantly, the traditional back-office staff members now carry out front-office functions, and they deal directly with clients, handle queries, review meetings and market new services,’ Perinpanayagam says. ‘They have become customer facing!’ Training includes mentoring under a team leader with gradual exposure to client meetings, combined with traditional classroom education. Individual training needs are identified through annual performance reviews.‘Our senior team is trained in project management in an intensive programme,’ Perinpanayagam explains. ‘Then there is targeted training on business process outsourcing-specific areas such as NASSCOM-certified BPO team leader and quality analyst programmes, and Six Sigma. Soft-skills training includes presentation skills and business communication.‘In the future, I can see Sri Lanka becoming a destination of choice for accounting services. Sri Lanka has a rich talent pool in accounting, an aptitude for numbers and good quality.’


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View from: IrelandJULIE SPILLANE FCCA, ACCENTURE BUSINESS SERVICES

‘Businesses and CEOs are now looking to their SSCs to do more and to be more business relevant,’ says Julie Spillane FCCA, EMEA and finance capability director at Accenture Business Services (ABS), based in Dublin, Ireland. ‘As such, we are seeing greater involvement for SSCs in driving enterprise-wide projects, such as ERP design, implementation/optimisation efforts and leading global or regional programmes. Finance, analytics, business insight, change management, project/programme management and leadership and people skills are in very high demand within the SSC sector and we see them as becoming even more critical as the model continues to evolve. Talent management is an all-encompassing mindset that ensures we make sound decisions about attracting the right talent and ensuring we support our people. We make significant investments in technical training, but also in leadership development and performance excellence, right from the beginning of a person’s career. SSC/BPO executives must negotiate a complex web of stakeholder interests to deliver on their objectives. Internally focused, the SSC/BPO executive must be able to motivate and lead their organisation in the pursuit of their objectives and to provide the leadership to enable the organisation to focus on and drive increased efficiency, effectiveness and customer service. Perhaps as important is the ability of the SSC/BPO executive to provide the bridge between the SSC and the business which it exists to support. Communication and business partnering capabilities are critical.’

View from: Czech RepublicJINDRICH KAISER FCCA, MONSTER

Monster, the global online employment group, first established a finance shared service centre in Prague, capital of the Czech Republic, in 2007. It primarily serves its European operations, but now delivers ad hoc services to 25 other countries. Originally, the SSC provided all the main transaction functions – such as accounts payable, collections, treasury and billing – but services have developed to include more analytical, business partnering and managerial functions.The drive to establish a finance SSC centre followed the implementation of a new finance system across Monster and the need to operationally scale to the company’s business model. ‘One of our main targets has been to develop internally,’ says Jindrich Kaiser FCCA, director of finance in Prague. ‘We search among our own teams to fulfil outstanding roles and have a forensic focus on the administrative, human, organisational and technical development. This slightly different and holistic approach aids staff retention significantly. ‘As more responsibility is taken on board there is a requirement for different skillsets. After initial development of the SSC, now it is much more about control and communication, working with auditors and local offices and being a business partner. In our experience, the local offices recognise this and start to approach us more for advice.’

View from: MalaysiaJASON CRIMSON FCCA, KIMBERLY-CLARK

As Kimberly-Clark’s Asia Pacific shared services director in Malaysia, Jason Crimson FCCA is responsible for general ledger operations, product costing, fixed asset accounting, accounts payable, accounts receivable and financial reporting for various K-C entities in the region.‘Over recent years, many SSCs have invested in deploying robust training and development programmes that have benefited staff in building foundational skills and provided the “solid ground” required,’ he says, adding that these have evolved into more advanced programmes. ‘We have seen signs of a shift from providing pure transactional processing services to providing analytics-based or business-partnering-based services. The scope of services SSCs provide has a front-line trajectory, with SSCs growing in maturity and building a critical mass of core resources and talent that fuels ability to perform higher-value services. Such developments can, says Crimson, enable a broadening of career opportunities for SSC staff. ‘The perception of SSC roles being “too narrow” or “not enriching” will be a thing of the past,’ he says. ‘But the expectation that SSCs will provide more analytical and business-partnering services to corporations means they need to leverage on dynamic career development plans to keep staff engaged and continuously learning.’

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The war for finance talent is raging. Around the world and across all industries, CFOs are joining the battle to attract, retain and develop

finance talent. It will be a protracted war, pitting companies against each other on a global scale and forcing finance leaders to constantly rethink their plan of attack. But to the victor will go the spoils: a more valuable, business-focused and efficient finance department and greater corporate competitive advantage. The current situation was inevitable. More and more, finance departments have been elevating their role to evolve from being ‘number-historians’ – collecting, consolidating and reporting numbers – to become strategic drivers of the business. As a result, the core skills of the finance department have also been evolving. Today, one of the most critical roles in the finance department is that of the finance business partner (FBP). As a primarily business-facing financial role, FBPs deliver a valuable mix of business insight and financial analysis to support the wider strategic

decision-making needs of the organisation. FBPs take a forward-looking and commercial view of finance and, supported by a rich consulting toolkit and high emotional intelligence, work to articulate different strategic options and influence decisions.

CULTIVATING CAPABILITY But FBPs don’t grow in the wild. They must be identified, developed and cultivated in order to align the skills required to successfully work between finance and the business. The capabilities required are varied and numerous: the ability to act like a business entrepreneur to work proactively; the ability to use technology effectively to support advanced data analysis; influencing and conflict resolution skills to win the support of internal stakeholders; communication skills to explain financial analysis in simple terms to business leaders; initiative to identify issues where finance can provide added value; the list goes on. Securing talent with these skills will not be easy. Indeed, according to research by KPMG International, more than 50% of senior

Ian Lithgow is a partner within KPMG’s People and Change practice. His experience has particular focus on oil and gas, retail, pharmaceuticals, manufacturing and public sector, and he was co-author of Maximising People Power: Effective Talent Management in Finance.

Digging up the talentFinance business partners don’t grow wild – they need to be identified and cultivated – so leaders should get gardening, says KPMG’s Ian Lithgow


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finance leaders (from a sample of 500) cited difficulty in finding and retaining skilled finance professionals as one of their greatest barriers to improving performance. And since these skills may not necessarily be readily available in the organisation – or even in the wider recruitment market – finance leaders will need to put a renewed focus on securing their talent pipeline. This requires more than simply implementing a new operating model and hoping for behavioural competencies and cultural change to follow. The development of FBP skills and capabilities can be supported in a number of ways, including job rotation programmes giving finance professionals the opportunity to experience life at the ‘coal face’ in other areas of the organisation, such as marketing or any other primarily commercial role. Future FBPs could also be encouraged through coaching or mentoring programmes or temporary secondments. Bringing non-finance professionals into finance also helps the transfer of broader business knowledge. Successful business partnering requires a long-term talent management approach. In part, this means that when recruiting new finance trainees, candidates should be assessed for their potential to become FBPs. It also requires a significant realignment of existing development approaches to reflect the changing career expectations of most finance professionals. The youngest accountants in the profession, Generation Y, place high value on development opportunities and career progression – but not necessarily along traditional paths. According to recent ACCA research, many wish to gain broad experience, initially following a horizontal career path and gaining experience in a range of roles within finance, before potentially moving on to a more traditional, vertical career trajectory. And while managing the aspirations of the youngest generation in finance will be a big challenge for organisations in the next decade, so, too, will be the ongoing management of the generation above them. In a corporate world where finance careers are becoming less uniform, Generation X tends to look for career paths based on a corporate ‘lattice’ rather than a ladder.

MAINTAINING COMMITMENT There will be a need to keep high-performing individuals motivated and committed, particularly as more opportunities become available in the external market. But the astute CFO will recognise that the benefits of great talent practices extend beyond

engagement and motivation. It must also support the development of high-performing individuals in key roles, with clear opportunities to progress careers in structured ways. Effective talent management also serves to ensure better succession planning, and has a positive impact on the bottom line through negating or reducing ‘staff replacement’ costs. Above all else, it helps cultivate the skills that finance professionals need to improve the performance of their organisations and drive long-term sustainable value.To meet the changing and challenging demands that now face the finance department, CFOs and finance leaders must ensure they have appropriate professionals with the right skills and competencies available in the right place at the right time. Clearly, adopting an integrated approach offers a tremendous opportunity to add value and build the influence of the finance function within organisations. Our experience shows that the organisations that put talent management at the heart of their finance function will be the ones that will build capability that gives both the function and the organisation a competitive advantage and – ultimately – win the war for talent.

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CREATING A TALENT MANAGEMENT PROGRAMME In a recent report by KPMG and ACCA, Maximising People Power: Effective Talent Management in Finance, we identify a number of key components to creating a clear and effective integrated talent management programme. These include:

Defining ‘talent’: clearly identifying the key skills and behaviours that the finance department requires to deliver the organisational strategy. Recruitment: taking into account short- and long-term needs and looking outside of the existing team to identify candidates.Creating competency frameworks: defining the technical, business and behavioural competencies required in every role at every level.Targeted development: focusing on developing those roles that are most critical to the success of the organisation, regardless of seniority. Comprehensive learning: going beyond the traditional, course-led training approaches to incorporate collaborative e-learning, experiential learning and even virtual finance academies. Structured career paths: developing and articulating a clear pathway to help individuals develop the skills, competencies and experience necessary to achieve senior positions and progress within the finance department.Performance measurement and reward: aligning the objectives of finance personnel against the overall organisational strategy with links to individual achievements.

Maximising People Power: Effective Talent Management in Finance can be found at www2.accaglobal.com/mpp

Sixty million Chinese people woke up on 1 September 2011 knowing that they no longer have to pay personal income tax. The increase in the tax threshold,

which was announced in late June 2011, from RMB2,000 per month to RMB3,500, means that only 7.7% of the country’s 300 million urban workers must hand over a portion of their earnings to the government. Alterations were also made to the progressive tax-rate scale, reducing the number of bands and shifting the boundaries so that people at the bottom of the economic ladder pay less tax while those near the top pay more. Further measures are expected to target taxes on capital gains, gifts and inheritances so that those who haven’t amassed their fortunes by earning a salary don’t slip through the net.The Ministry of Finance estimates that the reforms will cut tax revenue by RMB160bn a year – apparently a price worth paying to defuse short-term concerns about inflation and go some way to addressing the longer-term issue of China’s yawning wealth gap.But the role that tax plays in China’s efforts to redress an economy that has become worryingly imbalanced stretches beyond levies on income. Changes to VAT are likely to boost the services sector; tougher levies on resource consumption are intended to rein in excessive use of natural resources; a relaxation in certain parts of the current consumption tax should facilitate domestic spending; and tax breaks for selected industries and regions will support a wider drive for higher valued-added growth and draw economic activity into China’s hinterlands.All these proposals feature to some degree in the 12th Five-Year Plan, a document issued by the central government that outlines policy direction for 2011-2015. ‘The transformation of the mode of economic development is among the primary goals of the 12th Five-Year Plan,’ PwC observed in a research report previewing the tax measures. ‘China no longer focuses on quantitative expansion of the economy, but rather places more emphasis on the quality of economic growth to ensure sustainable development… Undoubtedly, tax would be one of the major stimuli to facilitate this goal.’The concept of the five-year plan is rooted in the command economy structure that China

assimilated from the former Soviet Union, but even Beijing’s earliest efforts in the 1950s were never as detailed as those that came out of Moscow. Although still a blueprint outlining overall objectives for a particular period, the plans evolved to meet the needs of the country’s changing economic structure. The 1980s incarnations incorporated long-term industry and investment planning and now they serve largely as policy guidelines for a more market-driven economy. These plans should not be seen as single documents but rather as manifestations of strategies drawn up by different regions, provinces and industries, most of which have their own five-year plans. Consequently, many of the directives or budgets featured in an overall five-year plan might have already been announced or implemented. It is also standard practice for a plan to be reviewed over the course of its lifetime and targets are not always met.The 12th Five-Year Plan was formally endorsed by China’s parliament in March 2011, but broad guidelines were approved by the State Council and Communist Party Central Committee four months earlier, the culmination of a two-year drafting process. These were then thrown open for public comment, which was duly factored into the more detailed prescriptions of the final plan.In many respects, the current plan picks up where its predecessor left off. This was the document that advocated a shift away from the ‘growth at any cost’ model that turned China into an investment- and export-driven powerhouse but with little thought to long-term sustainability – economic, environmental, social and industrial. Urbanisation remains the most potent force in the China development story and this won’t change for a generation. McKinsey & Company predicts that the urban population will swell to one billion by 2030, up from 665 million at the end of 2010. To accommodate the wave of migrants, by 2025 five billion square meters of road and 40 billion square meters of floor space will be built, and 170 mass-transit systems could be in place. These efforts are not enough on their own, though.‘Continued urbanisation will boost incomes, consumption and the size of the service sector,

thereby increasing the domestic market and

helping to deal with external imbalances. But

Chinese consumers are being encouraged to spend to boost China’s economy as this large advertisement in Shanghai testifies.

Plan for the futureChina’s 12th Five-Year Plan has advocated a shift away from an investment- and export-driven model to one that focuses on long-term sustainability

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ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS CHINA

it calls for further labour market and social

policy reforms, to facilitate internal migration

and reduce inequality,’ the Organisation for

Economic Co-operation and Development

noted in a paper published in March 2011.

The term ‘social policy reform’ covers a lot of

ground but there is a single end goal: boosting

domestic consumption. A decade ago,

consumption accounted for 45% of China’s

GDP; today it stands at 36% compared with

71% and 54% in the US and India respectively.

MENDING THE NET

All the effort put into increasing salaries – the

Beijing government, for example, wants to

boost minimum wages by 40% come 2015 –

and investing in transport infrastructure will

be fruitless if the extra cash goes unspent.

The problem is largely borne of precaution.

In the absence of strong social institutions

households save money ‘just in case’ they run

into trouble.

Beijing hopes it can mend the social safety net

before it is too late. The Social Insurance Law,

which came into effect on 1 July, is intended

to consolidate existing programmes that cover

pensions, medical care, unemployment, work-

related injuries and maternity. It will apply to

everyone, whether urban or rural resident,

state-owned enterprise or privately-owned

enterprise employee.

The 12th Five-Year Plan also endorses a

proposed pension scheme reform that would

allow coverage to be extended into rural areas;

a continuation of robust investment in health

care to ensure that treatment is accessible and

affordable; and the construction of 36 million

affordable homes, 220% more than the number

constructed during the previous five years, to

meet the needs of families unable to buy on the

commercial market.

Shen Minggao, Greater China chief economist

at Citi, sees a universal national basic pension,

a medical system that also covers rural areas

and the social housing programme as the key

factors in reducing precautionary saving. ‘These

are important measures on their own, but also

instrumental in promoting consumption as

a new source of growth,’ he wrote in a recent research note.The plan’s industrial platform has two strands. The first is rooted in social inclusion and wealth distribution – the spread of business into China’s hinterlands. To a certain extent this is a market-driven phenomenon. Wages are rising in coastal cities and, together with tougher environmental compliance requirements and a scaling back of subsidies for low-value exports, this translates to cost pressure in the manufacturing sector.

Some companies have responded by relocating elsewhere in Asia, but anecdotal accounts suggest that the majority are staying put, convinced by the country’s production capacity, strong logistics and relatively skilled workforce. Instead they are moving inland, drawn by relatively cheap labour and government incentives. Hon Hai Precision Industry, the world’s largest contract manufacturer of electronics, is a case in point: the company is scaling down its Shenzhen operations and building new facilities in Henan province in central China.

VOLUME TO VALUEThe second industrial initiative relates to the repositioning of China’s economic model, from volume to value. It has long been the government’s objective to be more than just a factory to the world, and develop domestic industries that create their own intellectual property rather than just build products based on other people’s templates. The pillar industries identified in the 12th Five-Year Plan – alternative energy, environmental conservation technologies, clean energy vehicles, biotechnology, advanced materials, information technology and high-end equipment manufacturing – are a clear illustration of the direction in which China wants to go. Together these industries are responsible for less than 5% of China’s GDP; by 2015 it is supposed to be 8% and by 2020 15%. In addition to cultivating green-friendly industries, the plan continues with a target for increasing energy efficiency, reducing the amount of energy required to produce each unit of GDP, and introduces a similar goal for carbon dioxide emissions. Other measures will be put in place to protect forests, minimise certain kinds of industrial pollution, promote industrial efficiency, curb motor vehicle emissions and encourage recycling.Although there is plenty of criticism of the practical implications of this approach – enforcement of regulations is as problematic and hotchpotch in the environmental sector as it is elsewhere in China – the policy and financial commitment is clear. ‘Green isn’t totally new in China – it has been mentioned in previous five-year plans – but the big difference this time is that the government seems to be thinking seriously about quality of growth [rather] than speed,’ says Wu Changhua, Greater China director at The Climate Group, a non-governmental organisation. ‘Restructuring has been put at the top of the agenda with a view to advancing low-carbon and clean energy.’

Tim Burroughs, journalist

Golden age: among other changes outlined in the 12th Five-Year Plan, a relaxation in parts of China’s consumption tax is likely to support domestic consumption – including purchases of gold-related products.


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Rons FongHead of origination and client coverage, wholesale banking, South China, and general manager, Shenzhen branch, Standard Chartered Bank (China)

Professor Xiaohui QuMinjiang professor, Xiamen University

Leah JinPartner, KPMG China

‘The Five-Year Plan will promote sustainable development and will lead to a more scientific, environmental, economical and friendly, reasonable, fair, healthy and harmonious development. Long-term sustainability and social development have been greatly enhanced. A new indicator, a happiness index, will improve the social wellbeing of individuals. The target is to spend 2.2% of GDP on research and development, and to promote the application of new technologies. It is also to strenuously develop education, health and culture to accelerate the construction of an ideological and material civilisation. A comprehensive social security system is being designed to remove the increasing wealth imbalance.’

‘The latest Five-Year Plan represents perhaps the most significant milestone for sustainable development in China. This is because for the first time in its history, the five-year plan formally includes a carbon intensity reduction target, which is set to trigger a series of new policies and regulations aimed at changing corporate behaviour. In addition to carbon-intensive industries, other sectors, such as retail and financial services, will likewise experience some degree of impact through the supply chain, as well as products and services that meet customers’ needs. A company should start preparing now by taking stock of its carbon footprint and developing a low-carbon strategy in order to gain early-mover advantage.’

‘Along with the 12th Five-Year Plan is the different positioning of regions and cities in the country. There is a specific chapter in the Plan on the cooperation between Guangdong, Hong Kong and Macau. In fact, this is not new; such strategic cooperation has been encouraged by the State Council and significant progress has been made and seen in the report on the review of the achievement of Guangdong’s 11th Five-Year Plan. Hence, the emphasis this time would be laid on the enhancement. Thus, one would expect to see more implementation and delivery of initiatives and projects in the coming five years.’

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The world’s fastest-growing economy is grappling with a shortage of accountants. Stephen Yiu FCCA, chairman of KPMG China, examines the profession’s future

Creating a common culture

In this exclusive interview Stephen Yiu, who took up the reins as chairman of KPMG China in April 2011, discusses with Accountancy Futures the future of the

profession in China.

Q: Forecasters predict that China will overtake the US and dominate global trade by 2030. What are the implications for accountants?A: As China gets more important and involved in global trade, there are a lot of areas where it needs to participate. It’s important that other countries understand China and how things have evolved. Some accounting and auditing standards may not be applicable in China. When international standards developed, they were based on views from the US, the UK and Europe. But it’s a process, and China should be more participative in this and express its views. International accounting standards will not be international without China’s involvement.


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Q: So it’s not about China conforming to existing standards, but participating and redefining what those international standards are?A: To be international is to say: ‘These are the standards that everyone accepts; these are the standards that are applicable to everyone.’ [The accounting industry] needs to consult all the key players. China’s becoming more important, so [the industry] wants to consult it as a key player, and if it wants the country to be involved, it needs to consider China’s view as well. In the past it’s been more about conforming to International Financial Reporting Standards [IFRS], but now it’s getting steered towards participation, involvement and final agreement to create new standards.

Q: How do you see accounting standards developing in China? Will there remain minor differences between Chinese and international reporting, or are these likely to be ironed out?

‘China needs a lot of accountants. Accounting is still a young profession [in China] and they need to develop it and recognise the importance of accountants’

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A: Within China, standards are being set by the Ministry of Finance. Obviously their key objective is to converge with IFRS and therefore they set the tone at the top. The key is how to push it down to the professionals who are applying and using these standards, and to understand what they mean and how to apply them. Therefore it’s a huge exercise but it’s good that the Ministry of Finance sets the tone.

Q: Do you think that most Chinese companies now operate to higher standards than are legally required?A: I wouldn’t say most. If you look at listed companies, they have to apply the Chinese accounting standards, which are in convergence with IFRS, but it’s a process. I don’t think you can say Chinese companies currently all conform to all the standards. We have a long way to go.

Q: The Ministry of Finance and the Chinese Institute of Certified Public Accountants are keen on growing the country’s own accounting talent. What is your opinion of the 2006 pledge by the CICPA to create 10 national-champion accountancy firms within 10 years?A: They have started off that process and merged a few [firms] into a few big accountancy firms. In terms of the revenue or headcount they’re still far away from the Big Four but this takes time to develop. I think the most important thing is to merge the culture in this process. Just for argument’s sake, if you have three different firms in Beijing, Shanghai and Guangzhou and move them together, you’re not just changing the name, you have to make sure they follow the same culture, the same process. From what I understand the Ministry of Finance is working hard on this and looking into what the common processes should be, and what the systems are that need to be built up by them to facilitate that change.

Q: So this 10-year target is too ambitious?A: China is different. It can make things happen. In terms of size, I think they can achieve it, but in terms of whether they can build up and share a new culture, 10 years might be a bit quick. They can merge a few firms together but you have to make sure that they’re working in the same way, cohesively and in the same direction.

Q: What is your opinion of the decision to allow mainland companies listed in Hong Kong to use Chinese accounting standards and auditors?A: If you look at the mainland companies, obviously for them it’s easier to use Chinese standards and practices but it’s different for

investors. Do they really understand what it means? Although Chinese accounting standards are converging with IFRS, presentation and disclosure are different, so it depends on what you really want them to achieve. I think big companies that have very diversified investor groups will probably still stick to IFRS because their [overseas] investors can only read IFRS accounts. If you’re talking about mainland companies whose key investors are still local or even based in Hong Kong, then I think [using these standards and auditors] is OK. Q: As ‘gatekeepers’ of financial accounts, how can the profession ensure the highest standards of ethics and integrity are maintained?A: The thing about ethics and integrity is that they’re not easy to teach. They are the foundations of the profession itself. Of course, we emphasise their importance on a day-to-day basis, and in training the key is the need to learn from our people. When they touch on this they’ll know what to do.

Q: Will this focus on ethics necessarily translate to accountancy firms in China?A: For us, this transparency is part of our lives but in China the practice is that gifts symbolise the appreciation of your relationship and your work. That relationship is a combination of friendship and client relationship. You have to respect the practice but maintain this ethical stance.

Q: How do you see the training of accountants in China developing over the next five to 10 years? A: I think China needs a lot of accountants. Accounting is still a young profession [in China] and they need to develop it and recognise the importance of accountants. Once you get into global trade and business, business-type professions – lawyers, accountants – need to emerge. They need to build up the profile of the profession. Each year we recruit between 1,500 and 2,000 accountants. We invest a lot of time in training them. It is important to build a profile of the profession so that people understand that it’s a good career, and then naturally you attract top-quality people. I think they need to do a lot of things, including on-the-job and off-the-job training.

Interview by Euan McKirdy, journalist

Stephen Yiu joined KPMG in 1983 after graduating from Hong Kong Polytechnic. He was seconded to London from 1987 to 1989 and in 2000, at the height of China’s economic development, became heavily involved in KPMG’s country operations there. He has been stationed in Beijing for the last 10 years and on 1 April 2011 took on a new role as chairman of KPMG China.

Q: ACRA has just hosted its 2011 Public Accountants Conference (PAC). Would you consider the event to be a success and what do you think are participants’ major take-backs?A: The PAC is ACRA’s flagship event for the accountancy profession and its stakeholders, and is an opportunity for us to engage in conversation over issues and developments. This is the sixth year that we have organised this event and, while different topical issues may be covered each year, the core focus remains firmly on the importance of high audit quality. This year’s conference theme centered around how the accountancy profession can look beyond delivering value protection to value enhancement for clients. It also covered topics that touched on pertinent issues facing small and medium-sized accounting practices (SMPs). For SMP members, many of whom were present at our conference, there are two key messages that we hope will be taken note of. The first relates to the overall fundamental message on the importance of high audit quality and how audit firms need to ensure that they have the right structures, processes and resources in place so that they are well positioned to perform the audit function well. For many of the SMPs, this may present a tougher challenge compared to the larger firms, but this is something that they will have to address square on, so long as they decide to remain in the audit business. The second point is that there are many other business opportunities beyond audit services that the SMPs could consider carving their own niches in. In the final analysis, accounting firms, whether big or small, need to continue to level up their capabilities to better meet their jobs’ demands and their clients’ needs, and they need to communicate clearly their value proposition to their clients.I am pleased to note that the general feedback regarding the conference has been positive. It is our wish that the conference presentations and discussions gave participants enough ideas and food for thought and that it would ultimately bring about the desired changes in the profession.

