ABmythe magazine for business and finance professionals accounting and business malaysia 04/2012

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CPDget verifiable cpd units by reading technical articles

stAy in the looP

the power of networks

on trACk? integrated reporting

Technical ias 17 leasesOpiniOn diversity matters

cpD low-cost options

CleAr givingwhy charities reform is needed

vision AnD PAssion margaret chin fcca on success

Olympus what went wrong?islamic Finance global ambitionspracTice healthy scepticism

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AB Asia Ads_Apr12.indd 4 06/03/2012 16:13 AB Asia Ads_Apr12.indd 2 02/03/2012 17:49AP_covers_Apr12.indd 1 09/03/2012 17:01

ISLAMIC FINANCEKPMG’s Anita Menon on the fascination with Islamic finance that is fuelling the growth of the sector outside of mature markets such as Malaysia. Page 24

STAY SCEPTICALAuditors should exercise professional scepticism and judgment when evaluating an entity’s ability to continue as a going concern. Page 42

ACCA CAREERSCheck out thousands of jobs and expert careers advice at www.accacareers.com

VIRTUAL BRIEFING CENTRE

Attend live and on-demand audio and video webinars in the virtual theatre, chat with fellow delegates in the networking centre, and access the digital library.www2.accaglobal.com/ab_vbc

Tricor Roots Consulting founder Margaret Chin FCCA had her hopes of enrolling at university dashed, yet she went on to thrive as a fi nance professional. In this issue, we talk to the revered businesswoman and accountant about her career. See page 12

GOVERNANCE OF GIVINGIt is said that having a charitable spirit is good for the heart. Malaysians, in general, are supportive of genuine charitable causes and generous in helping those in dire need. Many companies also support charities as part of their corporate social responsibility (CSR) programmes.

Many millions of ringgit are donated to charities each year, but the key question asked by many donors is whether the funds are fully used to help the needy. Media reports of financial scandals involving charities, relating to lack of transparency and poor governance, have added to increased scrutiny by stakeholders and donors.

Although Malaysia has not seen such major scandals among charities in recent years, the public receives little information about the finances of charities. And that is a cause for concern. A recent survey found a lack of consistency in the preparation of accounts and financial statements among charities. The Universiti Teknologi MARA research paper revealed that only 59% of charities surveyed had their financial reports audited by external auditors.

While the majority of charitable organisations in the country are well managed, prudent and transparent in their operations and finances, a substantial number still need to buck up in these areas. To maintain public trust and support, charities need to promote good governance, transparency and accountability. Read our cover story on page 16 for a detailed discussion on charities in Malaysia.

It is interesting to note that in neighbouring Singapore, one of the more recent initiatives has been the release of the Charities Accounting Standard (CAS), issued by the Accounting Standards Council in July 2011. The CAS is a significant simplification of the Financial Reporting Standards, tailored specifically to the needs of the charity sector. The primary objective is to improve public confidence in the sector while easing the reporting burden on charities – two admirable aims that would not go amiss elsewhere in Asia.

Lee Min Keong, abeditor@accaglobal.com

3Editor’s choice

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Audit period July 2009 to June 2010138,255

Features12 Passion and purposeMargaret Chin FCCA overcame early adversity to found Tricor Roots Consulting

16 Changing charitiesIncreased transparency and governance are vital

20 Blowing the whistle After Olympus, Japan needs to rethink its corporate governance model

24 Growth market The Islamic fi nance sector is burgeoning, says KPMG’s Anita Menon

28 Report card The annual report could do better, an ACCA study fi nds

30 In praise of convergenceIFRS is good news for investment analysts, says EquitiesTracker.com’s Jimmy Vong

34 Diverse opinionsWhat does increased diversity mean for the fi nance function?

VOLUME 15 ISSUE 4

Asia editor Colette Steckelcolette.steckel@accaglobal.com +44 (0)20 7059 5896

Editor-in-chief Chris Quickchris.quick@accaglobal.com +44 (0)20 7059 5966

International editor Lesley Boltonlesley.bolton@accaglobal.com +44 (0)20 7059 5965

Malaysia editor Lee Min Keong abeditor@accaglobal.com

Chief sub-editor Eva Peaty

Sub-editors Peter Kernan, Vivienne Riddoch

Design manager Jackie Dollar

Designers Robert Mills, Jane C Reid

Production manager Anthony Kay

Advertising James Fraserjfraser@educate-direct.com +44 (0)20 7902 1210

Head of publishing Adam Williams

Printing Times Printers

Pictures Corbis

ACCAPresident Dean Westcott FCCADeputy president Barry Cooper FCCAVice president Martin Turner FCCAChief executive Helen Brand OBE

ACCA Connectmembers@accaglobal.com +44 (0)141 582 2000

Accounting and Business is published 10 times per year. All views expressed within the title 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 2012 Accounting and Business. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA.

Accounting and Business is published by Certifi ed Accountant (Publications) Ltd, a subsidiary of the Association of Chartered Certifi ed Accountants.