That would be the ultimate measure of success for our conferences.

Q: One interesting aspect of this year’s PAC is the joint ACRA-ACCA survey on SMPs. In your view, what is the most important message that has emerged from the survey? A: With the growing complexities in the general business environment, we are mindful that it is becoming increasingly challenging for the accountancy profession, especially the SMPs, to survive and thrive, unless changes are made to the way they operate. Hence it is with this in mind that we commissioned ACCA to conduct a survey of SMPs to obtain a clearer sense of the current state of play in the SMP sector and to assess the challenges and opportunities ahead. The survey surfaced certain insightful findings, but in my opinion, what stood out most starkly is the urgent need for SMPs to level up and enhance their capabilities quickly in order to continue to deliver high-quality services to their clients, so as to keep up with the increasingly complex and

Juthika Ramanathan oversees ACRA’s operations, formulates policies and considers law reforms related to business entities and public accountants to ensure that the regulatory structure facilitates businesses. She is also an executive committee member of the Corporate Registers Forum and a member of several national councils and committees, including the Singapore Accounting Standards Council and the Pro-Tem Singapore Accountancy Council.

SMPs in SingaporeJuthika Ramanathan, chief executive of Singapore’s Accounting and Corporate Regulatory Authority, looks at the challenges

ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS SINGAPORE

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volatile environment that their clients are operating in.

Q: Moving forward, what are the clear ‘next steps’ that SMPs should be taking to address the issues identified in the survey?A: As stated earlier, SMPs should take steps to level up and enhance their capabilities to tackle the changing and more challenging business landscape. And we believe there are many existing options for them to do so. For instance, to enhance their technical capabilities, SMPs could avail themselves of the training opportunities that are being provided by professional bodies such as the Structured Audit Core Training by the Institute of Certified Public Accountants of Singapore (ICPAS) and ACCA’s Practitioners’ Clinic series. Besides upgrading their own technical capabilities, SMPs could also consider pooling resources via mergers and consolidations. While mergers and consolidations may be an effective way for SMPs to level up quickly, we noted in the survey that a majority of the respondents have difficulty finding a compatible partner. This may be an area where professional bodies like ACCA can come in, for instance by playing a ‘match-making’ role for members who share a similar aspiration to become bigger. Alternatively, SMPs can also consider engaging the services of professional companies that provide such match-making services. In addition, SMPs could also explore providing niche areas of services instead of audit, such as business advisory or taxation services.

Q: At the PAC 2011, ACRA also presented the practice monitoring programme (PMP) 2011 report. Are there any specific areas that you would like to highlight for SMPs’ attention, especially with regard to the message of high-quality audit? A: The PMP is one of ACRA’s initiatives to urge the profession towards continual upgrading and improvements, as it highlights to public accountants and firms the gaps which they need to focus their remediation efforts on.This year’s PMP report focused on a few areas of quality control that are particularly

important to all public accountants and firms, and I would just highlight two areas here. Firstly, there is the importance of proper documentation as a means of internal checks and communication of work carried out. Second, there is a need to ensure that there are adequate, competent staff working on audit engagement and that there is sufficient supervision by the engagement partners to address the audit risks of each engagement. As presented at the conference, there are many elements that have to be in place in order to deliver high-quality audit – for example, having the right internal quality control framework. For SMPs to deliver high-quality audit to their clients, they should also check to see that they are compliant with the Singapore Standards on Quality Control 1, which focus on the firm-wide quality controls and policies that should be in place.

Q: Do you see a lesson that the wider global audience may perhaps learn from the developments in Singapore?A: We believe that the issues that Singapore SMPs face are not dissimilar to what their international counterparts are also facing currently. It is my understanding that ACCA has also posted the same survey questions to selected SMPs in Malaysia and Hong Kong, and the findings from these two markets are largely consistent with those from Singapore. For example, evergreen issues relating to talent attraction and retention appear to be an area of concern for all SMPs in this region.In Singapore, a report was published in 2010 by our Committee to Develop the Accountancy Sector (CDAS) and we are currently working on implementing the various recommendations which we hope will bring about a transformation in the Singapore accountancy sector. I am sure many other countries are similarly looking towards addressing the key issues that they each face.

The survey, Small and Medium Sized Public Accounting Practices in Singapore – Bridging the Current to the Future, is available at www.accaglobal.com/pdfs/bridging

‘With the growing complexities in the general business environment, we are mindful that it is becoming increasingly challenging for the accounting profession, especially the SMPs, to survive and thrive, unless changes are made to the way they operate’

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ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS SINGAPORE

The continuing economic and financial crisis has exposed some fundamental problems in financial and regulatory systems across the European Union.

Countries both inside and outside the eurozone continue to wrestle with sovereign debt, internal deficits, a fragile banking system and a widespread perception of regulatory failures and weak corporate governance. Meanwhile growth has stalled as SMEs struggle to find finance and inward investment has slowed. These issues deeply affect accountants and the finance function, but they also offer an opportunity for the profession to set out a new vision to restore public confidence while at the same time supporting the needs of business and investors. A recent ACCA report, A New Vision for Finance and Business in Europe, looks at the key role accountants have in contributing to the strategy for a return to growth in the EU, as well as facing the challenge of transforming their own profession and demonstrating how it continues to contribute to the public good. This can only be achieved, says the report, with strong and strategic leadership from professional accountants.The report looks at ACCA’s drive to champion the value that accountants add – from promoting good business practice to identifying the drivers for high-performing organisations. It is especially vital to provide a strong foundation for long-term sustainable growth in Central and Eastern Europe. ACCA is contributing to this by working to enhance the standard of the profession across Europe through its qualification, training, member support, research and technical vision. It is also essential, says the report, that accountancy bodies work with employers and policymakers across the region to develop professionals within local markets.The report highlights the role of accountants in adding value by driving down costs and identifying drivers of value and profitability, as well as ensuring ethical practices. Key to restarting growth in the EU, says the report, is encouraging entrepreneurial activity, particularly among the small and medium-sized businesses that make up the vast majority of the EU’s businesses. As the then

ACCA president Mark Gold FCCA said during the ACCA President’s Debate in Warsaw in July 2011: ‘Entrepreneurship is exactly what Europe needs in order to lift itself out of its malaise.’ Accountants, with their long tradition of advising and supporting SMEs, play an important role in their success. That deep understanding helps inform the advice ACCA gives to government about the need for proportionate regulation. The report

highlights how, by drawing on strong alliances of business professionals across Europe, ACCA is providing an evidence-based approach to the regulation of SMEs and supporting the evolution of accountants from compliance workers to fully fledged business advisers. In other words, they are acting as ‘complete finance professionals’, combining in one place the skills required for financial reporting, management accounting, tax and regulatory compliance, risk management and ethical practices, together with the knowledge required to provide all-round advice to company owners and managers. In larger businesses, too, the role of the accountant has never been more important. The increased focus on risk management has highlighted the importance of accountancy

Mark Gold: ‘Today’s accountants not only grow and protect a business; they grow and protect its reputation, too.’

European visionThe EU’s 2020 growth strategy will be realised only by encouraging SMEs to identify drivers of profitability and value – and accountants have a key role to play

‘Entrepreneurship is exactly what Europe needs in order to lift itself out of its malaise’

ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS EUROPE

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Donald Tusk, prime minister of Poland, the current holder of the presidency of the Council of the EU, leads the only country in Europe not thrust into recession by the financial crisis.

skills in analysing a company’s risk profile and linking it to financial performance. Accountants in large companies are also vital to the development of new areas such as non-financial reporting.No longer just reporting to shareholders, accountants are expected to account to a wider stakeholder community for an organisation’s ethical practices and sustainability. Increased interest in reporting on corporate social responsibility (CSR) and sustainability is reflected by demands from legislators, shareholders and the public for more transparency. The report says that rather than being seen as a burden or an optional extra, CSR can be an integral part of a business’s adoption of innovative and more efficient practices that not only minimise its environmental impact but also cut costs. Promoting CSR will be a driver to promote European competitiveness in playing a leading role in emerging ‘green’ industries, creating innovative technologies and exploiting intellectual property and R&D. ‘Today’s accountants not only grow and protect a business,’ said Gold. ‘They grow and protect its reputation, too.’The finance function has become the guardian of the company brand. This means that accountants will play a key role in rebuilding public trust, embedding financial and ethical disciplines in the culture of organisations. ACCA’s report also looks at the need for wider adoption of common accounting standards. Common standards act as a source of public confidence and protection, and crucially

provide information to investors. Some of the most recent entrants to the EU 27 from Central and Eastern Europe achieved rapid growth on the back of substantial inward investment. The collapse of investor confidence has meant that many of these countries have suffered some of the worst contractions in the EU.Better corporate reporting will play a vital role in restoring confidence, and there are emerging developments such as the International Integrated Reporting Committee’s framework for reporting (see page 58) which are seeking to improve and widen its scope. The report also looks at auditing which has never had such a high political profile (see page 76). ACCA firmly believes in the value that audit brings to business and economies by building trust in corporate reporting.Poland has also made it clear that the hallmark of its presidency, which runs from July to December 2011, will be support for the EU’s Europe 2020 growth strategy with a focus on improving conditions for SMEs, particularly access to finance. Poland’s recent performance is a testament to how a strong local economy supported by SMEs can withstand global impacts, says the report.

Mick James, journalist

This article is based largely on A New Vision for Finance and Business in Europe: The Role of Accountants, available at www2.accaglobal.com/vfb

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ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS EUROPE

Swapping the world of property for the financial sector, Ewan Willars joined ACCA in December 2010 as policy director. Since then he has developed ACCA’s research and insights work, a cornerstone of the organisation’s global strategy, and heads the policy, research and small business units.

One of ACCA’s leading research programmes is called Accountancy Futures. Part of our research and insights agenda, Accountancy

Futures, after which this publication is named, lets us examine the future, and by so doing reflect on our present. Futurology is a way for organisations to add to their knowledge of the future environment in which they will operate. The process of future gazing has gradually become a mainstay of the business-planning cycle, applied with equal vigour to the worlds of fashion, technology, social studies and economic analysis and corporate endeavour. My own interest in futurology began with my passion for science fiction. One of my earliest close encounters with sci-fi was through Arthur C Clarke’s novel Islands in the Sky, which predicted from as far back as 1952 the fundamental role that geostationary satellites would play in providing a global communications network – the foundation of satellite TV, near-instantaneous personal communications, satnav and the internet. I was fascinated that this ancient-seeming paperback contained within it a clear-cut vision decades ahead of its time.

THE VALUE OF FUTUROLOGYFor the more serious world of global business, it was around the same time that futurology began to show its value. There are a number of methods that can give us a glimpse into tomorrow’s world. One of the earliest and most lauded proponents of futurology was Royal Dutch Shell, in the 1970s. The particular method it employed so famously was scenario planning. This starts by dividing knowledge into two subsets: first, things we believe we know something about, and then other issues we consider to be uncertain or unknowable. The first subset lets us project the past and present forward, recognising that the world tends to maintain momentum and continuity over time.The second subset, comprised of uncertainties and unknowns, includes issues that are much harder to predict over any length of time, such

as the outcomes of political elections, rates of innovation, fashions in markets and business, global crises and environmental disasters.Scenarios are then built around carefully constructed plots, based on trends and potential events, using the two subsets as the scenario variables. The resulting scenarios can then assist in the selection of strategies, identify possible futures, and make people aware of the effect that uncertainties may have on their future success.Shell identified the power this technique could have in generating and evaluating its strategic options, and improving its decision making. The scenarios used by Shell – and that are still being developed – are not mechanical forecasts. They are used to reveal different possible futures that are plausible, and yet challenge people’s assumptions. Because of its scenario planning, Shell was consistently better in its oil forecasts than its rivals, and identified the emerging overcapacity in the tanker business and Europe’s petrochemicals far earlier than its major competitors.More recently, scenario planning has been used to great effect by PwC, not as a means

A brief history of the futureStudying the future is an academic subject that has become a mainstay of the business cycle. ACCA’s Ewan Willars investigates

ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS FUTUROLOGY

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Futurist designer Syd Mead designed the city of the future for Ridley Scott’s 1982 film Blade Runner.

of forecasting its own activities, but to engage the corporate world through its visions of future developments in HR – the ‘red’, ‘blue’ and ‘orange’ worlds.

POSSIBLE FUTURESEach of these has its own implications for the future roles of companies, recruiters and HR staff, on the one hand exploring the possibility of a dramatic downsizing of HR functions, and equally dramatic upsizing on the other. The Managing Tomorrow’s People project enabled PwC to ask questions of business in relation to these possible futures: where are you, where do you think you are heading and what do you need to do to create a change-ready, people-ready business?A more normative approach is ‘backcasting’. This involves creating a future history, first by identifying a particular future scenario, and then developing a timeline that explains what events needed to occur for the future under discussion to emerge from the present. There are layers of complexity that make this a challenging approach, but it has featured strongly in the world of sustainability and energy strategy, although it has been applied to issues as diverse as identifying the policy pathways and business models able to support sustainable transport in China, to the analysis of market growth and future sales in Coca-Cola in the late 1970s and early 1980s.What results from this process can be made to be accessible and engaging to a non-expert audience, by communicating the link or trajectory that lies between the present and the desired future. It has subsequently found its way into local politics, particularly in the US. For example, it is being used to help to strengthen community-level green economies, by engaging local people by offering a vision of sustainable local living, and providing a way to help get them there. In the past 20 years, the Delphi method of futurology, originally developed in the 1950s, has enjoyed a resurgence in use by governments wanting to take a longer-range forecast. It has been used by the UK, German, US and Japanese governments, among others. In essence, it is a structured communication technique, and is relatively unique in that it relies on a panel of experts. The experts are asked to complete a survey, with a facilitator providing a summary of the anonymous responses, and a commentary concerning the reasons for the choices made. The experts are encouraged to consider their choices in the light of the overall responses, and over rounds of the survey the range of answers decreases and the experts converge on the ‘answer’.

The Delphi method has proven its worth in particular in making long-range predictions concerning specific issues. But despite the numerous methods on offer they all have their limitations. Few can truly claim to have foreseen the credit crunch, or can predict where the next economic crisis will come from with any significant degree of certainty.Of course, in business, the rear-view mirror is always clearer than the windscreen; hindsight gives us all 20:20 vision. In science fiction, this lack of certainty has resulted in some wide-of-the-mark predictions, for example when Harrison Ford’s character in the film Blade Runner is forced to seek out a telephone kiosk. This, in a world full of holograms, androids and flying cars, because the film failed to predict the ubiquity of mobile telephones and the internet, an example of simple but fundamental ‘unknowns’ that have gone on to revolutionise society.If we can work around its limitations, see the landscapes painted by futurology as a source of challenge and inspiration, and learn to live with a degree of uncertainty, then future studies can be a powerful tool for business.

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ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS FUTUROLOGY

ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS GLOBAL FORUMS

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No one today can ignore the impact of global forces on all our professional and business lives. International policymakers and standard setters create regimes that are increasingly implemented all around the world. National economies are highly interdependent, with cross-border trade and investment flows the norm. Appreciation of these powerful

global forces lies at the heart of the creation of ACCA’s 10 new global forums. They bring together influential business and professional leaders from markets around the world, reflecting the truly global nature of ACCA’s membership and reach. Effective use of communications technology will enable us to capture the insights and ideas of these experts, wherever they are based.Alongside increased international representation, the forums’ agendas will also become more international in outlook in line with members’ concerns. While the forums build on the work of ACCA’s previous highly-valued technical committees, they will have an expanded outlook. Members will be encouraged to pursue ‘blue-sky’ thinking to identify emerging issues. Their structure will also give greater flexibility in responding to emerging issues by allowing forum experts to support ACCA’s Research and Insights programme of research, publications, events and collaboration. We will invest in promoting the work of the forums through publications and other channels, including the website. We anticipate the forums and their chairs developing an international public profile, simultaneously reinforcing ACCA’s reputation and influence as the leading global body for professional accountants. We will draw on a wide range of experts, including employers. Responding to national developments will remain a priority, however, and we will continue to pursue a local agenda where appropriate, especially in areas such as tax, regulation and SME matters.The creation of the forums is a visionary development for ACCA, confirming our position as a global organisation that can lead debates on the international stage, expressing views based on global analysis. In this way, ACCA can act as an independent champion of our profession, striving to support the creation of business and public value in international markets. By developing a global framework of many experts across different specialist areas, ACCA will draw on expertise from across the spectrum to provide a truly informed and integrated perspective.

Neil Stevenson is ACCA executive director – brand

ACCA’s global forums will respond to the issues facing the accountancy profession in a time of rapid global change. For example (clockwise from top left): more emphasis is being put on renewable power sources; US president Barack Obama is struggling with the national debt; the revolutions sweeping the Middle East and North Africa are having economic implications; China plans to stimulate domestic demand and reduce its foreign trade surplus to encourage balanced growth.

Forum focus Neil Stevenson introduces ACCA’s 10 new global forums, set up to grapple with current technical challenges and to identify emerging issues affecting professional accountants

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ACCOUNTANTS FOR BUSINESS RICHARD MOAT FCCA FORMER CFO AND DEPUTY CEO, EVERYTHING EVERYWHEREACCA believes in the value that accountancy and sound financial management bring to business and economies. Through its Accountants for Business programme, ACCA is setting out an agenda for business that puts sound financial management at its heart, highlighting the ways in which accountants put themselves at the core of business life and a successful economy.The Accountants for Business Global Forum brings together the input and skills of representatives of global business, and our key corporate stakeholders. Leading global organisations are represented, with members based in a range of global markets. Their creative input, first-hand market intelligence and focused discussion enable ACCA to explore the interaction between people, professionalism and performance. The Accountants for Business forum themes for 2011–12 include diversity in business, the balance between risk and reward, the emergence of the e-professional, and the continued move towards global outsourcing and shared services.Acting as a business-focused think tank, the forum will ensure that ACCA is able to penetrate the complex issues affecting business, and ensure our research and insights continue to add value to business, and provide leading-edge analysis of the issues that matter in finance.

ACCOUNTANCY FUTURES ACADEMY NG BOON YEW FCCA EXECUTIVE CHAIRMAN, RAFFLES CAMPUSThe Accountancy Futures programme provides ACCA with powerful visions of the future, in response to emerging challenges in a range of issues. This venture will provide creative inputs into ACCA’s future research and insights. The Accountancy Futures Academy provides a platform for ACCA to have a forward-looking radar, tuned in to the emerging trends and discussions in the global business and policy spheres, and the latest reforms facing the world of finance.This group of thinkers, academics, business leaders and commentators will ensure that ACCA has access to a network of innovative experts that can help it to stay at the cutting edge. The Accountancy Futures Academy will foster fresh thinking and innovative discussions, identifying the barriers and facilitators of tomorrow’s successes, and the potential strategies to enable business and finance to navigate the choppy waters that lie ahead.

On topics such as the future of audit and global standards, the rapid changes undergoing corporate governance and reporting, the difficulty of maintaining access to finance for businesses and the imperative of environmental accounting, the Accountancy Futures Academy will enable ACCA to develop credible positions.

GLOBAL FORUM FOR GOVERNANCE, RISK AND PERFORMANCE ADRIAN BERENDT FCCA EXECUTIVE DIRECTOR, LCH.CLEARNETThe forum will identify current issues concerning governance, risk and performance (GRP), and will help to demonstrate how good governance and risk management practices can enhance business performance and success. It will take a particular interest in how GRP can enhance public value and in the role of the accountant in making measurable contributions to public good.The forum will focus in particular on the for-profit private sector and GRP in those larger corporations and financial services institutions that have a significant impact on wider society, whether individually or collectively. It will also work closely with other forums such as the Public Sector, SMEs, Corporate Reporting and Sustainability Forums.A key underlying theme will be the nature and value of money, and how we record and report financial transactions. Successful businesses that build long-term value are vital for global economies, for individuals and for society more widely. Good corporate governance is about managing risk to ensure that sustainable and long-term business objectives are not sacrificed to short-term financial performance. The forum will interest itself in the drivers of business and financial behaviour, and the interaction between governance and risk management, performance measures, regulation and, not least, corporate culture.

GLOBAL FORUM FOR CORPORATE REPORTING LORRAINE HOLLEWAY FCCA FINANCE MANAGER, ROYAL DUTCH SHELLA core purpose of the forum is to provide input into financial reporting standard-setting, in particular to influence the development of appropriate International Financial Reporting Standards. It will identify, evaluate and champion enhanced forms of reporting that bring value to investors. The forum’s work is on the issue that nearly all members are involved with at some level: accounting and reporting. However, with a broader focus on trends in corporate reporting, there are

NG BOON YEW RAFFLES CAMPUS

ADRIAN BERENDT LCH.CLEARNET

LORRAINE HOLLEWAY ROYAL DUTCH SHELL

RICHARD MOAT CFO


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key issues and opportunities coming up that this forum will need to cover. One example is integrated reporting, which aims to provide a holistic view of a business, bringing together strategy, governance, financial reporting and sustainability reporting to give the overall strategic view. This supports businesses in taking more sustainable decisions – financially as well as environmentally – and enables stakeholders to assess organisation performance. A discussion paper from the new International Integrated Reporting Committee will provide a key starting point in our debates. We will be debating the International Accounting Standards Board’s standard-setting agenda covering the next three years, which should reflect much less emphasis on the financial crisis and more on convergence with US generally accepted accounting principles (GAAP). There is unfinished business with financial instruments, revenue, leasing and insurance accounting. Beyond that, there will be issues from recent International Financial Reporting Standards adopters in Asia Pacific and a number of others.

GLOBAL FORUM FOR AUDIT AND ASSURANCE ROBERT STENHOUSE FCCA DIRECTOR, NATIONAL ACCOUNTING AND AUDIT, DELOITTE‘The status quo is not an option for the auditing world,’ warned European Commissioner Michel Barnier as audit came under scrutiny in the EU following the credit crisis. EC legislation is scheduled to be finalised in November 2011 and will, no doubt, further highlight two huge movements in the tectonic plates of the audit world. First, investors are demanding much more from the auditors of companies listed on securities markets. Second, in jurisdictions where audit is long established, smaller companies are increasingly being exempted from statutory audit. These contrary movements provide huge opportunities for the development of innovative assurance services. Leveraging their audit-related skills, practitioners can provide smaller companies with compilation and review services and larger entities with assurance on new subject matters associated with financial statements, such as corporate governance disclosures. I am convinced that ACCA will continue to play a leading role in the development of audit and assurance services. We will contribute to the development of fit-for-purpose assurance standards to meet these market demands. The forum will also continue to champion

the value of audit in society, as challenges to audit market concentration and auditor reporting play out and new challenges arise.

GLOBAL FORUM FOR SUSTAINABILITYDAVID NUSSBAUM CHIEF EXECUTIVE, WWF-UKACCA has played a leading role in relating sustainability to the accountancy profession, perhaps most notably through its creation of awards for social and sustainability reporting.This demonstrates ACCA’s early recognition of the important role that accountants have in the identification, measurement and reporting of the non-financial results and effects of the organisations for which they work or provide advice.There are increasing expectations from a range of stakeholders for transparency, and the costs of losing public trust and the licence to operate can be catastrophic. It is essential for organisations of all kinds to identify and manage the risks associated not just with the usual financial and control issues that accountants have always addressed, but also the business and strategic risks that may lie outside the accountant’s traditional habitat.The effects of business activities on carbon and water, on human rights and freedoms, and on poverty and biodiversity are subject to ever more demanding regulation. At the same time, corporate reporting has become overwhelming for producers and consumers alike. The International Integrated Reporting Committee is therefore attempting to define a new approach to communicating the consequences of business activities in a new way, and the Global Reporting Initiative is currently working on the latest generation (G4) of sustainability reporting guidelines.

GLOBAL FORUM FOR BUSINESS LAWFARIS DEAN ACCA SOLICITOR, LYONS DAVIDSON The consequences of the global financial crisis will be with us for years to come. The events of the past few years have also caused many people to think differently about what drives business behaviour and whether the law has yet found the right balance between encouraging entrepreneurial initiative and providing necessary protections for stakeholders and the public interest. The question of how best to achieve that balance is going to be a key feature of the agendas of governments and regulatory bodies the world over in the coming years. As a body that represents accountants, we are instinctively in favour of business activity and will always be prepared to support measures that aim to encourage investment, expansion,

ROBERT STENHOUSE DELOITTE

DAVID NUSSBAUM WWF-UK

FARIS DEAN LYONS DAVIDSON

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employment and trade. At the same time, it is inherent in our mission as a professional body to work in the public interest, and to advocate measures and conduct that reflect that. It is becoming increasingly apparent, however, that not only is there no conflict between the concepts of enterprise and the public interest but that long-term and sustainable business success depends on businesses recognising the self-interest of planning and operating in ways that respect the public interest and the concerns of their stakeholders. ACCA can offer a strong and distinctive contribution to the debates on business law issues and I look forward to working with our members and staff to achieve this.

GLOBAL FORUM FOR THE PUBLIC SECTORDATUK WAN SELAMAH WAN SULAIMAN FCCA ACCOUNTANT GENERAL OF MALAYSIAThe landscape for delivering public services is rapidly changing. In the aftermath of the most significant financial crisis that the world has seen in decades and the fact that government expenditure accounts for more than a third of gross domestic product in most countries, we believe that it is important for our work to focus on promoting effective public financial management and sound stewardship of public funds. We will prioritise those areas that matter to employers, members and, more widely, stakeholders such as governments, standard setters and audit institutions. Our focus over the next couple of years will be on building reputation and influence in the areas of public financial management reporting and budgeting, responding to changes in the audit and regulation landscape, and promoting accountability and transparency of public funds – ‘good governance’. Equally, we will respond to the challenges faced by public services in securing long-term sustainability of public funds, as well as the impact of the environment and climate change on resources and the role of the accountant. The forum is energised by the financial challenges ahead and will work towards adding public value to debates, changes and developments over the coming years.

GLOBAL FORUM FOR SMES MARK GOLD FCCA SENIOR PARTNER, SILVER LEVENEThe forum is a unique platform that will enable the views and experiences of SMEs to be represented from a global perspective. It will address a gap in thinking where policymakers often approach the SME agenda from a regional or national perspective. Consequently, the opportunities

to find common ground and, most importantly, to learn from these are often lost. ACCA’s SME forum will be working to establish and communicate this common ground by looking at what governments, policymakers and professionals around the world can do to ensure a level playing field where small businesses can thrive and grow. This will include looking at best practice for a proportionate regulatory framework; access to external finance that ensures growth and investment opportunities are exploited; and appropriate business support where the limited resources of smaller businesses would otherwise present an insurmountable barrier. The forum believes that policymakers in different jurisdictions have much to learn from one another and can benefit from proven best practices. It is our role to contribute to this learning process.

GLOBAL FORUM FOR TAXATION MUKESH GUNAMAL FCCA DIRECTOR, GLOBAL TAX QUALITY & RISK MANAGEMENT, ERNST & YOUNGTaxation policy is becoming fundamental to the way that governments fund what they do and balance the raising of taxes against reducing expenditure. The drive towards greater simplification and the focus on green taxes and globalisation may force us to think again about what taxes do and how they should be administered. Green taxes are one possibility, but so far there is no consensus on the best model to pursue. Should they be levied on producers or consumers? Should the revenues be ring-fenced, or put into the general ‘tax pot’? Increasingly, the physical effect of businesses cross borders, while their financial activities are less constrained. Consumers, too, can buy across national boundaries. Faced with such global activities, should individual governments act together or follow their own course? Will this mean a greater shift to taxing consumption or financial transactions, or some other mechanism? We favour changes that make the tax system simpler and more certain, remove regulatory burdens and make it easier to do business. Clearly it is not all about taxation. Access to talent and capital, efficient cost structures and stability matter, too. Drawing on our experiences as a global organisation, we can be a clear voice in leading the debate.

For more information, go to www.accaglobal.com/globalforums

DATUK WAN SELAMAH WAN SULAIMANACCOUNTANT GENERAL OF MALAYSIA

MUKESH GUNAMAL ERNST & YOUNG

MARK GOLD SILVER LEVENE

Business leaders who succeed in the uncertain and volatile post-recession world will be those who operate in an accountable way, says Ruth Spellman

An open book

that household-name businesses refused to advertise in the now extinct publication. All this has helped usher in an era where shareholders, customers and stakeholders are demanding, and expecting, more information and access than ever from the organisations they give custom to, work for and invest in.To succeed in the new economy, therefore, companies will need to demonstrate that they are taking a different approach. Transparency, accountability and ethical practice must all move much higher up the management agenda than they have ever been in the past. This applies to all sectors; accountability is no longer just something for civil servants handling publicly funded budgets to worry about. A values-driven approach should be at the heart of everything managers and leaders do. But this will only happen if it’s led from the top. The senior management team must walk the talk – this cannot be a case of just paying lip service. Take the example of BP, which proudly states on the brand values page of its website that it is ‘progressive, responsible, innovative and performance driven’. I’m not sure those who observed the Deepwater Horizon crisis would agree with the second of those. Practising what you preach has never been more important. For many businesses, starting to work in a more values-driven way may involve some reflection and analysis of their current organisational values and how these currently play out – or not – in their operations. Values must be communicated clearly to staff members; it’s a cliché, but employees need to live and breathe the brand. Suppliers should be next – a company’s approach shouldn’t be undermined by less ethical organisations it may be working with. One particular challenge is putting frameworks in place to help organisations monitor their ethical performance and to communicate openly about the way they work. This needs to become as important as measuring and reporting financial performance. If there are no skeletons in the closet, a business can’t fall foul of a WikiLeaks-style crisis.The company’s values should be a key consideration in business decision-making. Take the approach to rewarding employees. Staff bonuses, where they can be given, need

The last couple of years have been characterised by redundancies, corporate restructures, predictions about economic upturns, downturns

and double-dip recessions, and a consistently growing level of public mistrust of big business and politicians. Almost half of CMI members (44%) had to make people redundant in 2010 and, in April 2011, 81% of those working in the private sector told CMI that the UK economy was still having a negative impact on their business. Managers have been left wondering how best to adapt to the new circumstances they find themselves in.When writing my book, Managers and Leaders Who Can: How You Survive and Succeed in the New Economy, I was looking at where we go from here. I interviewed 30 leading UK businesspeople, including ACCA chief executive Helen Brand and Ernst & Young partner Adrian Godfrey, to elicit their views on how managers will need to behave and perform if they are to succeed in the post-recession economy. The consensus was that leaders must be more responsive to society’s expectations

and needs, with businesses taking account of a much wider range of issues than they have done in the past. The organisations (and leaders) that succeed in this new economy will be those that can demonstrate they work in an open and accountable way and can fully engage their employees in what the business wants, and needs, to achieve.

A VALUES-LED APPROACHThe recession has exacerbated mistrust of big business and politicians. The British public believes it has been betrayed by MPs fiddling their expenses and that taxes on hard-earned incomes have gone to bail out the risk-happy banks that caused the financial crisis in the first place. Recent allegations that a national newspaper hacked into private voicemails have resulted in a public outcry so vehement

Ruth Spellman OBE was until recently chief executive of the Chartered Management Institute (CMI). While at CMI she published her first book, Managers and Leaders Who Can: How You Survive and Succeed in the New Economy. Spellman has also served as the first female chief executive of the Institution of Mechanical Engineers (IMechE) and been chief executive of Investors in People. In 2007 she was awarded an OBE for services to workplace learning.

ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS LEADERSHIP

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If there are no skeletons in the closet, a business can’t fall foul of a WikiLeaks-style crisis

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to be justifiable and there should be nothing that a company would not be prepared to share the details of if need be. Businesses need to think about those groups that have a stake in their operations. What are their attitudes to bonuses? How would they feel about where funds available are spent and invested?

ENGAGING EMPLOYEES AND CUSTOMERS Evidence shows that organisational values are key to engaging both employees and customers. In fact, the most productive, loyal employees and customers are those who feel that their personal values resonate with the values of their employer or supplier. Companies need to think about how things like pay and rewards strategies fit with corporate values as well as considering them when recruiting. Are job candidates a good fit for the company in terms of values? If not, neither side is getting a good deal. There is a direct correlation between how engaged employees are with their employer and organisational performance, yet employee engagement levels are lower than ever. So low, in fact, that the government formed a taskforce, on which I sit, to tackle the issue. Managers should look on a values-led approach as a useful weapon in the battle to re-engage the workforce. In turbulent times, a strong and well-practised set of values and ethics can offer a guiding light for managers looking to engage and motivate staff. A manager faced with having to cut costs, for example, should look to the organisation’s values before making any decisions. If a company is well known for the favourable way in which it treats its staff, reducing headcount may not be a good option. Likewise, an enterprise which prides itself on doing right by its customers should talk to them before pulling certain products to save money. Employees will believe in what a company is doing and trying to achieve only if they can see how they themselves fit into the grand scheme. There is nothing as motivating as knowing you are making a contribution to the overall success of the business. Managing in the new economy presents a host of new challenges for the modern leader, but, if managers can take what they have learnt from the tumultuous past few years and adjust their practice accordingly, I’m convinced that they can succeed. Revisiting and reintegrating values into management behaviour and decisions in a way that meets the needs of all stakeholders and engaging employees are just a couple of the things leaders need to do if their businesses are to succeed and thrive.

ACCOUNTANCY FUTURES: ACCOUNTANTS FOR BUSINESS LEADERSHIP

On board with behaviourWithout the right board-endorsed culture, says Independent Audit’s Richard Sheath, it’s difficult to be a confident risk taker

The wonders of hindsight show us vividly how the wrong sort of behaviour was a prime cause of the continuing financial crisis. Too much

risk was taken without forethought and firm management. Corporate cultures failed to counter the inclinations of some individuals – and may have even fostered excessive risk-taking and lax attitudes to control and common sense. Although the 2008 horse has already bolted, it’s high time we shut the stable door before the next one escapes. So regulators are increasingly looking at organisational culture and expecting boards to do the same as part of their oversight of risk-taking and management.It’s up to boards to ensure that employee behaviours and attitudes are what they think they are – and what they want them to be. Behaviour matters need to be aligned with corporate strategy – inseparable from good risk management. Neglect of behavioural issues – which include attitudes, ethics and culture – can all too easily damage both reputation and share value. And if the board can be confident that behaviours are right, there’s far less chance of being hit by an unforeseen crisis.

WHAT ARE BOARDS ALREADY DOING? Not enough is the unfortunate – but not surprising – answer. A recent survey by Independent Audit supported by ACCA, It’s All About Behaviour: How Boards are Tackling Behaviour and Ethics, found that few are giving behaviour enough time and a clear enough focus. While they are starting to look more seriously at corporate behaviour, too many wait for it to come up in general discussions rather than subjecting it to structured enquiry.It’s easy to understand why boards haven’t gone further; we all find it easier to get assurance about processes rather than attitudes. But many directors and senior managers are telling us that behaviour and ethics are at the heart of good risk management. It follows that every effort needs to be made to overcome the methodological challenges and ensure that behaviours reduce risks instead of creating them.The good news is that boards are starting to look more seriously at corporate culture and

whether their organisations have the right ethics. But the picture is less reassuring when you consider what the majority are actually doing. While there is extensive awareness and general discussion, it is short on discipline. Assurance is often lacking in structure, too. Few boards get down to the nitty gritty of standards and programmes. Fewer than half tackle the subject specifically – even at committee level. Behavioural and ethical issues are far more likely to get picked up in general discussion rather than focused deliberation. For instance, you’d expect the code of conduct – the starting point for setting tone and framework – to be discussed seriously by the board. But this often gets left to the audit committee – there are surprisingly few ethics committees – or is not discussed as a defined issue at all. Very few boards give close consideration as to how the code is communicated, let alone to the directors’ role. Boards often discuss behavioural risks and recognise the need for oversight. But it’s not clear how they get a clear view of the nature and source of those risks. Yes, most talk about the ethical dilemmas employees might face but only a quarter do so in a formal and focused way. Even fewer consider employee feedback on behavioural issues and challenges. Moreover, the financial crisis may have put bonuses in the headlines but boards aren’t spending much time thinking about how reward systems shape corporate behaviour. Few take much account of signals from external stakeholders on corporate behaviour and ethics and even fewer adopt a structured approach to ethical due diligence for mergers and acquisitions (M&As) or joint ventures.It’s not that boards don’t talk about the need for standards and assurance about behaviour; rather, too many stop right there. Discussion on how to get assurance usually only happens at the committee level and (from what we see in practice) tends to be brief even there. Actual results from assurance programmes are seldom considered by the full board, and only a minority of boards receive regular reports on serious lapses in compliance or ethical behaviour.There is also a heavy reliance on conventional sources of assurance. Directors tend to rely on their contact with management. Reports on

Richard Sheath is a co-founder of Independent Audit, the corporate governance specialist. In working with boards, he specialises in risk governance and the work of audit and risk committees. He has practical experience of working with boards in securing comfort on behaviour and ethics. Sheath is also a director and the audit committee chairman of Eurochem, a global fertiliser company. He was previously a risk management partner with PwC.

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speak-up lines play an important part, as do independent reporting lines. But even though many boards say they rely on internal audit, the auditors themselves paint a contrasting picture. They are seldom asked to give a view on the prevailing culture and only half have been asked to report on compliance with the code of conduct or ethics programme.

WHAT SHOULD – AND COULD – BOARDS DO?Understand why behaviour matters. Too often it’s left vague and poorly understood. Directors should ask whether existing attitudes are needed to succeed, consider how undesirable attitudes could cause damage and agree on why and how it should fit into the board agenda.Set out what’s expected. Behavioural issues should be given a regular slot on the agenda, with programme effectiveness being reviewed at full board level. Communicate expectations. Management should prepare a communications plan, refined and agreed by the board, who then oversee its implementation, with regular feedback from employees.Ensure standards are embedded. Management should study and, if need be, reform training, with the board looking at management’s involvement. This always needs adapting to the challenges of communicating in different cultures and languages.Identify key influences. What drives behaviour isn’t always evident. For example, boards need to consider how reward mechanisms might

influence behaviour, look at how the board and top management set the tone and shape behaviour, and assess how growth, change and uncertainty impact culture.Conduct regular assessments. There are many indicators of behaviour that often already exist but are not used actively to build and maintain a picture.Get assurance. Few internal auditors have specific responsibilities or report in a structured way on the control culture and attitudes. Set an example. Boards often refer to their responsibility to set the ‘tone at the top’ but few work out what that means in practice. Practical steps might include training senior managers and directors, publicising board support and involvement in the programme.

IT’S NOT EASYBoards and management are often uncomfortable with such intangible, unquantifiable matters as how people behave and think. But there’s no dispute over how much behaviour matters. Without the right culture it’s difficult to be confident in your risk taking. You can’t regulate against people doing the wrong thing, but you can make every effort to help people understand how to do the right thing.

It’s All About Behaviour: How Boards are Tackling Behaviour and Ethics can be found at www2.accaglobal.com/aab

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Henderson’s Seb Beloe asks how investors can spot companies that are vulnerable to unethical practices and adopt strategies to avoid problems

Dangerously flawed

was the focus of a research project undertaken by Henderson Global Investors and PwC. The hypothesis adopted was that while unethical business practices are by their nature difficult to spot, there are nonetheless certain characteristics of businesses that make them more vulnerable. PwC’s forensic services division has, over many years, built up a library of case studies of businesses that have suffered from major business ethics controversies. Using this database, a list of ‘red flag’ characteristics that make businesses particularly vulnerable to fraud, corruption or wider business ethics malpractice was developed. These red flags, which fall into one of five broad categories – type of industry; country of operation; company structure and business model; management integrity and supervision; and high-level financial indicators – are routinely in evidence at companies where business ethics later becomes a critical issue. Of course, just because a company has a significant number of red flags does not necessarily mean that it is corrupt. It just means that a business’s characteristics and operating environment expose it to greater business ethics risk. In order to determine whether a company is indeed more likely to be subject to business ethics malpractice, direct analysis and engagement with the company’s management is required to understand the quality of its internal control systems.Such engagement can be highly revealing about a company. In some cases, the way the company responded to a request for a meeting to discuss these issues gave away a lot. In one instance, repeated requests for a meeting were only answered once a major accounting fraud had become public knowledge.In other cases, companies were able not just to articulate and share high-level policies and procedures governing the management of critical areas of their business, but also the additional detail of how the policies had been implemented, what they had learnt and how they had subsequently refined these policies. Similarly, other companies were able to tell a compelling ‘story’ of risk management backed up by data, for example, on how often business ethics hotlines had been used and/or how training on ethical business practices is implemented within the organisation.

Stories of corruption, fraud or wider business ethics issues are rarely out of the news. Every year has its crop of unwelcome headline scandals, often

implicating household corporate names or their staff in practices that damage reputations and send share prices plummeting. The US’s Foreign Corrupt Practices Act and most recently the UK Bribery Act aim to combat corruption, and their powers extend across the globe to companies that do business in the US and UK.While it is a near certainty that some companies will end up in the headlines, identifying and evaluating the risk that corruption or fraud will have an impact on a given company, represents a real challenge for investors. At the extreme, such issues can have a catastrophic impact on share prices, as the failures at Enron, WorldCom and Parmalat demonstrate, and recent regulatory action and litigation in the US and Germany have resulted in fines in the hundreds of millions of dollars.Corruption – that is, the ‘abuse of entrusted power for private gain’ – is an area of specific concern for UK companies in 2011, as the UK Bribery Act came into force on 1 July. The provisions of the act are also expected to be keenly applied by the Serious Fraud Office.Collateral long-term damage to brand and competitive edge also extends beyond the core issues of fraud and corruption and into wider business ethics issues. In recent years, companies shown to have unscrupulous business practices, poor working conditions for employees or suppliers and/or poor environmental practices have found that their broader reputation has suffered, undermining their share price in the short term and their ability to outperform their peers over the longer term by discouraging talented staff, customers and suppliers from working with them. If anything, the response of financial markets to business ethics issues is likely to become more pronounced, as governments continue to reinforce sanctions on businesses guilty of poor ethical practices. The problem facing investors is not so much whether or not these issues matter, but how they can spot companies that are particularly vulnerable to unethical practices and adopt investment strategies that ensure that they are not negatively affected. Addressing this problem

Seb Beloe is head of sustainable and responsible investment (SRI) research at Henderson Global Investors. He is responsible for the identification and analysis of critical sustainability and responsibility issues with investment relevance for the SRI funds. In addition, Beloe guides and oversees the research team’s communication and engagement with companies, the investment community, government and civil society to promote understanding of sustainability, corporate responsibility and SRI matters.


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While unethical business practices are by their nature difficult to spot, there are nonetheless certain characteristics of businesses that make them more vulnerable

recently terminated a business relationship as a response to unethical behaviour. The red-flag tool has already helped to identify one company that subsequently suffered a serious business ethics issue. However, it is too early to comment on its overall effectiveness. While many of the red flags are themselves not new to portfolio managers, incorporating them into a disciplined and structured framework to help assess business ethics risks is. This structured approach is of particular value at both the portfolio level and also in undertaking a stock-by-stock analysis, for example, at initial public offerings.Ultimately, it is clearly not possible to know definitively where the next corporate corruption scandal is going to come from. What is definite, however, is that there will be corporate scandals. Prudent investors need to respond to this increased risk by developing and applying tools and frameworks like the one described here.

This is an abridged version of Avoiding Bear-traps: An Investor Tool for Identifying and Managing Business Ethics Risks by Seb Beloe and Mark Anderson, published in Risk and Reward: Shared Perspectives, which can be found at www2.accaglobal.com/abt


Quality and extent of reporting was a key differentiator. For example, the most advanced companies were able to provide both detailed anecdotes as well as quantitative data on the performance of their internal control systems. In some cases, companies were also reporting this publicly either through their annual or corporate responsibility reports.However companies choose to manage and report on their approach to business ethics issues, there is no doubt that changes in businesses’ operating environments are increasing risk in the area of business ethics to companies and therefore to their investors. Indeed, a 2010 survey conducted by PwC on business ethics and ‘tone-from-the-top’ activity within companies, found that 70% of respondents agreed or strongly agreed that ethical risks were identified but only 34% reported they were adequately measured or evaluated, while 27% confirmed that their business had

Eliminating corruption in business has long been seen as an unrealistic dream, but momentum is building to turn it into a reality, reports ACCA’s John Davies

Stepping up the bribery battle

companies to foreign public officials. While by no means all countries are following the same line, something approaching concerted action is now happening.

BRAND REPUTATIONThe second reason for the momentum is that large companies are increasingly aware of the possible adverse consequences of engaging in illegal, illicit or morally dubious activities. As a result of greater transparency and more active consumer engagement, all large companies are now very conscious of the importance of brand reputation and keen to ensure that their customers and stakeholders are satisfied with the way that they do business. A desire to avoid getting involved in things like bribery may not, of course, be motivated solely by ethical principles; the $1.6bn of criminal fines imposed in recent years on the engineering company Siemens for bribery offences under US and German legislation amounts to a serious warning of what could happen to wrongdoers. For reasons relating both to social responsibility and prudence, therefore, engaging in acts of bribery to win contracts is coming to be seen as a risk not worth taking. A third reason for the move towards creating a level playing field is undoubtedly related to the realisation that the global financial crisis continues to pose great challenges to integrity in business transactions. It is common wisdom that the motivation to commit fraud generally increases during periods of economic difficulty. The pressures created by the economic climate may also exacerbate the temptation to win and retain contracts by underhand means. A major effort in eliminating corruption in business is being taken this autumn. The OECD will be presenting a plan to the G20 leaders’ November meeting in France to create a strengthened partnership between the private and public sectors. Aligning the two sectors behind a joint strategy is certainly essential if real and sustainable progress is to be made. The massive amounts of money spent in the area of public procurement have always represented a huge corruption risk and targeted efforts should indeed be made to

Creating the proverbial level playing field in respect of bribery and corruption in business has often been seen as a nice thought but one that is

unachievable in the real world. For a number of reasons, though, it would appear that there is new momentum behind the ideal of creating this level playing field. This momentum promises to result in a new global plan of action to be announced later this year. The first reason why this new initiative is happening is that longstanding moral pressure for governments to regulate corrupt behaviour on a standardised basis – led by the United Nations and the Organisation for Economic Co-operation and Development – now seems to be making progress. After years of criticism from domestic NGOs and organisations, in summer 2011 the UK implemented new legislation which has not only updated archaic legal provisions but brought in potentially far-reaching new arrangements making firms themselves liable for unauthorised acts of bribery committed on their behalf. Under the new corporate offence in the Bribery Act 2010, any UK company or partnership, and any foreign firm doing business in the UK, will commit the offence if any employee, agent or subsidiary pays or offers a bribe with a view to securing some form of business advantage. This will apply even if the bribe was paid or offered without the knowledge or consent of the firm. The effect of this new corporate offence is to galvanise all companies doing business in the UK into taking proactive steps to ensure that they have internal controls that will discourage and deter corrupt behaviour by staff and agents. Such measures are not new; the US has had comparable legislation on its statute book since the 1970s. But many other countries – including India, Indonesia, Russia and China – have now also developed legislation to criminalise the bribery of foreign officials along the lines of the OECD’s anti-bribery convention. And a growing number of countries – including Japan in 2006, Korea in 2007 and Poland in 2009 – are passing legislation to forbid the tax deductibility of bribes paid by

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


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It is common wisdom that the motivation to commit fraud generally increases during periods of economic difficulty

ensure more transparency, accountability and ethical conduct.

CAPACITY AND COMMITMENTThis all sounds positive and deserving of support. But for the good intentions to make a real impact they will need to be backed up by the capacity and commitment to take effective regulatory action at the government level, and it is here that the limitations of the plan are likely to be tested, especially as regards controlling the conduct of public officials. From what may be called the ‘supply side’, the private sector and accountants in particular are currently involved with law enforcement activity in a number of respects. Under the recommendations of the international Financial Action Task Force (FATF), accountants have responsibilities to act as the eyes and ears of the authorities in respect of suspicions of money laundering and the financing of terrorism. Auditors, meanwhile, will often have additional responsibilities under domestic regulations to pass relevant information on their clients to market authorities. In both those cases, it is apparent that while accountants, and others, can and surely do contribute valuable intelligence about suspected financial crime, the ultimate responsibility for using this information rests with the relevant enforcement authorities. The inherent difficulty is that the more intelligence is provided to them, the more stretched their resources will inevitably become. The dramatic cutbacks in spending of most national governments are already imposing further strains on their capacity to take effective action. Any new procedures endorsed by the G20 this autumn to combat corruption will need to envisage a workable basis whereby ambitions can be backed up by resources. There must, of course, be a place for strong enforcement action to be taken by governments and their regulatory agencies. But ultimately the most practicable form of control in respect of business corruption – and other similar matters – may turn out to be self-discipline; this will inevitably become more so if governments’ capacity to intervene and prosecute declines, as in the circumstances seems quite possible. The plans to be brought forward by the G20 must therefore be framed in the light of what level of enforcement can reasonably be anticipated, and also recognise the contribution that the private sector – including the accountancy profession – can make to create a climate in which the motivation to engage in corrupt activity can be tackled.

Conventional wisdom has it that the way out of the global financial downturn has to be led by the private sector. Not only that, but since the

vast majority of private businesses are SMEs, they are going to have to shoulder many of the expectations of the wider economy, whether they like it or not. Pinning down which form of business structure is most likely to promote enterprise and job creation is therefore something that must concern policy makers. In British and European business circles, many have heard that the US limited liability company (LLC) model has become something of a rallying point for optimistic, young entrepreneurs, each with that seemingly extra-special idea. For example, social media giant Facebook was a Florida LLC before it incorporated. YouTube was an LLC until it was bought by Google in 2006, which in turn has spawned LLCs such as Google Energy. Other, more established brands such as Chrysler and JP Morgan Securities have also chosen the LLC model. What is not well known to UK policy makers is how LLCs actually operate. ACCA’s research shows that relatively few Americans know much about them either, outside their own immediate field.

THE RISE OF THE LLC Our investigation has revealed that the number of LLCs in the US has rocketed in the past two decades. Registration of new LLCs is

10 times what it was a decade ago. The recent downturn saw a setback in this growth, but numbers continue to rise. However, Morris DeFeo of international law firm Crowell & Moring, says: ‘People have got LLC mania,’ and are disproportionately emphasising the LLC’s value. Because LLCs have a pass-through taxation model (the tax burden does not fall directly on the company but is passed on to its members), it can be incredibly difficult to attract venture capital to them. Venture capitalists will almost always only deal with fully fledged corporations. DeFeo advises his prospective clients: ‘Form an LLC if you wish, but you will probably have to form a corporation within a few months.’ As with many small businesses launched on a wave of optimism and the entrepreneur’s personal capital, cold realities become quickly apparent. Work by the Kauffman Foundation has shown that within five years half of all US small businesses will fail. LLCs are no exception to this rule. Cheap to set up, and offering many benefits to members, the LLC model is also extremely flexible. An LLC must have an operating agreement but there are no stipulations as to what this agreement should contain; it is up to the LLC’s members to define how the firm will operate. However, inexperienced entrepreneurs can be scared off by the LLC’s tendency to lack a plan for good business practice. LLCs have few set business patterns, and some business owners prefer the more standardised format that a corporation offers. Two-thirds of LLCs are run by a single member-manager but LLCs with multiple members are more likely to be a success.An interesting element of the LLC, and in contrast to UK SME companies, is that they are not legally required to produce regular, publicly available accounts. However, many LLC members choose to do so, as company accounts can be used to obtain credit and generate trust with clients, traders and customers alike. Recent research done at Indiana University shows LLCs are more likely to prepare regular financial accounts than any other US SME model.Accounts are likewise useful in obtaining cheaper business insurance and for LLC members to monitor cashflows and credit

Michael Weatherburn is a PhD student at Imperial College London. He worked for ACCA on a research project on comparative accounting requirements between May and August 2011.

Made in AmericaSome of the most successful businesses of recent times have been limited liability companies. Michael Weatherburn investigates the US SME model


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flows. Accounts also help to prevent fraud from both inside and outside the company. In addition, LLC members will often consult accountants for advice on business practice, and for help with the efficient management of taxation, payroll and social insurance costs. All signs point to the fact that they take this advice seriously.

PIERCING THE LLC VEILDespite offering limited liability, LLCs have found this veil increasingly pierced in the US. ‘Piercing the veil’ describes a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Since the LLC veil was first pierced in Utah in 1997, it has happened more than 10 times in four states, with the highest number in Delaware and North Carolina.While some of the reasons for veil piercing (such as mixing assets, fraud, undercapitalisation and insolvent trading) will be obvious to most entrepreneurs and policy makers, some are not. For example, failure to observe corporate formalities is a legitimate reason to pierce the LLC veil. SME experts accordingly advise LLC members to keep detailed records (including financial accounts and minutes) even when they are not required to do so by law. As research at Indiana University has also shown, allowances on personal property act as a kind of liability shield during litigation. As these allowances usually run in the tens of thousands of dollars, this diminishes the LLC’s limited liability, even if the LLC’s members are not always aware of it. As creditors often demand personal guarantees from LLC members, this can negate the entity’s limited liability. This practice is widespread in the world of LLC credit.

LOOKING FORWARDSME patterns in the US have been shifting in the past few years. Many more are being encouraged to export, particularly to the BRIC (Brazil, Russia, India, China) nations. The recent global downturn hit SMEs hard, not least by restricting access to credit and resources. The federal government has finally recognised this and made America’s Recovery Capital (ARC) loans available. In the 2009 financial year, $95m (£59m) of ARC loans were granted, and in 2010 this rose to $191m. Nearly 6,000 SMEs have benefited. Furthermore, in accountancy we may see a shift away from traditional US GAAP and towards International Financial Reporting Standards. Investment and manufacturing patterns in the US continue to change as businesses shift from traditional sectors to newer, service-

LLC members will often consult accountants for advice on business practice, and for help with the efficient management of taxation and payroll. All signs point to them taking this advice seriously

based ones. Buoyant areas of the US, such as Silicon Valley and Fairfax County, Virginia, increasingly attract investment. For example, Volkswagen of America has just moved its headquarters from Michigan to Fairfax. There is still more work to be done in this field. As US, UK and EU policy makers look to their small business sectors to provide dynamism and economic growth, it is important that they understand as much as possible about different SME entities. There are certainly many positive attributes to the LLC model, but it is far from perfect – and there is no one-size-fits-all approach.

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From shareholder value to public value The economy in a Petri dish: ACCA’s Paul Moxey on what corporate governance should look like in 2050

The continuing need for taxpayer support for the banking system and recent revelations about the curious relationships between some of the

media, the police and politicians in the UK highlight the need for the corporate world to take its responsibilities to society more seriously. Corporations do not exist solely to create shareholder value. In future, companies should also be able to demonstrate how they add public value, in other words, how and what they contribute to society and to the planet. For the last 20 years or so, corporate governance in the UK, and much of the western world, has developed incrementally. The direction of travel has been the same – towards adding more specification about the fundamentals of good governance: the role of non-executive directors; ensuring no single person has unfettered control; having effective risk management; aligning executive pay to performance; having an effective board, sound financial reporting and auditing; and encouraging shareholders to hold boards to account.By now, corporate governance should have evolved sufficiently to ensure that these fundamentals are in place. However, the financial crisis revealed that in some of our major financial institutions, previously thought to have been well governed, many of these fundamentals were not working as intended. Rather than taking a fresh look at what is needed for good governance, the response is, always, to have more detailed specification. Until recently companies, and many investors, thought their duty was simply to promote shareholder value, which they interpreted as maximising the share price in the short term. Attempts are being made to change the focus to long-term shareholder value and an acceptance that, to achieve long-term value, boards must consider the interests of other stakeholders. There is a growing recognition that the interests of institutional investors should be more aligned to the interests of society, as the people who entrust their savings to these investors form a large proportion of society. Indeed, in September 2011, a coalition of institutions led by Aviva Investors, including

ACCA, called on United Nations’ member states to require companies to integrate material sustainability issues into reporting – or to explain why they were unable to do so.Underpinning business and political thinking are the, usually unconscious, assumption and expectation of economic growth. In any system, growth can only continue when the resources on which growth depends are available. Constant growth means exponential growth. This requires exponential growth in the amount of resources required to feed it, exponential improvement in the efficiency with which resources are used, or a combination of both. Efficiency gains tend to get harder to achieve. So, accelerating demand would lead to decelerating efficiency gains. Ultimately, in any closed system, resources are finite. Mould in a Petri dish will grow as long as there is food. When the food is used up, growth will stop and the mould will die.How different is our Earth from a Petri dish? It is also a closed system except for incoming energy from the sun and the radiation of low-level heat. This incoming energy made life on Earth possible. The Earth cannot continue to support exponential growth in consumption of oil, coal, minerals, food, water or exponential growth in population. We know there are limits to growth but we do not know how far we are from reaching them. Whether or not we are approaching such limits as ‘peak oil’, the amount of energy needed to get more energy is increasing. A hundred years ago, 100 barrels of oil could be obtained at an energy cost of about one barrel, according to some estimates; the return ratio is now less than 10 and may be nearer three. To grow, our present economic system also requires growth in debt, which is not sustainable either. We are living with the consequences of too much debt in the financial system and are now learning what too much debt in nations means. This year, financial markets have been rocked as more and more people started to question where future economic growth might come from. Most political and economic comment is still about how to restore growth. Few are questioning whether it will be possible.

Paul Moxey is head of corporate governance and risk management at ACCA, and senior research fellow at King’s College London.

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Science and engineering, as well as logic, suggest that it cannot go on for ever. For economic growth, it seems to be a question of ‘when’ rather than ‘if’ it stops. Concerns about the environment, food and water suggest it may be sooner rather than later. But there is scope for optimism. According to Nathan Lewis, George L Argyros professor of chemistry at the California Institute of Technology, the sun provides more energy in one hour to the earth than all of the energy people consume in a year (2006). Re-engineering the economies of the world to be less dependent on fossil fuels, more energy efficient and make more use of renewable energy could provide a significant economic boost.It follows, then, that no matter whether or not our present corporate governance model is appropriate for our present needs, we will need something different for the future. We need an approach to governance which accepts that companies must work in the interests of society and that economic growth cannot be taken as a given. This of course means that companies and their shareholders cannot assume that a well-run company will make more profit every year. Value is not the same as profit. We should find new ways to measure how companies add value for their shareholders and for society. Public value can be considered as a measure of contribution to public good. We need to move beyond maximisation of shareholder value. In a recent ACCA publication, Risk and Reward: Shared Perspectives, I suggested that companies should say, in their annual report, how they contribute to public good.

Shareholders and other stakeholders can judge what companies say. This should provide a more useful basis for engagement than we have at present. Some institutional shareholders interpret their fiduciary duty to savers as maximising short-term share value. It seems that boards do so too. A recent ACCA research report, Shareholder Primacy in UK Corporate Law, found that interviewees from the corporate sector interpreted their directors’ duties as maximising share price in the short term – notwithstanding that UK company law requires directors to have regard for the likely consequences of any decision in the long term. A more enlightened approach is required. In the UK, it may be necessary either to amend the law on directors’ duties in section 172 of the UK Companies Act 2006, so that other stakeholders could enforce it, or clarify the fiduciary duties of institutional shareholders to the people who save with them. In some countries there is more of a balance between the interests of shareholders and other stakeholders. But clearly more could be done to encourage companies to focus more on the longer term for everyone’s benefit. We cannot tell what the future has in store for us but it would be better if we did not have to start from here. We do not want to be like the mould in a Petri dish.

Risk and Reward: Shared Perspectives, www2.accaglobal.com/pdfs/rarShareholder Primacy in UK Corporate Law, www2.accaglobal.com/pdfs/sp

Ends of the Earth: the planet cannot continue to support exponential growth in consumption of natural resources.

ACCOUNTANCY FUTURES: CORPORATE REPORTING INTERVIEW

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As Hans Hoogervorst takes over the International Accounting Standards Board chairmanship from Sir David Tweedie, they discuss the agenda for the future

Handing on the baton

accounting and financial reporting language was a remarkable success under the Tweedie chairmanship. And while the challenges change as an organisation matures, it was always going to be important to maintain continuity. The revolution which has seen International Financial Reporting Standards (IFRS) become the favoured accounting language for most of the world has been a steady and pragmatic one. At every stage in the first 10 years of progress overseen by the IASB, all manner of issues and events sprang up to challenge the revolution’s progress. The global financial crisis which has dominated the last few years brought its own challenges. Not least was the G20 countries’

The Scots and the Dutch are often thought to share many characteristics. They can be humorous and awkward. They are often obdurate and

certainly dogged and determined. Perhaps that, with the benefit of hindsight, is why the trustees of the IFRS Foundation chose Hans Hoogervorst to take over the chairmanship of the International Accounting Standards Board (IASB) when Sir David Tweedie’s second term came to an end. They certainly both seemed remarkably attuned to each other at the time of the handover at the end of June 2011. This was important. The great revolution which had given businesses and economies around the world the chance of a common

Hans Hoogervorst (right) shares many of the same qualities as outgoing chairman Sir David Tweedie (left), but also has direct experience as both politician and regulator.


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‘We should be pragmatic and not view accountancy as some kind of theology which needs to be theoretically perfect’

demand for acceleration in the process of refining standards which dealt with financial instruments, for example. There have been pressures from Europe, which had brought about much of the impetus behind IFRS in the first place by making them mandatory for listed companies in the EU. There has been pressure from the main regulatory body in the US, the Securities and Exchange Commission (SEC), as the IASB and the US Financial Accounting Standards Board (FASB) sought to bring about accounting harmony. Throughout all these pressures, country after country around the world signed up to the revolution. It has been hard work and much of the success has been down to the persistence

and indefatigable efforts of Tweedie, IASB chairman through those first 10 years. The key to the succession is that Hoogervorst shares many of the same qualities as Tweedie, but also has direct experience as both politician and regulator. He has been minister of both health and finance in his native Netherlands, has chaired the main Dutch securities and market regulator and has been chairman of the technical committee of the world stock market organisation, IOSCO. In all this experience lie the foundations for moving the IASB more firmly and directly on to the world stage.The IASB certainly needs to do this. Important programmes, such as those dealing with leasing and insurance, are still only halfway through. Efforts to bring about more convergence between IFRS and existing US GAAP have achieved a great deal but are not yet complete. The process of bringing about the changes which the G20 group of nations asked the standard-setters to make following the financial crisis is still in progress. The need remains to bring about a process whereby the US regulator, the SEC, feels able to join with most of the rest of the world by agreeing that IFRS should be used by the major US companies. And setting a new agenda for the future is the other major task to be achieved.Hoogervorst sees all this as part of the task of ensuring that the IASB maintains its development into a truly global organisation. ‘It is very important that the new agenda addresses issues raised by our new regions, like Latin America and Asia,’ he says, ‘and that brings me to a more general point. Under the leadership of David, while the IASB has

secured the buy-in of big parts of the world, we still need to solidify the organisation, making it a truly global organisation in which there is a strong sense of ownership around the world. We are still in a very young phase and hopefully we will mature a bit in the years that come. That will be a big priority.’In adding his perspective, Tweedie says: ‘Hans is quite right. The priority is now to finish the programme that the G20 and the convergence issues demand and that’s the absolute priority. That is what Hans is concentrating on. And he is absolutely right about the agenda. Hans has said publicly that this organisation will fail if it is just seen to be a European and American show. It’s got to be wider than that. ‘One of the main issues and one of the great advantages of having Hans here is the outreach. It’s going to be very challenging in the sense of “government political” and Hans is obviously experienced at that. And it is also about how you bind them all together so you don’t get people having carve-outs and breaking ranks. That’s going to be a big issue for the next year.’ This is where Hoogervorst’s skills come into play. He himself says: ‘You always have to listen very carefully to what your stakeholders have to say and what businesses have to say. But this also means that you cannot always please everybody. This will continue to be an enormous challenge, which is why I think my background comes in handy.’

PRAGMATIC APPROACHHoogervorst emphasises the way that this practical approach is very similar to the ideas which drove Tweedie’s approach over the last decade as well. ‘David is a very pragmatic person and I don’t think we differ very much in that respect,’ says Hoogervorst. ‘I think we should be pragmatic and not view accountancy as some kind of theology which needs to be theoretically perfect. We need to get as perfect as we can but, given the fact that accounting is far from a science and has a lot to do with judgment, it is no use to get too precise when you really cannot.’He has always been an advocate of transparency as well, long before his IASB appointment. Looking back at his time as a regulator, he says: ‘I developed a strong belief in the importance of transparency and openness in financial reporting. Indeed, during the crisis I spoke out in favour of maintaining the highest levels of transparency in financial reporting, much to the annoyance of those, and there were many, who believed at the time that the accounting should be neutered in order to “protect” investors and the markets from being spooked.’


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It was around this time that Hoogervorst first came to the notice of the accounting world specifically. In November 2008 he was asked by the IASB and FASB to co-chair the Financial Crisis Advisory Group (FCAG), a group of international leaders with broad experience of financial markets, to advise the IASB and the FASB on their response to the crisis. Looking

back at that experience, he points out that it involved ‘bringing a lot of people together by careful analysis and open discussions’. He feels this experience had strong lessons for his role at the IASB. ‘That should be the power of the IASB,’ he says, ‘the power of argument and the sheer quality of our work.’ He adds: ‘What I also picked up from FCAG is that accounting is not boring at all. It is a lot of fun and intellectually challenging, and that is why I took the job here at the IASB. Sometimes you need an outsider to come in and ask the basic questions – why do we do it like this? – to facilitate change.’ Tweedie pinpoints the major achievements of the first 10 years of the IASB. ‘The fact that 120-odd countries are using the standards,’ he says. ‘There was a handful when we started and I would never have imagined in 10 years that would have happened. Even getting rid of the reconciliation, never mind the US thinking of coming in, would have seemed impossible just a few years ago.’

WORLDWIDE REPUTATIONHoogervorst also sums up the Tweedie legacy. ‘David carries a tremendous reputation in Europe and around the world,’ he says. ‘Everybody knows him. Not everybody likes him. He has been extremely stubborn. But I think because of his stubbornness he has reached what he has reached, by not being afraid and not being afraid to step on people’s toes. That’s how you achieve things in life. He needs to be commended for it.’Tweedie refers to his tenure as looking after the organisation until it reached the verge of its teenage years. ‘It needs a different kind of parenting now,’ he says. Now it needs to spread its wings. The IASB of the Tweedie days of being permanently on the campaign trail to bring the message to the far-flung economies is almost over. The global reach of IFRS should be

assured. Now the work should be about trying to embed the idea in the world’s consciousness that financial reporting standards are not just the technical language of the accounting world. The next step is to make sure people understand the importance of a truly global financial reporting language in explaining economic realities and underpinning economic growth around the world.Hoogervorst made this plain in one of his first statements after taking over the chairmanship. ‘I really relish the idea of being able to make a difference at a global level,’ he says, ‘to be in a position to provide the highest levels of transparency that I believe in and to raise standards internationally. And I believe that my experience and contacts outside of the pure financial reporting world will be of benefit as the IASB takes its rightful place as an important cog in the global financial system.’That is where the change will be as the IASB moves through its next 10 years. The technical arguments will still underpin its work. But the value will be seen on a world stage, and no longer a purely accounting one. This is what Hoogervorst is trying to deliver.

Interview by Robert Bruce, journalist and commentator

‘The next step is to make sure people understand the importance of a truly global financial reporting language in explaining economic realities’

Tweedie refers to his tenure as IASB chairman as looking after the organisation until it reached the verge of its teenage years.

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ACCOUNTANCY FUTURES: CORPORATE REPORTING IIRC FRAMEWORK

A nother milestone in the integrated reporting journey has been reached by the International Integrated Reporting Committee (IIRC), with

the development of a proposed International Integrated Reporting Framework. This ties together core strands of reporting – financial information, management commentary, governance and remuneration reports, and sustainability information – and presents them in the context of an entity’s business model and strategy. In this way it provides a broader, more forward-looking explanation of business performance than traditional reporting. ‘It helps management teams to provide information on their organisation’s potential to create and sustain value,’ says Neil Stevenson, ACCA executive director – brand, and member of the IIRC’s engagement and communities taskforce. ‘Integrated reporting should reduce the compliance burden, but also enable more effective decision-making for investors.’Jim Singh, CFO of Nestlé, agrees. ‘If you are a company committed to the long term, and one of your ambitions is to be trusted, you have no choice – integrated reporting is the way to communicate,’ he says.

DISCUSSION PAPERThe framework is set out in the IIRC’s discussion paper, Towards Integrated Reporting – Communicating Value in the 21st Century. The framework is based on five guiding principles and six key content elements – shown in the graphic overleaf. The paper reports on how some organisations are already experimenting with integrated reporting. For example, chemicals producer Sasol explains its business model in its 2010 annual review by means of a colourful flowchart, giving clear descriptions of business actions, processes and outcomes. And Implats’ 2010 integrated annual report illustrates how operating context and risks can be reported. The platinum producer identifies the governance structure in place to effectively manage the risks and opportunities it faces. It describes its approach to risk management in a straightforward sentence, then provides specific details on each stage of its risk management process.While the paper emphasises the information needs of investors, encouraging sustainable business also lies at the heart of the framework.

Integration moves forwardIntegrated reporting is now a step closer, with the development of the IIRC’s proposed International Integrated Reporting Framework

A framework for the futureIntegrated reporting can have a profound impact on the capital markets with the time for two separate reports on financial and non-financial data long gone, a panel of experts from academia, business and the investor community recently agreed.In a session on integrated reporting in ACCA’s virtual Research and Insights Conference – which was chaired by Robert Eccles, professor of management practice at Harvard Business School – Mindy Lubber, president of Ceres, a coalition of investors, environmental organisations and other public interested groups, said: ‘You have got to acknowledge that climate change is a financial issue as much as it is an environmental or national security issue. If we have dozens of [Hurricane] Katrinas, the impact isn’t only on our community but on our capital markets and economic sectors. More overleaf

From left: Christy Wood, Eric Hespenheide and Mindy Lubber.More overleaf

Applying it would lead to sustainability awareness and decision-making becoming increasingly embedded in management thinking and business processes.‘Integrated reporting won’t just change the way businesses report on their business; it will change the way businesses do business,’ says Stevenson. ‘Silo-based thinking will be replaced by integrated thinking; a report’s focus will change from looking at just the past to being past- and future-focused, connected, and strategic.’As Göran Tidström, president of the International Federation of Accountants,

stresses: ‘The goal of the IIRC is not to increase the reporting burden on companies, but to help them and all their stakeholders make better resource allocation decisions.’Mervyn King, chairman of the King Committee on Corporate Governance and the Global Reporting Initiative, also sees integrated reporting as vital to sustainable business. ‘To make our economy sustainable we have to relearn everything we have learnt,’ he says. ‘That means making more from less and ensuring that governance, strategy and sustainability are inseparable. Integrated reporting builds on financial reporting, and environmental, social and governance reporting.’The IIRC is road-testing the new framework through a two-year pilot programme launched in October 2011. Corporate reporters and investors will be sharing their knowledge and experiences. The IIRC seeks comments on its discussion paper from all interested parties.

Sarah Perrin, journalist

Towards Integrated Reporting – Communicating Value In The 21st Century, is available at www.theiirc.org

‘I believe in three to five years [integrated reporting] will be common practice. That’s the challenge and that’s where we need to get to.’All three panellists – Lubber, Deloitte partner Eric Hespenheide and Christy Wood, chairman of the board of governors of International Corporate Governance Network (ICGN) – agreed that a framework is needed under which companies can begin to disclose non-financial data on issues such as recruitment, energy consumption and environmental and social impacts.South African companies are leading the way in trialling the initiative because the South African stock exchange has made it a listing requirement to ‘comply or explain’ on integrated reporting matters.

The International Integrated Reporting Committee The International Intregrated Reporting Committee (IIRC) was created in August 2010 with a mission to ‘create a globally accepted integrated reporting framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format’. It brings together leaders in the business and sustainability communities, including the International Accounting Standards Board, the US Financial Accounting Standards Board, the International Federation of Accountants, the Global Reporting Initiative, AccountAbility and The Prince of Wales’s Accounting for Sustainability Project. There are also representatives from major companies and the accountancy profession, including ACCA, and investors, academics and civil society. By working together, the group aims to create a framework that can be applied consistently around the world.

Strate

gic fo

cus

Connectivity of information

Conciseness, reliab

ility and m

ateriality

Responsiveness and stakeholder inclusiveness

Futu

re o

rient

atio

n

Operating context, including risk and opportunity

Future outlook

Organisational overview and business model

Strategic objectives

Performance

Governance and remuneration

THE BUILDING BLOCKS

The new framework lays down five guiding principles (shown in the pentagon’s border) that should underpin six key elements of the report’s content (shown within the pentagon).

Robert Eccles (right)


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The context in which business operates is subject to fundamental change. The recent financial crisis has demonstrated shortcomings in

corporate governance, and in risk assessment and risk management. There is also growing awareness – but one that is happening far too slowly – that the Earth’s resources are being consumed at a much faster rate than they are being renewed and, crucially, that no value is given to natural capital. The British government, for example, recently published its National Ecosystem Assessment, which concluded that the natural world is critical to our well-being and economic prosperity, but is consistently undervalued in economic analysis and decision-making.Corporate reporting and the measurement of the impact of decision-making have not kept pace with these changes and challenges, and we are, in effect, battling to address 21st century challenges with 20th century decision-making and reporting systems.To put it briefly: a new system is urgently required that provides clear and concise information about an organisation’s performance, past and prospective, bringing together its environmental and social, as well as its financial impacts. The urgency lies in the fact that it is not much good rushing around like headless chickens trying to develop a new system once we have managed to test the world’s vital natural systems to destruction – which we are rapidly on the way to doing.I have been concerned about this for quite some time and last year my Accounting for Sustainability Project, working with the Global Reporting Initiative and the International Federation of Accountants, established the International Integrated Reporting Committee (IIRC) to develop a new globally accepted integrated reporting framework to address this issue.The integrated reporting initiative is ambitious in vision and scope and will not only require a new model for accounting and reporting, but also a new mindset for considering these matters.

Accountants are, perhaps, more comfortable dealing with retrospective information and matters that can be quantified with a high degree of certainty in financial terms, but the information we now need has to be more forward-looking and must cover issues which, while they cannot all be quantified with precision in financial terms, are nonetheless vital to considering an organisation’s success.By providing this information, integrated reporting will support the necessary changes in individual and corporate behaviour which could stimulate the creation of wealth and jobs, and at the same time safeguard our environment for future generations.For these reasons I hope that you will feel able to support the development of integrated reporting and the work of the IIRC – work that, I hope and believe, will help put the true value of natural and social capital at the heart of our world economy, and help set businesses on a course not just for survival, but for lasting economic prosperity.

This is a transcript of HRH The Prince of Wales’s video message. www.accountingforsustainability.orgwww.theiirc.org

HRH The Prince of Wales makes integrated reporting callIn a video first presented at ACCA’s Research and Insights Conference, HRH talked of the need for a new corporate reporting model and mindset

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Mahreen Khan reports from the ACCA WWF Earth Talk in Islamabad on the annual report of 2030 and the future of corporate reporting in general

Perspectives from Pakistan

policies and continuous political uncertainty. A legacy of mistrust, between business and government, lingers decades after the nationalisation programme of the 1970s, contributing to a prevalent culture of under-reporting profits. A leading businessman reflected: ‘Profit is still a dirty word in some government circles, so you have to be careful how much you reveal about your business.’Given this trust deficit between government and business, and the challenges of doing business in a developing country under economic strain, words like transparency, disclosure and sustainability reporting can seem incongruous to many. This sentiment was acknowledged by the Ministry of the Environment, during the Earth Talk debate on the annual report of 2030. ‘In a fragile economy, the environmental compliance regime has to be sensitive to business concerns,’ said a ministry official.

MANDATORY V DISCRETIONARYThe ministry’s view was welcomed by business leaders and accountants, who strongly favour incentivisation rather than regulation, preferring a discretionary reporting framework, not a mandatory one. All panellists agreed that despite this widespread preference, mandatory sustainability reporting is inevitable as regulation increases to stem the increasingly visible fallout of climate change. Sarfaraz Rehman, CEO of Engro Foods, said that ‘future global reporting will be totally transparent, not just dealing with bottom lines, and regulated intrusively to support an inclusive business model which cajoles corporate minds away from consumption – growth – profit’. The Pakistan government is encouraging businesses to embrace sustainability reporting now rather than waiting until a mandatory regime is introduced. ‘Sustainability reporting will help keep Pakistani companies globally benchmarked in all aspects of their operations and will assist them in competing for markets and capital. It will improve the reputation and brand of Pakistani companies worldwide,’ said environment minister Samina Ghurki. But what is the key to a truly comprehensive and effective reporting framework? ‘To integrate environmental reporting with the

Ask the average person whether they would rather read an annual report or the telephone directory and you are likely to get a nasty surprise –

that is, if you’re the author of your company’s annual report. Although the covers have become glossier and even artistic, most of the report can leave non-accountants bewildered by its complexity, verbosity and information density. Providing information about a business in a manner which does not meet the information needs of stakeholders is reflective of company attitudes. Many see reporting as a necessary evil rather than an opportunity to communicate with their stakeholders. But with a global economy teetering from the double blow of global recession and climate change, there is growing consensus and pressure to change the way businesses behave. Since the global economic crisis has exposed the devastating downside of the traditional growth-driven, profit-maximising model, there is agreement that a more holistic business model is urgently required. This modifies performance metrics away from a focus on short-term financial aspects, towards including the environmental, social and sustainability impact of a business.As corporate mindsets shift towards this more inclusive business model, reordered reporting priorities would support this with integrated reporting, including not just audited financial information but independently verified social, environmental and governance costs of business. Speaking at the ACCA WWF Earth Talk 2011, where business, government, media, policy and environmental leaders came together to discuss business and the finance profession’s role in addressing sustainable development challenges, Hammad Naqi Khan, director of programmes at WWF Pakistan, said he would like to see the annual report of 2030 as ‘integrated, balanced, transparent, traceable online and, despite being mandatory, an effective tool to communicate to both external and internal stakeholders’.In Pakistan, the annual report is widely viewed as a burdensome legality by companies largely averse to disclosure of any kind, financial or otherwise. This ‘disclosure phobia’ stems from the vagaries of financial and taxation

Mahreen Khan is a communications and public policy specialist based in Pakistan. A barrister by training, her writing covers politics and economic issues. She also serves on the Federal Tax Ombudsman Advisory Committee, which aims to improve tax administration in Pakistan.

ACCOUNTANCY FUTURES: CORPORATE REPORTING ANNUAL REPORT 2030

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‘Sustainability reporting will help keep Pakistani companies globally benchmarked in all aspects of their operations,’ says environment minister Samina Ghurki.

Hammad Naqi Khan wants the annual report to be ‘integrated, balanced, transparent, traceable online and, despite being mandatory, an effective tool to communicate to stakeholders’.

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ACCOUNTANCY FUTURES: CORPORATE REPORTING ANNUAL REPORT 2030

financial statements, so that if profitability is being achieved at a high cost to the environment, there may be audit qualifications raised,’ said Aqueel Merchant, partner and country leader of advisory services at Ernst & Young Ford Rhodes Sidat Hyder. He wishes to avoid the dangers of information overload so that future reporting is ‘integrated, robust and transparent, without being overly narrative or quantitative in nature’.The good news for the environment is that bicep-busting annual reports will be replaced with paperless, electronic versions. Currently, ‘online’ for many companies means putting a PDF version on the internet. But that will all change. Ayla Majid, vice chairman of the ACCA Pakistan Members Network Panel, sees future reports as not just becoming technology enabled but being transformed into ‘an integrated model which make reports easier to access, more comprehensible and even interactive, allowing immediate stakeholder input and feedback’. In Pakistan, annual reports vary greatly in the quality and integrity of narrative information, which is why most accountants and auditors advocate a standardised framework for non-financial reporting, on a parallel with International Financial Reporting Standards. Important initiatives are already being taken

internationally to introduce standards for integrated reporting, and Pakistani businesses are taking note. However, the business community is less keen than Pakistan’s accountants and auditors to implement external verification of non-financial information. They may have to overcome their reluctance, as accountants are confident that independently verified narrative information will be a key feature of the annual report of the future. Professionals like Aqueel Merchant predict that ‘future non-financial reporting will include a combination of numerical data with benchmarks and a qualitative rating system’.

STAKEHOLDERS AND ENGINEERSDr Afra Sajjad, ACCA’s head of education, MENASA, and an expert on corporate reporting, says: ‘Reporting should meet the expectations of all types of stakeholders, balancing the information needs of shareholders and the requirements of regulators. Shared value is what is required… not just shareholder value.’ That includes objective risk assessment, providing ‘a balanced and reliable overall view of the business model’s performance with a compelling, comprehensible story of the past, present and future of the business’.

Such an enhanced reporting framework will lead to even more demands on professional accountants, and Engro’s Sarfaraz Rehman believes that reporting will become so specialised that a new professional species – ‘environmental engineers’ – will emerge.It is clear that companies must become accountable for the environmental, social and sustainability costs of their businesses. Reporting has a vital role in ensuring this accountability. The annual report of 2030 must be integrated, accessible and comprehensible for all readers, not just accountants.

Many see reporting as a necessary evil rather than an opportunity to communicate with their stakeholders

Executive vice president of the Shanghai Stock Exchange, Zhou Qinye, explains why company investors need more than just figures

Beyond the numbers

Zhou and other regulators want companies to explain their operations to investors in a clear and useful way. As the push towards more narrative reporting picks up speed in bourses around the world, companies listed in Shanghai – from small domestic firms to multinational companies with multiple listings – are increasingly expected to follow suit.

This means more detailed explanations, not just about revenue, turnover, tax and profits but also what a company does, how it does it and how it plans to do it in the future. It also means getting rid of jargon and complicated structures while creating reports that are easier to read and understand. The rapid growth of China’s stock markets makes this an increasingly urgent priority.Over the next decade, the SSE is likely to become the largest market in the world, according to a KPMG report released in June. KPMG says that China’s equities markets grew tenfold from an absolute value of US$400bn in 2005 to US$4 trillion in 2010. New boards, including an International Board that is close to becoming a reality, are attracting a wide range of companies. In the first quarter of 2011, the combined value of the Shanghai and Shenzhen bourses hit US$4.2 trillion, surpassing the US$3.6 trillion estimated value of the Tokyo Stock Exchange. Shanghai is the larger of the two markets with capitalisation of 17,900 billion yuan at the end of 2010, compared with Shenzhen’s 8,600 billion. Shanghai also had 505 bonds listed, compared to 191 in Shenzhen. Shanghai is and will remain China’s dominant bourse with a capitalisation of US$2.77 trillion at the end of 2010. Both markets are still heavily dependent on retail investors, making it particularly important for companies to disclose the right information. A number of high-profile issues with the disclosures of Chinese companies and accusations of fraud emerged towards the

The main problem for investors in companies listed in China is not accessing information. The problem is accessing useful information.

Public companies in China have made giant leaps in terms of disclosure requirements. The list of data companies have to provide in interim and annual reports is extensive. However, much of that information is of little value to investors. Narrative reporting is in its infancy and – despite much progress – the majority of companies listed in Shanghai or Shenzhen are still unlikely to volunteer anything more than they absolutely have to.‘Companies focus on disclosing actual and immediate information that affects the price of the stock,’ says Zhou Qinye, chief accountant and executive vice president of the Shanghai Stock Exchange (SSE). ‘We want to improve the accuracy, fairness and completeness of the information and to make the information more immediate.’

ACCOUNTANCY FUTURES: CORPORATE REPORTING NARRATIVE

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The most important thing is to build a market that is fair and comfortable

Expectations gapThere is a wide gap between what investors would like to see in company disclosures and what preparers (surveyed in an earlier joint report with Deloitte) think they should offer, according to a survey of 590 investors carried out by ACCA and the Shanghai Stock Exchange.The vast majority of investors, 88%, said disclosures in annual reports were important or very important in their decisions. However, some 44% of investors think information on directors’ remuneration is important, compared with 31% of preparers. While 78% of investors rate corporate governance information as important, only 46% of preparers think along the same lines. Investors want more information on plans, business models and competitive advantages as well as on tangible and intangible assets, such as the expertise of staff. They want to know about risk and management and material events.Both sides agree on the importance of reporting plans and prospects, but investors want more management analysis.Most disclosures are too formulaic and don’t reflect the information that investors value most. This lends more support to a need to innovate in corporate reporting, which is timely with the piloting of a new model of integrated reporting. The growing number of companies on the International Integrated Reporting Committee suggests movement in this direction.

Download Beyond Numbers, What Do Investors Need? at www2.accaglobal.com/pdfs/beyondnumbers_en or www2.accaglobal.com/pdfs/beyondnumbers_cn

Zhou Qinye, executive vice president of the Shanghai Stock Exchange (SSE), is both regulator and scholar. He is a certified accountant and one of the most powerful regulators in China’s equities markets, but his career has been built on research. Zhou graduated from the Shanghai University of Finance and Economics in 1986 with a master’s degree in economics. He went on to publish multiple papers and lead research projects for the Ministry of Finance on issues surrounding capital markets, information disclosure, employee remuneration and internal control of financial statements. Aside from his work on many regulatory bodies, he is also an academic adviser to PhD candidates at Fudan University and adjunct professor at Xiamen University, Tongji University, the Shanghai University of Finance and Economics and Shanghai Lixin University of Commerce. He sits on the Accounting Standards Committee of the Ministry of Finance, the China Internal Control Standards Committee, as well as the auditing standards and the internal control instruction committees of the Chinese Institute of Certified Public Accountants (CICPA). Zhou is also a director of CICPA, a standing director of the Shanghai National Accounting Institute and a member of the Shanghai Judicial Expertise Working Committee.

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end of 2010 and first half of 2011, but typically all involved Chinese companies listed in overseas markets. ‘Many Chinese companies have been having problems in the US,’ says Zhou. ‘This is because the disclosed information is not complete. If all information is linked through the internet, these kinds of problems could be avoided.’ The SSE wants to implement more fluid disclosure requirements that emphasise narrative disclosures rather than just numbers. The increasingly widespread use of eXtensible Business Reporting Language (XBRL) in mainland China – unlike Hong Kong, where XBRL has not really taken off – makes more immediate and effective disclosures a reality.

On the other hand, getting past the numbers and into business operations has proven challenging. Since 2006, the SSE has required companies to disclose more information on corporate governance and corporate social responsibility. A number of companies, about 240, have taken the lead in reporting more information on corporate governance, says Zhou. Zhou says that in 2010, the SSE focused regulatory development on environmental protection, encouraging companies to disclose more information about the impact of their operations on the environment. In the near future, the SSE will focus on more comprehensive operational and business disclosures along with more disclosures on


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intellectual property issues. Already, says Zhou, there is progress. ‘Narrative disclosures have improved constantly in the past couple of years,’ he says. ‘Public companies are more active in disclosing material information on their own initiative.’The most obvious and immediate challenge for the SSE as it works to improve the quality of disclosures is creating a set of regulations that require companies to explain more but allow them the flexibility to decide what is important and what isn’t. Since the SSE became more aggressive in asking for more details, there has been an explosion of information that makes it difficult

for investors to figure out what is relevant and what is not, especially as companies tend to copy each other’s disclosures. ‘The annual reports from public companies are very much alike, so the investors think there isn’t a lot of useful information,’ says Zhou. This perception is not necessarily true. Unfortunately credibility – like beauty – is in the eye of the beholder. ‘The most important thing for us to do is to build a market that is fair and comfortable for investors to invest in,’ says Zhou. ‘Confidence and credibility are very important.’

Interview by Alfred Romann

Junk the jargon: useful information presented clearly and concisely is crucial for investors.

Clean energy increasingly looks like a viable way to decouple economic growth from the rise in toxic carbon emissions

Brave new green world

such as Brazil, South Africa, India and China (the BASICs) to cut their rising emissions, while the BASICs, along with the rest of the developing world, say it is the responsibility of rich countries to cut their emissions, since they caused climate change in the first place.The UN-led negotiations on a new global treaty to curb climate change have stalled following the massive momentum that built up just before the Copenhagen summit in 2009. That summit proved a major disappointment and soon after the weak Copenhagen Accord was signed on the very last day of the conference, the urgency surrounding the talks evaporated. The worldwide recession has meant rich countries are loath to take any action that might further slow down their economies.

OPPORTUNITY, NOT THREATMany experts now believe that the key to progress is to see tackling emissions as an economic opportunity rather than a curb on growth. UK climate change expert Lord Stern says: ‘All countries, particularly in the rich world, should now be taking still stronger action to tackle climate change and to embark on the transition to low-carbon economic growth. This will be a new-energy Industrial Revolution, full of creativity and innovation and great benefits beyond simply cutting the risks from climate change. We can see its beginnings – it is time to accelerate.’ In fact, since the current global economic recession began, presidents and prime ministers have been talking about green or sustainable growth. US president Barack Obama referred to it in his inauguration speech. At a more recent meeting of Asia Pacific countries, his commerce secretary Gary Locke announced: ‘In the next few decades, world economies will need to rebuild and reinvent virtually every industrial activity – from power generation and transportation to manufacturing and construction – all to succeed in an energy environment that looks drastically different from the one that we’re used to.’Scientists are now calling for a major shift to clean energy and energy efficiency to curb emissions. In its recent special report on renewable energy and climate change mitigation, the UN Intergovernmental Panel

The world is not in good shape. Food prices are rising, fresh water is depleting, energy prices are soaring, biodiversity is dying out,

the population is growing, intense storms are damaging towns and cities, and floods and droughts threaten the livelihoods of millions. Clearly climate change is taking a big toll on human populations, just as the scientists predicted it would. And the rate of change is accelerating, according to the latest findings from the International Energy Agency (IEA). It appears we have even more to worry about because greenhouse gas emissions increased by a record amount last year, hitting the highest carbon output in history. That means the chances of keeping global temperatures below two degrees celsius by the end of the century are getting slimmer. Scientists say that if the Earth warms more than two degrees, then we will not be able to avoid catastrophic climate change. Low-lying countries like the small island states and the densely populated Bangladesh want the upper limit to be even lower, at 1.5 degrees celsius. The IEA notes that last year a record 30.6 gigatonnes of carbon were released into the atmosphere, mainly from burning fossil fuels. If this pattern continues, the results will be excessive planetary warming that will disrupt even more lives. The IEA has calculated that if the world is to escape the most damaging effects of global warming, then annual energy-related emissions should be no more than 32 gigatonnes by 2020. If this year’s emissions rise by as much as they did last year, that limit will be exceeded much earlier, making it all but impossible to keep warming to a manageable rate. Three-quarters of this rise has come from growing economies such as India and China. IEA chief economist Fatih Birol says: ‘Our latest estimates are another wake-up call… Given the shrinking room for manoeuvre in 2020, unless bold and decisive decisions are made very soon, it will be extremely challenging to succeed in achieving this global goal, agreed [at the United Nations Climate Change Conference] in Cancún.’However, international climate change negotiations are currently in deadlock. Rich countries want large emerging economies

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ACCOUNTANCY FUTURES: ENVIRONMENTAL ACCOUNTABILITY GREEN ECONOMY


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Cheap solution: in Denmark, wind energy is often less expensive than energy from coal plants. E.ON’s new Roedsand-2 offshore wind farm, which opened last October in the Fehmarn Belt between Germany and Denmark, consists of 90 turbines which will be able to deliver electricity to 200,000 homes.

Market leader: China has forged ahead in solar technology and hydroelectric power. The China Solar Valley International Convention Center, powered by solar energy, in the Solar Valley in Dezhou, in east China’s Shandong province, covers 43,000 square metres and can reduce carbon emissions by 860 tonnes per year.

Biofuel future: a technician works in a lab at the Brasil Ecodiesel factory in Iraguara, north-east Brazil. As Brazil has large areas of land and plenty of water, it can grow its own bio-resources. Twenty-five per cent of ethanol, extracted from sugarcane, is added to gasoline. Biodiesel blends became mandatory in early 2008.

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on Climate Change called for nations to invest heavily in renewable energy to cut prices and make it more affordable. Since most carbon emissions come from burning dirty fossil fuels to produce energy, the key to reducing those emissions remains the development of clean energy sources. The US, however, is still lagging behind countries such as China and Brazil when it comes to investing in green energy. China, for example, is now the market leader in solar technology and hydroelectric power. Tariq Banuri, who heads the sustainable

division of the UN Department for Economic and Social Affairs in New York and prepares the annual report called the World Economic and Social Survey (WESS), says: ‘In 2009, the WESS report demonstrated that the costs of renewable energy could be brought down to affordable levels within a decade through a coordinated global plan. Several countries are acting in ways that contribute to this result, although to my knowledge China is the only country that has consciously adopted the cost reduction target. Specifically, its plans are to make renewable energy competitive with fossil fuels in five years.’Brazil is the other large emerging economy investing in clean fuels and it has become a market leader in ethanol. Brazil doesn’t need to invest in solar or wind energies since it has large tracts of land and plenty of water. These allow it simply to grow its bio-resources. In the developed world, the Scandinavian countries, particularly Denmark, have become world leaders in developing sophisticated wind technology. In Copenhagen, wind energy

from large offshore wind turbines is actually cheaper than energy generated from coal plants. The EU as a whole is investing heavily in solar energy and plans to set up extensive solar panels in the Sahara Desert, which will be initially expensive. ‘Each country has to look at its infrastructure and investment and see which path is accessible and affordable for it,’ explains Banuri. ‘The future really has to be about making renewable energy cheap. Instead of asking how to afford something that is too expensive, we need to ask how to make it affordable. This is like turning a corner and seeing the world before you. Once you turn the corner, the solution to climate change will emerge automatically.’Expectations of the next UN Climate Change Conference – to be held in Durban, South Africa, in December 2011 – do not seem high, and many experts are pinning their hopes on the subsequent UN summit, to be held in Rio de Janeiro in June 2012. The Rio+20 conference (it has been 20 years since the Earth Summit was held in Rio) will focus on two topics, one of which is the ‘green economy’, and will be attended by all major heads of state. It is hoped that the world will come together in Rio to formulate an action plan. Economic growth can be compatible with reductions in emissions of carbon dioxide – Sweden has decoupled its growth from emissions. But experts say that green growth could have even bigger consequences than just reshaping an economy. They say it could inaugurate the same sort of system transformation as the railway or the internet caused. Nobody can really foresee how green systems will transform the way we live and work and what new businesses will evolve. But those who believe in green growth say it will end up creating a brave new world for our children and all the resources with which the Earth is blessed.

Rina Saeed Khan, journalist, winner of Earth Journalism Award, Copenhagen 2009

The headlines: China’s green economyChina’s ambition to create a green economy shows no sign of diminishing. Behind the country’s ‘clean industrial revolution’ lies some pressing needs: to maintain growth and investment, to address resource limits, to remain economically competitive, and to keep its house in order so it can be an important voice on climate and energy. China’s 12th Five-Year Plan outlines energy price reform, carbon trading pilots and energy labelling for consumer products. The country also plans to accelerate the growth of clean energy technologies with a four-fold increase in nuclear power generation (to 40GW) and 63GW of new hydroelectric generating capacity. Another 48GW of new wind capacity is also planned and solar generation is targeted to reach 5GW by 2015. The plan also sets out aggressive growth plans for low-carbon technologies such as electric vehicles, next-generation IT, energy-efficient products and renewable energy. Technologies such as plug-in electric vehicles and LED lighting are likely to play a greater role in cutting emissions beyond the current plan, especially as China’s large-scale manufacturing drives down their price for every nation. (See also Plan for the Future, page 26.)

In the developed world, the Scandinavian countries, particularly Denmark, have become world leaders in developing sophisticated wind technology

I am not an accountant, but my father is. I grew up with the impression that the profession guarantees that the numbers tell the truth. When I started working

for large companies I received an even stronger confirmation that accountants give credibility to financial results – the reason why businesses exist. Accountants and auditors are the ones bringing symbolic expressions of performance into the real world of regulators, investors and stock exchanges. All that magic is expressed in crispy financial reports.When I started working with sustainability reports 10 years ago, I had the natural expectation that accountants would work the same magic on the numbers we collected to express the contribution of business to the sustainable development of society and the economy. I was wrong. Accountants were far from that field.Until today business and society have been struggling with how to consider the expression of sustainability performance to the ‘real’ world of regulators, investors and stock exchanges. As good as it can be, the sustainability report does not have the same magic as a financial report.

As the context in which business exists changes rapidly, the information in financial reports is no longer considered enough to express business performance, opportunities and risks.

MISSION IMPOSSIBLE?In the last edition of Accountancy Futures we had the opportunity to read about the efforts that A4S, the Global Reporting Initiative (GRI), ACCA and others are making to move the corporate reporting agenda towards integrated reporting, through the work of the International Integrated Reporting Committee (IIRC). According to its chair, Sir Michael Peat, the framework to be developed by the IIRC and its stakeholders should provide ‘a new internationally accepted approach

Making the magic happenFor sustainability reporting to have the impact needed by business and society, accountancy skills are urgently required, says GRI’s Nelmara Arbex

Does the accountancy profession have the ability to unleash the power of sustainability reporting?

It is time for accountants to reconsider their boundaries – to work with the already very real demand for sustainability performance data and reporting needs of companies

ACCOUNTANCY FUTURES: ENVIRONMENTAL ACCOUNTABILITY GLOBAL REPORTING INITIATIVE

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ACCOUNTANCY FUTURES: ENVIRONMENTAL ACCOUNTABILITY GLOBAL REPORTING INITIATIVE

to reporting – an approach which provides more comprehensive information about the full range of an organisation’s impacts and performance, past and future, in a clear, concise, consistent and comparable manner’.Read the definition again. It sounds… impossible. After more than 100 years of exercising financial reporting and one or two decades of leading companies implementing sustainability reporting, it is difficult to imagine that we can now develop an approach that can do all that at once. I agree it is difficult. Very difficult. But it is an excellent way to help all professionals in the accounting, auditing and sustainability reporting fields understand that their work will change profoundly. For now, the agenda is to plan the steps to go in this direction, even if we will need some time to develop a robust approach.So as we embark on this difficult journey, what steps can we take now? In GRI’s opinion there is a lot that accountants and auditors can do. If you are trying to keep in mind the future of your profession, while also staying connected to businesses’ needs today, there is something very real to consider: there is already a great demand for data illustrating the economic, social, environmental and governance performance of companies. This demand –coming from short- and long-term investors, regulators, rating agencies, board members and other stakeholders – is increasing quickly.Thousands of reports are currently prepared using the GRI Sustainability Reporting Guidelines. Since 1999, GRI, a network-based organisation, has worked with thousands of professionals to develop international guidelines for companies to express in a broader way their impacts, risks and opportunities. GRI’s guidelines provide indicators that companies can address to communicate economic, environmental and social performance. They are developed through an international consultative approach, involving business, non-governmental organisations, investors, labour representatives and other experts from different fields.So the first step is simple: accountants and auditors can get better prepared to deal with such data, bringing those symbolic expressions of performance – sustainability data in this case – into the ‘real’ world of regulators, investors and stock exchanges. If we want to move towards a sustainable economy, all that magic in financial reports needs to be applied here.

GET INVOLVED – NOW!But there is an even bigger opportunity for accountants and auditors to get engaged and

help shape the way companies will report on sustainability issues in the next five to 10 years: by helping to design G4, the next generation of the GRI guidelines – now!GRI is currently updating the guidelines to cover emerging topics and respond to changes in demand for more accurate and auditable sustainability data. It would be a great contribution to the history of corporate reporting if such sustainability reporting guidelines were shaped with the influence of accountants and auditors, as these will be used by thousands of companies and experts around the world.So the question is: how can the guidelines be structured, and what should be in them, to ensure that the resulting sustainability reports are relevant, useful and verifiable? How can GRI and the network shape indicators that help companies communicate accurate, robust and verifiable data? And how can this data be communicated so that assurance is possible?GRI is now asking professionals and organisations to take part in the first G4 public comment period, which started in late August 2011. The public – including accountants and auditors – have the chance to indicate what is important to them, and communicate their preferences to the working groups that GRI will convene in 2012 to draft the new guidelines.All this effort is not just about the content of the reports; it is also about how reporting processes will come into the digital era. Information format must be considered, and this may have an impact on accountancy and auditing in the future. Digital sustainability reporting is on the rise, and many companies are now producing reports online; there will come a time when the printed report is a thing of the past. This has implications for reporting cycles and the way data is produced, verified and communicated. What we currently know about auditing is based on an annual cycle of data gathering and verification. But society is hungry for information and requires real-time updates on performance.The future will undoubtedly bring a very different way of looking at accountancy and auditing, and professionals will be adapting their skills, knowledge and focus over the next few years. It is time for accountants to reconsider their boundaries – to work with the already very real demand for sustainability performance data and reporting needs of companies, helping to improve the quality of sustainability data and make that magic happen.

Nelmara Arbex is deputy chief executive of the Global Reporting Initiative (GRI). She joined the GRI secretariat in 2006 and leads the guidance, support and innovation area, supervising the development of the GRI Framework, learning and coaching programmes and report services. Arbex has a wealth of experience in corporate responsibility and sustainable development, including as manager for corporate responsibility at Natura Cosmetics in Brazil.

Professor Robin Jarvis is ACCA’s head of small business and chairs FIN-USE, a panel set up by the European Commission to address financial services issues. He is also a director of the Institute for Small Business and Entrepreneurship. His current research interests include financial reporting for small entities, the demand for voluntary audit and the role of the accountant as a business adviser. He is the author of nine books and has written and published numerous research papers.

A digital agenda is one of seven flagship initiatives designed to deliver Europe 2020, the European Union’s growth strategy.

Considering the role of IT in economic progress over a number of decades, it may seem surprising that enabling Europe to make more of digital advancements is still a topic that requires such high-level attention. That is, until you consider the facts:

* Fewer than one in 10 of EU e-commerce transactions are crossborder;

* Europeans often find it easier to conduct a crossborder transaction with a US business than with one from another European country;

* Europe continues to underinvest in IT-related research and development, at just over half of US spending;

* 150 million Europeans – some 30% – have never used the internet.

With so much potential remaining untapped, it is no wonder that the digital agenda is seen as a key enabler to European growth. The question of how it can effectively engage the small and medium-sized enterprise (SME) sector, which accounts for 99.9% of all businesses, will therefore be critical to its success.

CLOUD COMPUTINGFast and widespread internet access has made possible the adoption of cloud computing, where data storage and applications are run on a server at a location other than the user’s own computer. Considering that SMEs are often discouraged by the upfront investment that IT requires, the flexibility offered by cloud services can effectively address this. Despite this, however, small firms are yet to make the most of the opportunities on offer, with 60% of UK SMEs admitting in the Open University Business School’s Quarterly Survey of Small Business in Britain for Q1 2011 that they do not know what cloud computing is and only 6% reporting that they already use such services.From data security fears to a general lack of awareness of how cloud computing works and its relevance to business, all point to a real need for awareness raising. There is a clear public concern around data security reflected in recent data loss scandals, and there is an added confusion relating to the legal framework for crossborder data flows in Europe. Cloud services therefore require careful consideration by an SME owner, addressing

Digital agenda Creating a European digital single market will support increased harmonisation that will benefit SMEs in particular, say ACCA’s Professor Robin Jarvis and Rosana Mirkovic

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Rosana Mirkovic is senior policy adviser at ACCA’s SME unit. Her interests include business support, ethics, business transfer, intellectual property and global trends in SME development. Mirkovic is a member of a number of SME stakeholder groups including the European Federation of Accountants and Auditors for SMEs expert group and the Intellectual Property Awareness Network, and she was a member of the United Nations expert group on small business development and corruption.

issues around data governance, the pricing of bolt-on services, differences between providers and the ability to switch. Independent SME advisers, including accountants, can address many of these knowledge gaps and therefore need to be closely engaged.‘As primary advisers to SMEs, accountants are in a good position to inform such clients about the efficiency and cost benefits of cloud computing on demand, which gives affordable access to more powerful technology that is always up to date,’ says Mark Lange, senior policy counsel, Microsoft Europe.

E-INVOICINGAlthough e-invoicing – the electronic delivery of invoices and related information by a company to its customers – has been used, debated and researched for many years, actual takeup among businesses across Europe remains low. Despite the rapid growth in electronic communications, current estimates suggest that e-invoicing accounts for only around 5%. Conservative estimates put the benefits of e-invoicing across Europe at between €135bn and €245bn per annum, according to PwC. Some European countries are doing better than others. In Nordic countries, the market is well developed; in Finland, for example, there is a new requirement for state agencies and institutions to receive only e-invoices from their suppliers, sending a clear message to the business community while building confidence in the system. In the UK, on the other hand, government has so far been slow and is yet even to allocate internal responsibility for this increasingly important agenda. ‘Migration to e-invoicing has been on the agenda in most countries in the EU already for many years now but those countries that started early can now benefit from a large number of interacting service providers,’ says Bo Harald, head of advisory services at Tieto and chair of the European Commission expert group on e-invoicing. ‘It is not a question of e-invoicing as such but of e-invoicing as a base for automating accounting, VAT reporting, etc. Seeing this big picture has certainly helped the early starters who will exceed a 40% penetration this year.’ A major concern – and the biggest challenge – is convincing the SME community of the benefits. Only 22% of European SMEs,

according to European Commission figures, send and receive at least some e-invoices. The fact that virtually all invoices start off in electronic form, however, points to the significant potential for much higher adoption rates – making the next step ‘send’ rather than ‘print’! At a recent ACCA event on e-invoicing there was a clear agreement that one route to higher adoption is through integration with online banking. ‘If the banks do not come in and take care of the mass market, it will take far too long and it will be far too expensive,’ says Harald.

SOCIAL LENDINGSince the near-failure of the banking system in 2008, the combination of low interest rates and rising risk aversion has provided an alternative environment for the incubation of a new system of financing, where individuals rather than banks lend to small businesses, spreading lending to control risk. Social lending is able to duplicate many of the benefits traditionally associated with online disintermediation. Lenders can get much higher returns than currently offered by saving accounts – the average return on social lending with one of the key UK players is 8.3% – while businesses can save up to 25% on the cost of finance and, unlike with bank loans, access their money within a few days rather than weeks. Most importantly, default or failure rates are extremely low.While individual peer-to-peer (P2P) lending is relatively well established, the opportunities available to small businesses are potentially significant. Creating a European market in this field is again of crucial importance but with the regulatory and policy framework surrounding it far from harmonised across member-states, the EC needs to take stock of best practice while nations consider how tax incentives – already fairly established for informal equity financing – can best be extended to P2P investing.The most interesting potential behind the digital agenda is its power to transcend national borders, and Europe needs this desperately; it is, after all, the world’s largest market, with 500 million people generating about £10 trillion in economic activity a year. Yet its full economic potential is held back by lack of harmonisation. Considerable progress is therefore needed and the creation of a digital single market presents one of the most promising solutions – not least for the small business.

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ACCOUNTANCY FUTURES: ACCESS TO FINANCE DIGITAL SINGLE MARKET

Governments need to reduce the compliance burden if they are to help small businesses drive growth, argues ACCA’s Chas Roy-Chowdhury

Thinking small

Today’s small businesses are tomorrow’s multinational companies. They grow, they supply goods to larger companies, they export, they

provide jobs, and they pay tax. In short, they matter. They need to be encouraged, as they are the seeds of wealth creation. What they do not need is to be treated in the same way as their global cousins. They do not need complex administrative tax burdens; they do not need to fill in reams of tax forms in order to pay their fair share. But unfortunately many tax authorities, under pressure like never before to boost revenue, make them do exactly that; they swamp small business with processes and administrative systems which threaten their very existence. Without small businesses, economies around the world will fail to find the growth needed for recovery. It is time for tax authorities and their governments to make significant inroads into the red tape and tax compliance systems that could, if they remain unchecked, cut off the fuel from the engine of economic growth.Of course, trying to define a small business presents its own challenges; should a definition be based on number of employees, turnover, assets, products, or a combination of these and other measurers? The truth is, small businesses are very difficult to define, and definitions will inevitably vary depending on size of jurisdiction. Europe has its definitions, but individual states within the European Union will have their own views. But we should forget about defining small businesses. The simple fact is you know a small business when you see one. The trouble is that they often go unseen and unheard. They are, by their very nature, too busy to make representations to governments despite often feeling the full force of government action. And they have every right to be concerned. PwC recently carried out a study in partnership with the World Bank and its International Finance Corporation, which investigated the administrative burden and cost of paying taxes in jurisdictions around the world (Paying Taxes 2011: the Global Picture). The analysis was based on applying the tax systems of some 183 economies around the world to a model manufacturing firm, employing some 60 people. It found that, on average,

Chas Roy-Chowdhury FCCA is head of tax at ACCA. He has a degree in applied economics and worked in public practice from 1980 to 1991, when he joined ACCA’s technical department.

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the company would have paid nearly half of its commercial profits in taxes, spent seven weeks dealing with its tax affairs and made a tax payment every 12 days.The study didn’t stop at corporate income tax, which forms only one of the many taxes that the company would have faced and is only part of the burden. On average, the company would be required to pay nine different taxes. In fact, corporate income tax only accounted for 12% of payments and 25% of compliance time. There were also labour and consumption taxes to be paid, as well as property taxes and a number of other charges.The statutory rate of corporate income tax, is not of course, the best indicator of the amount of tax a company is required to pay. Nevertheless, reducing profit tax is still the most popular reform, although easing the compliance burden is equally important.

HIGH INCOME BENEFITInterestingly, one of the key findings of the study was that paying taxes is easiest in high-income economies – they have the lowest tax cost and the lowest burden. The study commented that these economies tend to have more mature tax systems, a lighter administrative touch and greater use of electronic interfaces with the tax authorities.For a small company, it is clear therefore that the tax burden can be exceptionally high, especially where it is required to comply with the same obligations as, say, a large multinational company. This is why tax authorities and governments need to think small when setting national tax policies. At a very basic level, there should be a ‘one in, one out’ rule where the administrative burden is not allowed to increase – this is currently the aim of the UK government. Sunset clauses are also important – when a tax for a specific purpose has outlived that purpose, then it should disappear into the sunset. And more authorities should allow electronic filing – not only does this help automate the process, it ensures authorities are working with clean financial data.There is, however, one overriding aspect that can often be forgotten by authorities, but is absolutely fundamental for small companies – cash is king. Small companies must have

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ACCOUNTANCY FUTURES: ACCESS TO FINANCE SMEs

It is time for tax authorities to make significant inroads into the red tape and tax compliance systems that could, if they remain unchecked, cut off the fuel from the engine of economic growth

a good, sustainable cashflow. They have problems enough dealing with their trade creditors and debtors without having to answer the demands of tax authorities. A good business plan and high-quality professional advice will help ensure a healthy cashflow, but tax is cash as well. Time is money, and tax compliance takes time as well as money. And complexity can cost – businesses want to be sure they are paying the right amount of tax; too much and they are diverting cash away from other needs, too little and they may then face a costly tax audit.Small businesses therefore need a small tax regime. Changing legislation, complex policy objectives and an inconsistent approach all add up to complicated systems. A simplified system reduces compliance costs, decreases the number of tax return errors and creates a fair and transparent process. It will even reduce the administrative costs for the tax collecting authority.There are a number of tools that governments and tax authorities can use to deliver simplification. They can consult with stakeholders over draft legislation, narrow the scope of existing legislation through thresholds and allowances, and introduce optional systems, such as flat rate schemes.They can also look at how and when tax is

paid, preventing companies having to pay tax on earnings that haven’t materialised. Instant bad debt relief should be allowed, tax should only be paid on the cash once it has come in. Again, looking at the UK, HM Revenue & Customs’ Time to Pay scheme provided a vital lifeline during the recent recession, allowing small businesses greater flexibility over their tax payments. There needs to be a change in the mindset of tax authorities, which all too often call in the bailiffs to collect tax debts.Accountants have their role to play as well. We can act as advisers, counsellors and have a collective voice – able to lobby governments

for change, at an international level as well.Small businesses need to be helped and nurtured. Governments should be thinking small – after all, what works for SMEs will probably work for larger organisations as well. It is hard enough competing in today’s economic environment without a big government placing big compliance burdens on the shoulders of small businesses.

This article is based on a presentation given by Chas Roy-Chowdhury to the International Organisation of Tax Administrations in June 2011.

The success story of microfinance in the developing world is often told in boardrooms and in business school. Over the past two decades,

the sector has grown exponentially, moving from charitable ventures conceived and championed by philanthropists taking their chances in business, to a huge industry accommodating traditional and new players of varying sizes with different financial and organisational structures. The majority of them are still small non-governmental organisations but a few have turned into big businesses by channelling the growth and using sophisticated financial mechanisms to raise finance and manage risk.The modern-day microfinance business is a global industry with numerous small players and a few large ones, all with complex links in the communities they serve. On the internet new organisations have emerged, linking lenders and borrowers directly with each other and sharing the risk and returns. In Kenya, some players have become full commercial banks with corporate and microfinance portfolios running alongside each other. Some civil society and community-based organisations have become private companies and listed on national exchanges or have issued corporate bonds and commercial paper. But the industry is plagued with stories of fraudulent practices. Accusations of profiteering have been levelled at players in India, and there are widespread calls for better regulation globally to protect the poor from unscrupulous microfinanceers. In many parts of India there is a loss of faith in the microcredit sector. Muhammad Yunus, the Bangladeshi economist who won the Nobel Peace Prize in 2006 for his efforts to bring microfinance to the developing world, has thrown his weight behind calls for regulation.

BUSINESS OR SOCIAL MODEL?Microfinance suffers from an identity crisis. Consider this; at the start, the business model was widely thought to be questionable at best and many traditional entrepreneurs and bankers felt that the venture would be lucky if it broke even. This was because at the time making money by lending to poor people was unheard of, indeed in some quarters it was a

laughable idea, because the poor clearly had no collateral to offer and the risk of default was very high. Also, the extremely small loan sizes (less than US$100) would still require the full range of banking software to handle loan set-up, repayment plans, interest charges, taxes and portfolio valuations. So though they had respect from the development community, microfinance providers were not really taken seriously by traditional bankers. Ironically, this scenario has turned full circle, with the corporate players taking the business model seriously but paying scant attention to the social and poverty-reduction aspects that are at the core of the design. Yet without the social aspect the microfinance lending system cannot overcome the banking-collateral issue and succeed financially. The social aspect is responsible for attracting strong investment and banking interest.

IRRESISTIBLE TO THE INVESTORA factor in the success of the business model has been high profitability. Microfinance loans are charged at high levels of interest, unheard of in traditional banking in the developed world. The global average is around 35%, which the providers say is to cover the high costs of loan management at a micro level. This profitability is supported by a good rate of microfinance loan recovery; 95% recovery rates are also unheard of in traditional banking, more so in the developing world.The interest rates are high because the industry is barely able to meet the high loan demand and the high initial technology investment in loan management people, hardware and software means all existing players are keen to keep rates as high as possible. There is room for many more new players before price competition will inevitably bring rates down but there are barriers to entry in that new entrants must build up their own management, governance and IT systems, as well as engage good local knowledge, presence and relationships.The 95% recovery rates are achieved because the microfinance business model uses joint liability, linking small peer social groups into a joint financial relationship guaranteeing each other’s loans and ensuring that default is

Alnoor Amlani FCCA is an independent financial management consultant in East Africa who writes regularly on social and business issues.

Big challenge of small loansAs microfinance becomes a huge global business, its users are faced with the task of ensuring that its ethics remain intact, writes Alnoor Amlani FCCA

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difficult because the entire group is penalised for anyone’s default. This system works well for the business model but is onerous on the borrower because the loans introduce financial elements into, and become an integral part of their social relationships – and the power of the lender in those relationships can be abused, leading to social unrest and a failure of trust in microcredit.

NEED FOR GOOD GOVERNANCEA system combining good microfinance institution (MFI) governance and transparency with industry regulation needs to be in place to draw out legitimate complaints properly, ensure that any injustice is redressed and protect borrowers from unscrupulous lenders.In Kenya, the Microfinance Intermediaries Act of 2006 provides an effective regulatory framework. Kenya is ahead of many African countries in this respect. It has been ranked as the second-best business environment for microfinance intermediaries in all of Africa (and one of the top 10 in the world). However, this is not enough. Microfinance intermediaries have not yet properly complied with regulation, and the challenge remains to ensure that good governance and transparency are practised widely. Although internal controls in Kenyan intermediaries are generally of higher quality than those of their counterparts elsewhere in Africa, the combination of multiple funding sources, domineering founders and investors fixated on doing business with the largest intermediaries (who thus fail to hold them properly to

account) holds within it the seeds of future problems. And, of course, while the regime for regulation and supervision of the more formal institutions is solid, a large number of credit-only institutions remain virtually unregulated.

THE FUTURE OF MICROFINANCE IN AFRICAWith better regulation, the microfinance business is set to grow, especially in sub-Saharan Africa, where poverty appears to be on the increase for many reasons.

The failure to mitigate global climate change in the Horn of Africa has resulted in starving people arriving in Dadaab refugee camp in northern Kenya. After the food handouts are exhausted, the only sustainable solution is for these people to start generating their own incomes; this will need microfinance. But it is unfair for them to pay 35% interest while second-home buyers borrowing in developed countries only pay a small fraction of this. Yunus has called for rates to come down to around 25%, offering a 10% spread between borrowing and lending rates for MFIs. It is time that African governments moved to reduce microfinance lending rates and brought the business model closer to the social movement behind microfinance.

A man makes footwear from tyres at the open-air Ngara market near Nairobi. The Kenyan Microfinance Intermediaries Act 2006 provides a framework to help protect borrowers from bad lenders.

The microfinance business is set to grow, especially in sub-Saharan Africa, where poverty appears to be on the increase for many reasons

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A number of inquiries have put the spotlight on the role of audit in recent months and we should be braced for radical change, says ACCA’s Ian Welch

Year of reckoning

the major issues which were raised during investigations by the UK House of Lords’ Economic Affairs Committee, the EC and the US. Several recurring themes emerged from those inquiries including audit concentration, joint audits, mandatory rotation of auditors, and the provision of non-audit services to audit clients, not to mention the role of the auditors and whether that should be overhauled. In Europe, where the debate has been fiercest, European Union financial services commissioner Michel Barnier has twice this year told gatherings of senior auditors that the ‘status quo is not an option’. In his speech at the conference of the Federation of European Accountants in June, Barnier spelled out the areas that he wanted to move on, in order to increase auditors’ independence, which he argued was increasingly doubted by shareholders, who had lost confidence in corporate reports as a result. ‘We see auditors who are too closely linked to clients,’ he said.

There should be some decisive outcomes in the next few months on the future of audit in both Europe and the US. These will inevitably have

major implications in other global markets. The unprecedented number of official inquiries into the role of audit over the past 12 months – sparked by the continuing aftermath of the global financial crisis – will culminate in legislation scheduled for November 2011 by the European Commission (EC) and reports issued by US regulators and the UK competition authorities. In a recent policy paper Audit Under Fire: a Review of the Post-Financial Crisis Inquiries, ACCA warned that it was crucial – given the importance of audit to the efficient operations of capital markets – that regulators and policymakers are not tempted to make ‘eye-catching’ initiatives which restructure the way audit is carried out but which may add costs to business for little benefit. ACCA also outlined its views on some of

Hammering home: EU financial services commissioner Michel Barnier has emphasised the same three issues: non-audit services, mandatory firm rotation and joint audits.

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Ian Welch is ACCA’s head of policy and responsible for driving ACCA’s thought leadership and policy initiatives. He was previously head of corporate communications, heading up ACCA’s global media and public affairs teams. Before joining ACCA in 2003, Welch was a public relations manager at KPMG and previously a journalist on Accountancy Age.

Barnier has twice this year told auditors that the ‘status quo is not an option’

In saying this he had seemingly taken little note of the debate among members of the European parliament (MEPs) between February and June – in that time, a series of amendments had been put forward which ACCA largely welcomed. The MEPs’ Legal Affairs Committee issued a report which included:

* Calling for an extension of the scope of audit, to include a greater focus on risk.

*Clear demarcation of audit and non-audit services provided to the same client rather than a ban on the latter.

*Strengthening the role of the audit committee.

*No compulsory rotation of external auditors.But none of this seemed to influence the commissioner, whose three main ‘orientations’ were the same as they had been at an earlier conference in February: non-audit services, mandatory firm rotation and joint audits. Talking about non-audit services, he said: ‘Too many are given to audit clients. They will often be a higher fee than the audit.’ And then the big one: ‘How can you be wholly independent? We have to limit or even prohibit non-audit services for audit clients.’ ACCA, among others, has repeatedly warned against a ban on non-audit services, but there clearly remains an appetite on the part of the EC for some tightening of the rules on additional services. On rotation of firms, Barnier said there needed to be ‘a balance between too much, which would damage quality, and too little, which would harm independence’. On this, he was joined by James Doty, chairman of the US regulator, the Public Company Accounting Oversight Board (PCAOB), who argued that firm rotation would be more effective than just lead partner rotation within the same firm, as the new partner would not want to be the ‘one who lost the long-standing client’. Given the keenness expressed by both EC and US regulators to work together (and indeed their duty to do so in the regulatory architecture post-crisis) it seems that some movement on this issue will be forthcoming.

‘ICONIC’ ISSUEJoint audits were criticised by the UK Financial Reporting Council CEO Stephen Haddrill as ‘an iconic issue within the EU – but not a good issue’. ACCA and most member states would agree with him that they are a costly innovation of little proven benefit, but Barnier and his colleagues praised their use in France, arguing that they had paved the way for smaller firms to show their worth. On competition or ‘diversity’ of firms, the

Lords’ committee reported in late March and called for the Competition Commission to investigate the dominance of the Big Four, a request which was swiftly taken up. ACCA expects the Office of Fair Trading (OFT) to report at the end of the year, roughly when the EC legislation will appear. Barnier insisted in June that he was ‘not crusading against Big Four’, although he added: ‘We do not believe we should have only four.’It makes sense for the OFT to probe this area given the ineffectiveness of previous measures to help boost competition. And we hope it will not only address the issue of restrictive covenants by banks or other capital providers which are a blatantly anti-competitive tool, but also current audit liability rules.Disappointingly, the EC seems to have lost focus on an area which was one of the key planks in its original green paper last October – expanding the actual role of the auditor. ACCA has argued consistently that audits should be enhanced to include perspectives on risk management, corporate governance, and testing the underlying assumptions in business models. It is more encouraging that the US authorities are involved in extensive outreach to discover precisely what it is that investors and other parties want from audit and how relevant

information from audit findings can be communicated to them. One of the ideas floated in the PCAOB’s wide-ranging ‘concept release’ in June was that of a free-form report, an auditor’s discussion and analysis (AD&A) report, mirroring the company’s narrative report the management discussion and analysis. This is also one of the ideas proposed in the research paper commissioned by ACCA and written by Maastricht University (see page 83) and is well worth exploring further. Given that the US tends to take firm action after crises – the PCAOB itself was formed under the Sarbanes-Oxley legislation which followed the Enron scandal – it might be in the US that the biggest eventual changes occur. But with the EC seemingly determined to take radical steps one thing is for sure: the audit profession needs to brace itself for major change over the next 12 months.

Audit Under Fire: a Review of the Post-Financial Crisis Inquiries is available at www2.accaglobal.com/auf

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The recent financial crisis exacerbated investors’ expectation gaps with respect to financial reporting by companies and the role of the

auditor in a financial statement audit. In response, governments and regulators in the US, UK and Europe are taking various approaches to meet the reporting needs of investors. These approaches may expand and/or re-apportion responsibilities across the financial reporting chain, although some approaches are more holistic than others. All anticipate the auditor’s reporting model – and perhaps the framework for financial reporting more generally – changing considerably.The Center for Audit Quality (CAQ), established by the US public accounting profession in 2007 to serve investors and the capital markets, has made it a priority to convene investors, audit committee members, CFOs, CEOs and others involved in financial reporting in a series of roundtable discussions on the evolving role and value of the auditor. An important focus is what information investors need that they currently do not receive and who in the financial reporting chain is best suited to provide it. As of mid-July 2011 we had held sessions in four US cities, and we are exploring additional discussions in the US and abroad later in 2011. These discussions are similar to, and we hope will build on, those that ACCA held around the globe in 2010.

QUALITY, NOT QUANTITYIt has been no surprise to hear that investors do not want more voluminous information, but they do want more qualitative information from management and auditors. The Public Company Accounting Oversight Board (PCAOB), the profession’s regulator in the US, is considering ways to enhance the qualitative information that auditors might provide while retaining the pass/fail auditor’s opinion. In June 2011, the PCAOB published a concept release on changes to the auditor’s reporting model based on its own outreach to various stakeholder groups, including the CAQ, which identified a number of areas where the auditor’s report could be clarified or expanded. The concept release seeks feedback on the potential expansion of the

auditor’s report, communication of additional information, and practical challenges and/or unintended consequences that may result from additional reporting.The CAQ welcomes the PCAOB’s concept release and its willingness to listen to the views of all stakeholders in crafting alternative approaches, and has submitted an initial comment letter that identifies several overarching principles to guide consideration of revisions to the auditor’s reporting model that are equally applicable to US and non-US audit regulators. These include: management, not auditors, should remain the original source of disclosure about the entity; any changes need to maintain or enhance audit quality; any changes should narrow, or at least not expand, the expectations gap; any changes should add value and not require investors to

A change in the wind directionChanges to the role of US public company auditors must be holistic, argue the Center for Audit Quality’s Cynthia Fornelli and Angela Desmond

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Cynthia Fornelli is executive director of the Center for Audit Quality, which represents public company auditors. Directorship and Accounting Today have recognised her contributions to accounting and corporate governance. She is a former executive at Bank of America and official with the US SEC.

sort through ‘duelling information’ provided by management, the audit committee, and independent auditors; and auditor reporting should focus on the objective rather than the subjective.In addition, the CAQ has identified several significant modifications to the auditor’s reporting model that are responsive to investors and could be implemented over the short term. One would be the use of an emphasis of matter-like approach in which the audit report would identify specific topics or events, unusual transactions or other matters that were considered areas of audit emphasis by the auditor. These descriptions would have to be objective, fact-based and make specific reference to where such items appear in the financial statements. Another would be to prepare a new report on the examination of the issuer’s critical accounting estimates disclosure in its management discussion and analysis (MD&A). Although the Securities and Exchange Commission (SEC) would need to require this new report, auditor attestation here would serve to continue to improve disclosures by management in this important area and would provide more emphasis on the important judgment calls made in preparing the financial statements. The CAQ’s initial comment letter generally aligns with much in the PCAOB’s concept release. As a demonstration of the profession’s commitment to meaningful change, the CAQ developed model disclosures for each of its recommendations for the PCAOB and other commentators to consider.

TOO MUCH INFORMATION?However, the prospect of providing information akin to the auditors’ communications with the audit committee – such as a proposed auditor’s discussion and analysis – is more problematic and could have a significant impact on the financial reporting framework for issuers and on auditors. The auditor’s written report to the audit committee is prepared with the expectation that a dynamic, two-way discussion between the auditor and committee will occur around the points made, particularly those pertaining to accounting and financial reporting matters involving a high degree of subjectivity.Moreover, the audit committee already has considerable insight by virtue of its financial reporting oversight responsibilities that provide context for communications from the auditor that the financial statement user will not have. Providing investors with the same information that is given to the audit committee, without the context obtained

Angela Desmond is senior director for external relations at the Center for Audit Quality, where she leads the CAQ’s external relations and communications activities. She previously served as chief of staff of the Public Company Accounting Oversight Board and as a senior officer at the Federal Reserve Board.

from a two-way dialogue, would generate greater confusion and not enhance the overall understanding of the readers of such a report. Consideration might be given to how the role of the audit committee could be strengthened so that investors have more confidence that committees are indeed serving investors’ interests. For example, it has been suggested that the audit committee could provide investors with an expanded report.Of course, the SEC, and not the PCAOB, has jurisdiction over the audit committee. This underscores the need for our regulators to work together proactively to improve the financial reporting framework including but not limited to the auditor’s reporting model. In our roundtable discussions, stakeholders expressed frustration with annual reports containing hundreds of pages of information drafted mainly (as one lawyer participant stated) ‘for juries’. Without a holistic approach, ‘improvements’ in disclosures will result in a patchwork of overlapping disclosures and gaps in information.We are already seeing some consensus about potential improvements to the auditor’s reporting model. The CAQ’s comment letter is consistent with the message heard at our roundtables: investors want more qualitative information from management and, where appropriate, want the auditor to weigh in on the adequacy of the process management used and, perhaps, on whether the information is an accurate representation of facts, assumptions and so on. We plan to share what we hear at the roundtables with the PCAOB and other policymakers later this year. The roundtables are encouraging hard thinking around the cost-benefits of various proposals, including determining whether modifications to current standards and regulatory frameworks will truly have a positive impact on the capital markets and the public’s perception of the role of the auditor, as opposed to simply piling on more disclosures.The profession is listening hard to what investors are saying and it is prepared to implement change under a framework that assures consistency of approach. The need for consistency transcends US markets; our global markets require consistency of reporting and auditing frameworks to the fullest extent possible. We look forward to continuing our dialogue with stakeholders – including thoughtful members of ACCA around the globe. As Winston Churchill once said: ‘There is nothing wrong with change, if it is in the right direction.’

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ACCOUNTANCY FUTURES: AUDIT AND SOCIETY CENTER FOR AUDIT QUALITY

David Gerald is the founder, president and CEO of the Securities Investors Association (Singapore), the voice of retail investors in the city-state. He regularly features in international magazines, such as Forbes, and often appears on international TV news networks to discuss corporate governance issues. He was recently appointed to the Singapore Corporate Governance Council.

When a company brings in investors to fund its business, it becomes responsible for protecting the interests of those

investors. The audit of financial statements has long been recognised as a major component of this protection by many parties: auditors, analysts, investor lobby groups and, most significantly, retail investors themselves.This year, SIAS, the Securities Investors Association (Singapore), worked with ACCA Singapore to carry out a survey on the value of audit to retail investors in Singapore. The survey is a follow up to a study commissioned last year by ACRA, the Accounting and Corporate Regulatory Authority, which focused on the audit committee chairmen of listed corporations. These surveys aim to discover how the quality of audit can be raised to the satisfaction of a company’s various stakeholder groups.This year’s survey was sent out online to 33,000 ACCA and SIAS members, primarily retail investors. The results are very much in favour of external audit. Out of 390 respondents, 90% indicated that audited financial statements have value, and 40% stated that external audit brought ‘a lot of value’. The reasons they cited are straightforward: audit provides an independent and impartial view of the company, it helps investors to understand the company’s financial health better, and it also generates confidence in the company’s financial statements.It is clear from these findings alone that investors want good corporate governance and transparency in a company. This supports what SIAS has repeatedly stressed: corporate governance and transparency must be an integral part of a company’s business model.Audited financial statements were also found to be one of the top-three sources of information investors use when making investment decisions. As much as 80% of respondents consider audited financial statements to be important in this regard; and 30% even stated that audited financial statements were very important. The only dissenting note came from a minority who pointed out that the audit opinion, in its current form, is based primarily upon historical financial statements.

The importance of audit in investment decisions is corroborated by an earlier, unrelated report by PwC UK, which found that the majority of investment professionals valued the fact that data is audited regardless of whether or not they had done their own due diligence. Clearly, investors place significant reliance upon audit in its current form. The onus thus falls upon the auditor to ensure that these stakeholders receive information that is sound, comprehensive and easily accessible.At the same time, however, investors have indicated that they want to see more information in audited financial statements. Of those respondents surveyed, 77% were actually in favour of expanding the scope of audit. It is easy to see why. ACCA Singapore’s findings give rise to the question of what constitutes a comprehensive report. The global financial crisis highlighted that even audited financial statements are sometimes unable to provide the full picture of a company’s financial situation. This is clearly a concern for retail investors who rely upon such statements, together with media and analyst reports, to guide their decisions.

WHAT INVESTORS WANTTwo points of particular interest are internal controls and risk management, which more than 80% of respondents asked for. Companies wishing to remain attractive to investors must provide assurance that their internal controls are solid, and that their risk management processes are both adequate and effective.Survey respondents also cited the existence and quality of assets as something that should be reported, as well as the need for commentary on the assumptions made and policies adopted by management in preparing financial statements. Furthermore, a large number of investors mentioned that they would find value in non-financial information, such as corporate governance practices and social responsibility issues. The majority also indicated that if any of the additional areas mentioned were to be covered in audit, they would prefer the information to be publicly available instead of being restricted to the audit committee.In short, retail investors want to be able to put financial numbers in context. They are calling

Confidence boostDavid Gerald, president of SIAS, and ACCA’s Darryl Wee reveal the findings of a joint survey to find out the true value of audit to retail investors

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ACCOUNTANCY FUTURES: AUDIT AND SOCIETY RETAIL INVESTORS

for extra depth and transparency in audit, and they are not the only ones. According to the PwC survey, institutional investors also place considerable value on additional information, although in slightly different areas from retail investors.

ROUNDTABLE TALKSAlso, between 2009 and 2010, ACCA conducted a series of international roundtable discussions involving participants such as businesses, auditors, regulators, finance providers, ratings agencies and others. One of the conclusions arrived at is that audit must remain practically useful to stakeholders. It has to provide relevant and accessible information. And to achieve this end, certain revisions may have to be made to the scope of audit – similar to those called for by investors.There is a downside to this, of course. To expand the scope of audit would place an extensive burden on auditors, with implications for skills and training. The cost for companies would increase. Both retail investors and roundtable participants agree on this.Otherwise, the positive responses from ACCA Singapore’s survey indicate that the present scope of audit is satisfactory to the great majority of retail investors, and that it does have critical value to them. Also, should audit be expanded to cover the additional areas which investors are requesting, external audit is well equipped to report on them.

Moving forward, however, internal audit should begin to play a larger role in the financial reporting framework, regardless of cost. There is considerable overlap between internal and external audit in the areas where investors have requested more information. Internal controls, in particular, would benefit from the oversight of an internal audit function that is more closely acquainted with the workings of the company, and can thus deliver more comprehensive reports and opinions as compared to external auditors. This is an issue of some significance, given that recent problems with S-chip companies listed in Singapore have brought the need for stricter internal controls under the spotlight.Many companies do not have an internal audit function because they find that the cost of establishing it is prohibitive. However, they should also bear in mind that a scandal can be even more costly to them. Companies need to go beyond the current status of internal audit as a best practice recommendation, and adopt it as a core part of their operations. There also needs to be closer cooperation between internal and external auditors. In the long term, this is the best way to enhance the value of audit to retail investors, in a way which directly benefits them.

The Value of Audit: Views From Retail (Private) Investors is available at www2.accaglobal.com/SG_VOA

Darryl Wee is country head, ACCA Singapore. Prior to joining ACCA, Wee was chief commercial officer of Nestronics Singapore. He also spent seven years at Agilent Technologies, and was managing consultant at PA Consulting Group, where he oversaw the performance and development of the Singapore Management Development Consultancy team.

ACCOUNTANCY FUTURES: AUDIT AND SOCIETY RETAIL INVESTORS

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Ann Vanstraelen holds a PhD in applied economics from the University of Antwerp and is currently full professor of accounting and assurance services at Maastricht University. Her research interests include governance, financial reporting quality, auditing and other assurance services. Her work has been published in leading academic journals, and she has been involved in several research projects.

The financial crisis has been the trigger for regulators and standard-setters to revisit the audit report, in the context of a number of

criticisms by different parties. The central question boils down to whether the standard audit report communicates the appropriate information to stakeholders and whether its form and content promote audit quality. To help inform the debate, ACCA asked the Maastricht Accounting, Auditing and Information Management Research Center to carry out a study on extended audit reporting. Our objective was to develop a framework for extended audit reporting, then test this with stakeholders, in order to develop an agenda for future research.To begin with, we classified potential additional disclosures in the audit report into five categories: clarification of the scope of the financial statement audit and language; information on the audit team and engagement statistics; information on the audit process; further information on the results of the auditor’s evaluation; and disclosures beyond the scope of the financial statement audit. We then presented this framework – with some potential formats – to auditors, analysts, investors and other users of financial statements and asked them how the information value of the audit report could be improved. We found that users want a conclusion about the fairness of the financial statements, as included in the existing audit report, but preferably near the front. Users would also like to have more information on a number of auditor findings, some of which imply an extension of the scope of the audit – for example, to key risk areas, management judgments, etc. However, they do not attach much value to boilerplate statements. And finally, users believe they may benefit from some additional educational material on the scope of the audit and the language used in the audit report.We propose an audit reporting model structured around the four main information items listed near the bottom of this page. Future research seems warranted before regulatory action, if any, is taken. This could fall into five categories: perceived usefulness, change in decision-making behaviour and

impact on audit quality of alternative reporting formats; unintended consequences of changes to the audit reporting model; cost/benefit analysis; development of educational material; and division of responsibilities.Our proposed audit reporting model may be a first step in closing the information gap, which is currently the focus of regulators and standard-setters. However, to take audit reporting to a next level, we suggest that this should go hand in hand with a change in the corporate reporting model.This will most likely imply an extension of the scope of the audit and possibly also a change in the frequency of reporting. But if society demands a different corporate reporting model, then auditors have to facilitate this demand to enhance the value of the audit. But audit cannot be considered the ‘holy grail’ that will meet all users’ information demands. Auditors are only one of many different players in the governance of business reporting. Finally, management is ultimately responsible for providing stakeholders with the information they need. This responsibility cannot be transferred to standard-setters, regulators, public oversight bodies, auditors or any other governance mechanism.

A Framework for Extended Audit Reporting can be viewed at www2.accaglobal.com/fear

Getting more from auditProfessor Ann Vanstraelen of Maastricht University reports on the results of ACCA-commissioned research into a framework for extended audit reporting

PROPOSED AUDIT REPORTING MODEL

1 Scope of the audit2 Findings of the

audit3 Auditor discussion

and analysis4 Information on

the auditor with reference made to the audit firm’s transparency report

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ACCOUNTANCY FUTURES: AUDIT AND SOCIETY EXTENDED AUDIT REPORTING

‘It’s about moving people away from thinking this is a minority issue. It’s not for minorities. It is about the success of business in the 21st century’

Employers have long been forced to provide equal opportunities, but many now see diversity as an increasingly important component of business success

The new diversity

The fact that diversity is now a boardroom agenda item highlights how far the issue has come. Diversity of gender and race has often been driven by legislation, but

many business leaders have come to realise that, as the pace of globalisation speeds up, there is a strong business argument for a varied workforce.The composition of the workforce has evolved to reflect changes in society. Consumer and client buying habits have developed in parallel, so it stands to reason that employers should recruit staff who mirror society.Nowadays, diversity in the workplace goes well beyond gender and ethnicity. Diversity today must ensure no bias towards gender identity, sexual orientation and race, to physical or mental disability, religious beliefs, age and cultural experience and behaviour. Employers are now taking diversity a step further by focusing on inclusion.

Many large corporates are keen to embrace this, and to be seen to be doing so. HSBC, for example, has a long-standing worldwide advertising campaign, which shows a variety of images – such as a tattooed face, the Leaning Tower of Pisa and a briefcase full of money, among other images, posing questions like, ‘Right or wrong?’, ‘Good or bad?’ – with the strapline, ‘The world’s local bank’. When the campaign was launched in 2002, HSBC said: ‘Underpinning the advertising is HSBC’s philosophy that the world is a rich and diverse place in which cultures and people should be treated with respect.’ The point of the campaign is to recognise that different cultures and peoples see things in completely different ways. It’s poignant, clever and forward thinking.For the accountancy profession there is a further incentive to embrace diversity and inclusion. What employers need from today’s accountants and finance professionals is sufficiently different enough to require a new kind of accountant. The skills and experience required of today’s accountants have moved on and whereas a

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ACCOUNTANCY FUTURES: DIVERSITY NEW DIRECTIONS

decade ago the profession, business and the boardroom were dominated by middle-aged men, today’s business world is different.Ewan Willars, director of policy at ACCA, says: ‘The discussion has moved on in the last five to 10 years. Previously it was about gender and ethnicity, but now it’s in terms of widening the role of accountants in business. The role of the finance function in business has changed and employers are noticing that they need a wider set of skills to respond to the marketplace and address an underlying need about the way the business works.’While in the past differences in the workplace were seen as a source of friction, says Willars, now employers want to ‘capture the heat of that friction’ and channel it to elicit fresh and different ways of thinking.The 2007 credit crunch and ensuing global recession highlighted the need for people with different experiences, views and behaviours to sit in boardrooms and on non-executive committees, to avoid groupthink and challenge decisions.The internal audit function has also laboured in the past under groupthink, says Willars. ‘They all went to the same university, trained in the same way and there was little friendly confrontation or questions over the way they did things. That has since changed and now they identify people with a range of backgrounds and experience,’ he says.Since the crisis, companies have recognised the need to inject diversity into their businesses on every level, and a growing body of evidence shows that a more diverse workplace leads to better business performance.‘We need people who can spot market changes so we need a mix of people. The challenge is that as humans we like to work with people who are like us and think like us, so the shift has moved towards diversity of thinking,’ explains Sarah Churchman, head of diversity at PwC.The Big Four firms recognised years ago that, as global organisations competing to sell their products and services, they must have workforces that reflect their clients’ views, experiences and needs.One of the key drivers for the Big Four firms initially was attracting and retaining staff, but their philosophy on diversity has clearly moved on to encompasses diversity of thinking and behaviours, not just a physically diverse

workforce, but one with myriad experiences.Last spring PwC rolled out its Open Mind e-learning training to all staff and partners.‘Until you are aware, you can’t change. It’s cultural change,’ Churchman adds.Sarah Bond, head of diversity and inclusion at KPMG, agrees. ‘It’s a broader understanding that it’s about value and differences. There’s an understanding that creating an inclusive environment isn’t about limiting it to just gender and race. People think diversity is only about minorities but we are keen to see it as about our culture.’But challenges remain. It’s all very well having a diverse workforce, but if it isn’t managed well then the outcome can be a workforce that is split into silos of different types of people, because management hasn’t overseen a simultaneous policy of inclusion.Keeping it on the boardroom agenda is also tough, especially in economically challenging times. ‘Diversity and inclusion, in difficult economic circumstances, slip off the priority list. It’s a continual challenge. It’s not about single interventions; it’s about changing the culture. It’s easy to think of diversity and inclusion as setting up networks or running events – which aren’t to be underestimated – but if you are really talking about change then you need to do something big,’ says Bond.KPMG is also running a programme of training about raising awareness of unconscious bias. ‘It’s about moving people away from thinking this is a minority issue. It’s not for minorities. It is about the success of business in the 21st century,’ Bond adds.

MEETING DEMANDIndeed, clients are actually demanding a varied workforce. Churchman says: ‘We’ve had some experience of clients asking for balanced teams with women and with steadily increasing frequency. The culture of diversity is the strongest having people with capabilities to deal with business across geographies; people with the cultural insights because they come from the culture.’Understanding and embracing diversity delivers better results and ensures companies are fit for the marketplace, now and in the future. But diversity must be handled with care. Management shouldn’t simply toe the line and hire a varied workforce for the sake of it. Companies, if they haven’t already begun to think about it, must now start to assess their workforce and their business needs and embrace change for the benefit of business and the workforce alike.

Michelle Perry, journalist


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Soo Fern Lee, partner and ASEAN people leader at Ernst & Young Advisory Services, Malaysia, kicks off our round-up of how financial professionals from around the world view the various aspects of diversity

Diverse perspectives

Diversity today no longer means just differences in race or gender. It encompasses the whole human experience. Multiple dimensions

such as generation, culture, personality, skills, training, educational background and life experiences need to be considered.To thrive and innovate in today’s global economy with its various challenges, companies require flexibility, creativity and imagination – qualities that can be nurtured only by a diversity of viewpoints, experience, skills, cultures and education.If an organisation does not leverage the potent weapon of diversity, it risks limiting its creative potential, and ultimately, losing its competitive edge.Furthermore, as companies become more global and expand into new markets, they demand a more global mindset and greater diversity from their partners, clients and customers too.Differing voices and viewpoints are powerful factors in steering innovation. They generate lively debate, healthy conflict, fresh ideas and potentially, new products and services that result in visible benefits to the bottom line.By receiving and implementing innovative ideas from a variety of individuals with different backgrounds, skills and experiences, leaders can drive steady growth and profitability for their organisations.An organisation’s performance can improve as a result of diversity. Diverse viewpoints lead to broader perspectives on business issues, better ideas, better teams and better decisions.

CHANGE IN CULTUREInclusiveness is all about making the diverse mix work. Diverse teams stimulate innovation and new ways of problem-solving. But they need an inclusive culture to help them function at their best. In today’s globalised world, the people we work with and for come from a diverse range of backgrounds and cultures. At Ernst & Young, we actively recruit and develop a workforce that mirrors the world we live in and has the skills and mindset to work effectively across any borders. We encourage our people to move around the organisation,

both geographically and functionally, to help foster the global mindset needed to work in crossborder and crosscultural teams. We send them on international assignments, allow them to experience a wide variety of roles and to develop new skills and competencies through exposure to different cultures, industries, individuals and ways of thinking. We also have formal training and learning programmes in place to support them.

Soo Fern Lee believes that organisations must leverage the ‘potent weapon’ of diversity.


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Ladislav Hornan FCCA, managing partner of the London and Nottingham offices of national accountancy group UHY Hacker Young

We have a broad diversity at UHY. Accountancy Age produced a diversity survey some five years ago which revealed that UHY

Hacker Young leads the way in the profession’s diversity stakes.Senior partners before me recognised that a diverse partnership was a good thing because you can reach all sorts of different communities. I have continued that philosophy. For example, we have a Malaysian partner, Dato’ John Lim, who is well connected in Malaysia and brings business in from there. I bring business in from the Czech Republic.We are attuned to putting into place international plans. We recently set up a China desk under the aegis of a new female partner, Julie Wilson, who is originally from China. She is growing the China desk through her personal connections, and our technical strength as a firm.Similarly, we have recently recruited another partner, Bob Savic, to develop work with clients from the CIS (Commonwealth of Independent States) and CEE (Central and Eastern Europe) countries. Bob is a native Russian speaker and speaks other eastern European languages too. We are currently developing further dedicated teams to focus on business opportunities in other countries, such as India. All of our international business desks are led by people from the region in focus, ultimately enhancing our diversity as a firm. Ladislav Hornan brings in business from the Czech Republic.

Faisal GhafoorCFO, Central Depository Company of Pakistan

Derek MohammedLead audit partner and talent leader, Deloitte Trinidad

As finance functions grow diverse, it will be essential to harness the benefits of diversity by ensuring that there are equal opportunities for development, and that a diverse pipeline is available. It is a challenge in emerging economies given the movement of finance professionals to emerged economies. The enthusiasm of the finance function to learn and contribute beyond its core expertise is also a factor in businesses benefiting from the diversity of their finance functions, and finance functions achieving their true potential of driving business performance.

In 2008, we launched Deloitte in the Trinidad and Tobago marketplace, from what was a local firm. We are operating in a completely different arena. What in hindsight seemed like an overnight process was the transformation of our finance, information technology, human resources and work methodologies to comply with the strict standards and consistency expected of a global firm. To achieve this we needed some radical physical and organisational changes, as well as a change in the mindset of our professionals.

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Hung To ViFinance and control manager, BP Exploration Vietnam

Imran Husain CFO, Unilever Pakistan

Petr Kouba Manager, Advisory Services, Ernst & Young Czech Republic

Wairimu NjagePeople and change manager, PwC Kenya

Jim Yang ACCAGeneral manager, financial department, China Life

BP has strategically established businesses in emerging countries and systematically developed strong local talent pools, including in the finance function. These local talents will best serve BP’s interests in emerging countries, where there are complex local issues, different practices and cultural variances. However, local talents need to be developed to understand BP’s culture and head office requirements. This has been carried out by the movement of staff, not only from head office to the regions to set up new operations, but also back from the regions to the head office. This is a valuable development opportunity for finance staff from the regions to get exposure to the head office environment and see the big picture from the top, while at the same time diffusing their regional knowledge to senior management.

At Unilever we focus on diversity. The finance function has proved to be a great example where diversity has really benefited the organisation as a whole; from gender balance to hiring talent from various backgrounds and industries. The finance function ensures, working with human resources, that it makes itself attractive for people of diverse backgrounds and qualifications outside and within the organisation and provides the training that is required. We recognise that diverse teams, including the finance function, play an important role in enhancing our company’s brand perception and competitive edge.

The finance function has evolved and involves a lot of diverse activities, which are changing and growing over time. From our experience, a good finance leader plays an active role in defining company strategy. The group CFO is also usually responsible for corporate IT, purchasing, administration and corporate governance. A good CFO should master sophisticated communication skills in order to build trust and satisfy all stakeholders. A further challenge is to manage an international finance team and its members with a different cultural and technical background, including working in different time zones. Is the complexity of the finance role an issue? Not really. It is much better to have a perception of the business partner rather than the service provider. Moreover, the diversity of finance creates a challenging environment where the finance leader enjoys a high level of career satisfaction.

When we consider diversity, we look at the full range of human and organisational differences and similarities. The real payoff comes through creating an environment of inclusion, and the process of leveraging each unique individual to strive toward a common goal. Diversity management is an important part of talent management and there is a demonstrated clear link between investing in diversity and inclusion and corporate performance. Investments in diversity tend to result in greater agility, better market insight, stronger customer and community loyalty, innovation, and improved employee recruitment and retention. PwC takes diversity and inclusion seriously.

The evolution of China Life’s finance function has resulted from the swift development and increasing competition in the insurance market in China. As we work on the transformation of our business operation system to maintain our competitive edge, our finance function has to provide the relevant information for decision-making and we need the right people in the right place. Different functions have different requirements for financial talents. For example, staff that are responsible for the implementation of financial reporting standards and preparation of financial statements require professional accounting qualifications. Budget management staff will benefit from knowledge of cost and management accounting skills, and methods besides the basic accounting knowledge, to deeply understand and deliver business strategies and tactics and implement budgetary controls. A diverse workforce in the finance function helps you pick the right person for the right job.

Accountancy and other professional qualifications play an important role in promoting social mobility, particularly in non-industrialised countries

Freedom to choose

Social mobility – or rather the lack of it – is a perennial problem for politicians the world over. Although the causes of its absence are varied and

complex, few dispute that a lack of educational opportunities is fundamental. Yet access to post-primary education remains closed off to many social classes around the world.Moving up the social ladder is virtually impossible for those not already part of the middle or upper classes in many societies, particularly in non-industrialised countries.Yet even in developed countries, movement upwards has become stymied in recent decades. In the UK, for instance, Tony Blair’s government made it a manifesto pledge to eradicate child poverty, considered one of the root causes of a less mobile society.

The theme of social mobility has been again adopted under the UK coalition government of the Conservatives and Liberal Democrats. In a white paper published in April 2011, Opening Doors, Breaking Barriers: A Strategy for Social Mobility, deputy prime minister Nick Clegg said: ‘In Britain today, life chances are narrowed for too many by the circumstances of their birth: the home they’re born into, the neighbourhood they grow up in or the jobs their parents do. Patterns of inequality are imprinted from one generation to the next.’The statistics make startling reading: 25% of children from poor backgrounds fail to meet the expected attainment level at the end of primary school, compared with 3% from affluent backgrounds. A mere 7% of the population attend private schools, but the

Flying free: professional qualifications such as ACCA’s help people to escape the poverty trap.

ACCOUNTANCY FUTURES: DIVERSITY SOCIAL MOBILITY

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View from: South Asia DR AFRA SAJJAD, HEAD OF EDUCATION, MENASA, ACCA

‘Most believe that university education is the key to economic and social mobility, but the cost is also quite prohibitive. As a result, many turn to professional qualifications. These have really contributed to positive social mobility in Kenya.‘A good example is Ashif Kassam, who is currently group chief executive of RSM Ashvir, one of Kenya’s leading mid-sized accountancy firms. After finishing high school in 1988, Ashif studied part time for the ACCA Qualification for five years, while holding down a full-time job as an administration manager. After completing his final exams in 1993, he joined Samvir, a firm of certified public accountants, becoming a manager in 17 months and a partner within five years, making him the fim’s youngest partner. After the merger of Samvir with Kassim-Lakha Abdullah in January 2000, Ashif was appointed as the managing director of the consultancy arm, PKF Consulting, before moving to his current role with RSM Ashvir.’

privately educated account for more than half of the top level of most professions, including 70% of high court judges and 54% of CEOs of FTSE 100 companies.Social mobility offers people the freedom to improve their position in society. Its lack is not just damaging for individuals but also leaves the country’s economic potential unfulfilled, the report finds. Unlike many professions, such as medicine and law, the accountancy profession, including ACCA, has opened up routes that allow entry at various levels, not just through an expensive-to-fund post-university degree. In the UK, for example, around 48% of ACCA’s trainees come through a non-graduate route. An accountancy career offers people the chance to earn while they learn. Neil Stevenson, ACCA executive director – brand, argues that while the cost-effectiveness of non-university routes is clearly important, employing finance professionals who have taken different educational and career routes also creates much needed diversity within businesses, making them stronger and more sustainable, and adding to the bottom line. ‘ACCA has long worked to open up the profession to people of all backgrounds, remove artificial barriers and meet the diverse needs of both trainee professionals and their employers,’ he says.

‘We need to promote professional qualifications as equal alternative routes to employment alongside traditional academic routes. We also need to provide flexible entry points while maintaining a high and consistent outcome to reassure employers and the wider public that all professionals irrespective of their background have achieved a common standard.‘More than this we need to be clear about the role professional bodies can play. We can be agents of change working closely with employers, tuition providers and others who recruit students while contributing to public policy on widening diversity in business. We can promote the benefits of professional qualifications to a wide pool and crucially ensure that we identify role models and advocates who can make professions appear more human, relevant and for “people like me”. And in our educational and development programmes we can ensure we remain accessible and use core values such as opportunity and diversity to inform product development and ensure we champion social mobility in policy and in practice.’ACCA, set up in 1904 ‘with the express aim of opening up access to the accountancy profession’, welcomed Clegg’s social mobility initiative and pledged support for the Business Compact on Social Mobility. The compact calls on businesses to commit to

‘There are lots of examples of people that have come from extremely underprivileged homes and the ACCA Qualification has completely transformed their lives and that of their families. ‘If this is the definition of social mobility, then ACCA is definitely helping to achieve it in Pakistan. ‘For example, there was one young boy who used to sell flowers at traffic lights for 50 rupees a bunch. An ACCA member regularly passed by this boy to buy flowers and over time got talking to him about ACCA, its studies and the qualification. In the end the member decided to sponsor the flower vendor to study accountancy with ACCA. He passed all his exams first time through sheer commitment and determination. Now he has a very good job in a bank. That has radically changed his life and that of his parents. ‘In addition, anyone qualifying in Pakistan can travel overseas to find a good job.’

View from: Africa ANTHONY KARIUKI, HEAD OF ACCA KENYA

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View from: Europe ANDREW LECK, HEAD OF ACCA UK

View from: Asia Pacific CHIEW CHUN WEE, HEAD OF POLICY, ASIA PACIFIC, ACCA

A quote from deputy prime minister Nick Clegg in the Opening Doors, Breaking Barriers: A Strategy for Social Mobility white paper.

support communities and local schools, to improve skills and create jobs by providing opportunities, and to recruit openly and fairly. The Big Four firms – PwC, Deloitte, Ernst & Young and KPMG – have worked for years with the UK’s Social Mobility Foundation to address the imbalance where professions remain the domain of the middle classes. In a number of countries, ACCA has pursued alternative forms of funding to open up the profession to disadvantaged groups via, for example, the World Bank, government schemes and its own Simpson Scholarship.Dr Afra Sajjad, ACCA’s head of education, MENASA, says: ‘There are lots of examples of people that have come from extremely underprivileged homes and the ACCA Qualification has completely transformed their lives and that of their families.’Anthony Kariuki, head of ACCA Kenya, adds: ‘Many Kenyans have studied ACCA and gone on to use the qualification to improve their lives. A good example is Ashif Kassam [see View from: Africa] who is currently group chief executive of RSM Ashvir.’But there is much more to be done in the UK. ACCA UK says that entry to the professions can only be achieved with a complete shift in attitudes to professional and vocational qualifications. Its report, Climbing the

Ladder: ACCA and Social Mobility, makes 16 recommendations for improving an individual’s ability to improve their social position.

Michelle Perry, journalist

Climbing the Ladder: ACCA and Social Mobility is available at www2.accaglobal.com/ladder

‘In Britain today, life chances are narrowed for too many by the circumstances of their birth: the home they’re born into’

‘It’s clear that the UK must focus on “upskilling” the population if it is to achieve its ambition of being in the top eight countries in the world for skills, jobs and productivity by 2020 and if it is to break down barriers to social mobility. Our report, Climbing the Ladder: ACCA and Social Mobility, offers 16 recommendations.‘The first is the need to ensure that careers advice in state schools really engages young people about the benefits of professional qualifications. Another states that the government must also address the perception gap between academic and vocational or professional qualifications. These are vital, especially given recent reports about youth unemployment levels rising, and also more universities announcing they will charge the maximum fee of £9,000 per annum.‘We have also recently introduced Foundations in Accountancy, an entry level suite of awards aimed at those looking to start a career in accountancy, perhaps as a technician.’

‘Social mobility is about an individual’s ability to break away from the status quo in the social hierarchy. It is a common expectation that professionals receive a substantially better remuneration package than blue-collar workers and are generally perceived to be of a higher social standing. It is no different in Asia Pacific. One very senior member, who is now a well-recognised figure in the accountancy sector in Singapore, has shared on more than one occasion that he might not have been able to make it without ACCA. Coming from a less privileged background, he was able to join the workforce earlier to finance his studies, because of the flexibility ACCA offers. Today, we serve a good proportion of non-graduates and graduates from other disciplines, who may have realised midway into their previous careers that an accountancy qualification is their golden ticket to success. It is rewarding to know that ACCA has given them a second chance.’


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Looking to the long term with outcome-based budgeting and policymaking is a developing trend in public-service management, says Dr Aidan Rose

Making outcomes count

Outcome-based budgeting enables governments to link resource allocation to results. Following the 2008 global financial crisis, it is

critical for them to improve the link between policy outcomes and budgets.Public services are often charged with so-called wicked, intractable problems that have no obvious solution. Often these problems, such as anti-social behaviour and the rehabilitation of offenders, need to be managed by several agencies working together towards jointly agreed outcomes. Adding budgeting to the equation makes the link between resources and what public policies seek to achieve. As the Centre for Social Justice puts it: ‘Allocating funds to programmes on the basis of their effectiveness is not simply a question of financial responsibility. Outcome-based government means focusing on those initiatives that change people’s lives: tackling causes rather than simply treating symptoms.’ However, outcome-based budgeting is rarely practised. In times of growth, governments focus on how to distribute the increment, whereas in harder times the focus is on the allocation of scarce resources. The message from a recent UK National Audit Office report paints a picture of poor financial management in UK government departments, with little evidence of strategic approaches to public expenditure. Despite initiatives to

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ACCOUNTANCY FUTURES: PUBLIC SECTOR BUDGETING OUTCOMES

extend flexibility, departments are subject to tightening measures that encourage spending within the fiscal year and discourage carry-overs in departments that only add financial considerations at a later stage, resulting in a tenuous link between policy and resources. Also, cuts are top-sliced rather than structured, with little focus on long-term savings. In many countries, budgeting is input-based and involves allocating monies to different types of spending on an annual basis. This process ends in a rush at the end of the fiscal year, with little thought as to how the current year’s activities relate to programmes stretching over several years. Additionally, public services are delivered to a greater or lesser extent in a political environment, and, all too often, politicians seek to align policy cycles with political cycles. This process does little to encourage sustainability and financial planning for public services, nor effective planning nor evaluation. Despite this, initiatives have proliferated to reform budgetary processes to develop closer links between budgets, programmes and performance. This thinking was developed for production-based environments in the private sector, and has been adapted for social and service-based programmes in the public sector.Many budgetary reform initiatives can be traced back to the US. In the 1950s, the Rand Corporation experimented with Programme

Dr Aidan Rose is a freelance consultant specialising in public service management and education. His particular interests are the reform of public services in the UK and eastern Europe. Most recently he helped make the EC’s Social Fund outcome-orientated.

Moving the focus to outcomes involves a shift of thinking, which needs cultural change and new skills

Planning and Budgetary Systems (PPBS), which sought to allocate resources to policy programmes. This enabled resource inputs to be linked to programme objectives viewed over the lifetime of the programme. This approach was of interest to the federal government, where it was introduced in the Department of Defense.The concept of accountability has moved on from a search for financial rectitude and due process, to one that embraces performance and results. This conceptual shift is best understood with an example from foreign aid. Aid programmes have been criticised for failing because there has been too much emphasis on accountability to donors rather than to recipients. In recent years, several OECD countries, including the UK, US and New Zealand, as well as the wider international aid community, have made moves towards so-called results-based management, where the focus is on which results are achieved in terms of outputs and outcomes, in return for inputs. This required a number of questions to be addressed, such as:

* What do we mean by outputs and outcomes?

* How they relate to each other?

* How do we determine the relationship between inputs and outputs?

Outputs are things that organisations produce, while outcomes are seen as impacts on society. The former tend to be more immediate whereas the latter are often realised in the longer term. Moving the focus to outcomes involves a shift of thinking, which needs cultural change and new skills for policymakers, managers and finance specialists.Today, market mechanisms are used to purchase services from a range of internal and external suppliers. This raises the question of how to monitor and evaluate the performance of service providers and how to reward them. In the US, the 1998 Workforce Investment Act (WIA) seeks to increase occupational skills attainment by participants and to increase their employment, retention, and earnings capacity. The act is managed by the US federal Department of Labor and funds are given to the states where Workforce Development Councils, led by business interests, manage the funds and allocate them to regions in the state. The programme measures are implemented by employment and training agencies, which purchase services from external providers.In England and Wales, government seeks to use the private and third sectors to provide employment programmes through the Flexible New Deal, with 80% of its service provided through a ‘stable core of reliable providers’. The policy does not prescribe what activities providers undertake but, instead, rewards


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providers when jobseekers return to work. More recently, the Ministry of Justice proposes to apply a similar approach to its rehabilitation programmes for offenders, rewarding private and third-sector providers through a system of payment by results. The proposal seeks to give

providers the freedom to innovate in new forms of service delivery to achieve outcomes at the level of the individual offenders. They would then be rewarded by payment for results. Elsewhere, the European Commission (EC) is considering the reform of the European Social Fund to use external providers to provide employment services. This complex reform involves the EC working with member states, which, in turn, commission the services of external providers which deliver commissioned services and are rewarded for achieving results.

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All three examples raise important issues, from how to define outputs and outcomes to the relationship between them and resource implications. Outcomes are often defined as ‘impacts on society’ but can be defined at a number of levels. For example, a jobseeker might return to work after completing a training programme. This may involve defining what constitutes a return to work, for example, what constitutes appropriate work for a given client and for how long. Policies such as this are not delivered in a vacuum and there could be other factors at play.Factors in the wider environment: The state of the local labour market may affect the likelihood of a jobseeker finding employment. This may mean that potential providers of services will bid for more lucrative contracts in buoyant local labour markets rather than those with long-standing structural unemployment.Changes in the policy itself: Public policies are not static. They have life cycles and are subject to politics, policy change or changing funding regimes. This may make it hard to evaluate whether a particular intervention contributes to a long-term impact on society.

Changes in other policies: Policy change elsewhere may affect the policy in question. For example, in England the introduction of the Work Capability Assessment is leading to more people with health issues being deemed fit for work. The effect of this is that providers will need to allocate resources and work with target groups with greater barriers to employment than was previously the case.Defining outcomes: The policy-planning process involves making choices about setting of goals and ways to achieve them. Local agencies may be subject to mandates set at a higher level but new localist agendas may allow agencies to choose how to achieve them. Reliability of performance data: Rationalist techniques for decision-making require accurate and timely data and the resources to analyse the data. The US experience of the WIA showed problems of unreliable and sometimes manipulated data.Setting appropriate time horizons: A policy-programme outcome entails a longer-term effect, such as the promotion of educational and lifetime opportunities through the provision of free school meals. Problems of linking outputs to outcomes exist here. Managing contractors: Many of the problems in dealing with and managing contractors experienced in the WIA programmes are reflected in the experience of the UK Department for Work and Pensions. It found problems in using contractual mechanisms to determine the behaviour of contractors. Rewarding performance: The link between payment and results raises questions about what constitutes a result and how and when contractors are rewarded. Organisations can define contract specifications that reward outputs delivered, milestones reached or results achieved. Outputs, such as the number of school meals served, may be observable, but they do not constitute a result. Rewarding outcomes is based on a judgment that the intended impact on society has been achieved. Outcome-based budgeting and policymaking makes significant demands on the intellectual and skills base of policymakers, managers and financial professionals. It has the potential with a strong evidence base to make public service delivery more rational and more productive in the sense of achieving desired outcomes. However, one must never ignore the political factors with both large and small ‘p’s’ and the pressures for decisions that meet the demands of external priorities. Governments should refresh their thinking on outcome-based budgeting, learning the lessons from the past.

ACCOUNTANCY FUTURES: PUBLIC SECTOR E-HEALTH

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Off the pagers The introduction of wireless telephone technology by Nottingham’s NHS Trust in the UK has resulted in wide-ranging benefits for staff and patients

Improved public healthcare often relies on increased spending. But effective use of new technologies can achieve a triple win of lower costs, higher productivity

and better health outcomes.Nottingham University Hospitals (NUH) NHS Trust adopted a new system for clinical care management outside core daytime hours, using wireless telephony and messaging to provide information to doctors. This system provides a clear basis for prioritising requests by nurses for doctors to see patients. It replaces a system of pager requests, which doctors had to follow up with landline calls for more information.Efficiency gains from the new system were equivalent to an additional 8,000 hours of clinical support for patient care. The rate of return on investment is under four months and has led to a reduction in patient stays in hospital.Through more effective prioritisation of doctors’ time, patient safety has been significantly advanced. With more and more reliable information provided to doctors who were called to see patients outside core hours – ie overnight, at weekends and on public holidays – the quality of clinical care has improved, with better health outcomes. Potential weaknesses in the quality of information provided at handover between doctors at the end and beginning of shifts have been remedied.Staff satisfaction levels have also increased through higher-quality communication. The previous system required experienced nurses to be employed to coordinate the flow of information to doctors and to decide when pager messaging was appropriate. These roles were difficult to recruit to and frequently had vacancies – further undermining the efficiency of the old system. The new system has the support of staff and has eliminated the problem of staff recruitment to the coordinator roles. New tablet devices were willingly used by staff within half an hour of being deployed.

ADDITIONAL BENEFITSThere have been other important productivity gains from replacing pagers with mobile telephony. NUH consists of two large campuses,

one of which is spread over a large area and contains very long corridors of a quarter of a mile in length. The process of responding to pager messages by finding a landline and then visiting a patient for what may not be an urgent consultation was very inefficient. Doctors would often be dispatched to a ward to see one patient, where they were then asked to see other (non-urgent) patients as well, with the doctor and ward nursing staff unaware that another doctor would be on the way.The lack of staff confidence in the pager system, combined with a failure in many cases of doctors at the end of a shift to properly brief doctors coming onto shift, meant that it was common for two doctors to replicate visits to a patient. In addition, pagers could only store 10 messages, but there were often 15 calls handled at peak periods (such as after handovers). Some urgent messages could be lost, causing delays to patient care.Other weaknesses of the old system included risks of breaches of patient confidentiality; lack of control in the reporting of clinical incidents; inconsistencies in the reporting of patient details between scheme coordinators and ward staff; the deskilling of the coordination role; a negative impact on ward noise levels; lack of data for workforce planning; and gaps in the recording of training experience of junior doctors. A review of the old system concluded that it was not fit for purpose. The replacement system was introduced in February 2011 and quickly gained support from staff. It used a Cisco Cius tablet, Nervecentre software and communicated via the Cisco medical-grade network – an industry-standard communications network, that operated across both NUH sites. The network is used by NUH to support other ICT applications. The total cost of adopting the wireless solution for the project – called H@N, or Hospital at Night – was £118,000.

ACCA ASSESSMENTAn assessment of the project was carried out by ACCA. It used a special methodology that overcame traditional difficulties in evaluating the impacts of new technologies adopted in the health sector. These can be problematic to measure because of the diversity of

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ACCOUNTANCY FUTURES: PUBLIC SECTOR E-HEALTH

schemes and effects. The methodology – the Model for Assessment of Telemedicine, or MAST – is both qualitative and quantitative and was developed with the aid of European Commission funding. Mark Millar, an ACCA Council member and chief executive of the Milton Keynes NHS Foundation Trust, said: ‘The old system of H@N administration was complex and inefficient, raising questions of safety and having poor levels of staff satisfaction. The H@N coordinators are now able to spend around 60% of their shift providing direct clinical care on the wards, compared with 3% at best before. The investigation team showed that while H@N coordinators had previously spent under four hours per week on clinical work, using the new system they were able to spend over 75 hours per week on direct hands-on care.’Andrew Fearn, director of ICT services and senior information risk owner at NUH, said: ‘Working with Cisco and Nervecentre we have been able to introduce a system that removes unnecessary complexity and from which NUH will reap direct financial and operational

H@N coordinators are now able to spend around 60% of their shift providing direct clinical care on the wards, compared with 3% at best before

benefits, as well as being able to help patients get more timely care. These results show that collaborative processes, supported by networked communications and collaboration, can deliver significant improvements in performance in the areas of quality and productivity – aligning with the overall NHS Quality, Innovation, Productivity and Prevention (QIPP) Programme aims and objectives.’There are lessons from Nottingham’s experience that have wide applicability – not just in the use of wireless technologies to achieve efficiencies, but also more generally in the scope for using e-health approaches to improve outcomes.

Paul Gosling, journalist

01 ACCOUNTING FOR CARBONThe strong correlation between solid financial figures and good climate change disclosure and performance has been shown in a recent report from PwC, which analyses company responses to the Carbon Disclosure Project. Its latest annual Global 500 report examined the carbon reduction activities of the world’s largest listed companies. The report is available at www2.accaglobal.com/cdp

02 A GOOD CRISIS FOR IFRSThe financial crisis has improved perceptions of International Financial Reporting Standards among CFOs and investors alike, an ACCA study has found. The report, Towards Greater Convergence, is based on interviews with CFOs and investors and also looks at global auditing standards, corporate governance and non-financial reporting. www.accaglobal.com/researchandinsights

03 THE LESSONS OF E-LEARNINGCommissioned by ACCA to explore technology-enhanced learning and assessment in more depth, research consultancy Lighthouse Global was completing its report as we went to press. It will feature insights from employers and e-learning experts, identify the drivers behind the adoption of e-learning and assessment, and offer practical recommendations.

04 GLOBAL GROWTHACCA’s membership hit 147,000 at the end of its 2010/11 financial year, up from 140,000

the previous year, while its worldwide student base reached 424,000. It was rated the leading professional accountancy body in terms of reputation, influence and size, in an independent survey of 1,300 employers in 20 countries. ACCA chief executive Helen Brand (pictured below) was awarded an OBE in June, while leading health finance professional Dean Westcott FCCA (also pictured) has been elected the new president of ACCA.

05 UN SPOTS THE SYSTEMS GAPThe UN Conference on Trade and Development (UNCTAD) has developed a guidance tool to help developing countries to identify gaps in accounting and reporting systems and priority areas for capacity building and technical assistance. Based on global benchmarks and national practices, it covers financial and non-financial items. www.unctad.org

06 NATIONS DROWNING IN FINANCIAL FLOODSFinancial scrutiny exercised by parliaments is failing to keep pace with the scale of financial challenges faced by nations. This is the key finding of new research by ACCA, due to be published in late 2011, which identifies a need for greater awareness through skilled training and professional development.

07 MARKET-ENTRY ICEBERGSCFOs should be involved at all stages of the market-entry process, according to a study by Ernst & Young. EY’s What Lies Beneath? report reveals the risks of underestimating the costs and time involved in entering rapid growth markets. More at www2.accaglobal.com/wlb

08 DRIVING SUCCESSOrganisational needs are evolving faster than ever, and accountants accordingly need to adapt to best serve their employers, and maintain relevance and public trust, says the International Federation of Accountants. Read more at www2.accaglobal.com/ds

09 THE SPIRIT OF ENTREPRENEURSHIPACCA has teamed up with Forbes Insights to examine the entrepreneurial attitudes of European executives and what makes some businesses better at delivering innovation, including the role of accountants, auditors and the finance department. The report was imminent as Accountancy Futures went to press.

Looking aheadA round-up of recent and upcoming research and events

ACCOUNTANCY FUTURES: PREVIEW

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ACCOUNTANCY FUTURESCRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 04 I 2011

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DIGITAL EXPOSUREHOW TECHNOLOGY IS CHANGING THE WORKFORCE

PLUS: SHELL CFO ON STRATEGY I TOP 10 RISKS I OUTSOURCING AND SKILLS I E-HEALTH I KPMG CHINA CHIEF I THE NEW DIVERSITY I HANS HOOGERVORST AND SIR DAVID TWEEDIE I THE IMPORTANCE OF FUTUREGAZING I MICROFINANCE IN AFRICA I INTEGRATED REPORTING

Accountancy Futures – Issue 04 – October 2011

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