29 Lincoln’s Inn FieldsLondon, WC2A 3EE, UK+44 (0) 20 7059 5000

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AB MALAYSIA EDITIONCONTENTSAPRIL 2012

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ACCA NEWS61 Devanesan Evanson Organisations must let accountants fl ex their risk management muscles, says ACCA Malaysia’s president

62 Cost-effective CPD There are many ways to access quality CPD on a budget

63 Dean Westcott Diversity should be embedded into everything we do, says the ACCA president

64 News Proton and BDO become Approved Employers; members briefed on UK university’s MBA programme

many ways to access quality CPD on many ways to access quality CPD on

TECHNICAL46 Update The latest from the standard-setters

48 CPD: Understanding leases We take a look at the features of IAS 17

51 Joined-up thinking Malaysia’s journey towards integrated reporting

54 Covering all eventualities How the IASB’s Practice Statement on Management Commentary and IFRS 7 affect the reporting of risk

57 Accounting solutions Introducing our new Q&A column from a team of problem solvers at PwC

BRIEFING06 News in pictures A different view of recent headlines

08 News in graphicsWe show a story as well as tell it using innovative graphs

10 News round-upA digest of all the latest news and developments

VIEWPOINT33 Errol Oh Maintaining professional scepticism is a must

40 Cesar Bacani Auditors need to be transparent in expressing their concerns

37 CORPORATE37 The view from Susana Jardim of Woodside, plus news in brief

38 Land of opportunity Ambitious fi nance professionals should consider moving into the outsourcing sector

41 PRACTICE41 The view from Wilson Cheng of Ernst & Young, plus news in brief

42 Extinction evaluation Auditors’ professional scepticism is vital when assessing an entity’s ability to stay afl oat

Regulars

CPDAccounting and Business is a rich source of CPD. If you read it to keep yourself up to date, it will contribute to your non-verifi able CPD. If you read an article, learn something new and apply that learning in some way, it will contribute to your verifi able CPD. Each month, we also publish an article or two with related questions to answer. If they are relevant to your development needs, they can also contribute to your verifi able CPD. One hour of learning equates to one unit of CPD. For more, go to www.accaglobal.com/members/cpd

Your sector

WorldwideThere are six different versions of Accounting and Business: China, Ireland, International, Malaysia, Singapore and UK. See them all at www.accaglobal.com/ab

CAREERS58 Get connected Building a network beyond the accountancy profession will pay huge dividends

60 Young and ambitious Yang Jidong, Department of Public Offering Supervision, CSRC

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01 Japan is set for another

killer earthquake, warn scientists. Tectonic activity in Greater Tokyo has tripled since last year’s quake, which triggered a tsunami

02 New York Knicks basketball player

Jeremy Lin (centre) filed to trademark the catchphrase ‘Linsanity’, used to characterise his rapid rise to fame in Asia

03North Korea agreed to halt

nuclear missile testing at its Yongbyon nuclear complex in exchange for 240,000 tonnes of food aid from the US

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04 Premier Wen Jiabao (third

from left) cut China’s economic growth target to 7.5% as he opened the last National People’s Congress under the current leadership. Wen also pledged to create nine million new jobs in towns and cities

05 Private jet operators in

Hong Kong are boosting their fleets with more planes to keep up with demand from wealthy Chinese, who are keeping luxury aircraft in the city to avoid red tape and taxes

06 Philippine’s president Gloria

Arroyo pleaded not guilty to electoral fraud on 23 February 2012. She was escorted to the Manila court from a military hospital where she has been receiving treatment for a spinal condition

07 A UN team arrived in

Australia to investigate whether future coal exports and oil and gas exploration will damage the Great Barrier Reef

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JAPANJAPANJAPANJAPANJAPANJAPANJAPANJAPAN

MALAYSIA’S BILLIONAIRE CLUBFlamboyant AirAsia CEO Tony Fernandes FCCA was ranked 15th among the 40 richest Malaysians, with a wealth of RM1.77bn, according to Malaysian Business magazine. In first place was Robert Kuok Hock Nien (Kerry Group/Kuok Group) at RM45.7bn, followed by T Ananda Krishnan (Usaha Tegas) at RM42.9bn and Public Bank’s Tan Sri Teh Hong Piow at RM12.6bn.

OPTIMISM BEGINS AT HOMECFOs in Asia, with the exception of those in Japan, are much more positive about their regional economy than the world economy. On average, they rated the state of their region’s economy as 6.4 out of 10, but gave the global economy a substantially lower 4.7, according to the 2012 CFO Outlook Asia report released by Bank of America Merrill Lynch.

HIGH-RISE RENTSSingapore remains the third most expensive city in Asia for renting residential property, and ninth most costly in the world, despite only modest increases in rents last year, according to the latest accommodation data from the ECA International survey.

4.7 World economy

6.4Local economy

48%Proportion of Hong Kong residents who speak Mandarin.

3OMPredicted number of men in China unable to find wives by 2017.

1MNumber of workers needed in Guangdong as labour shortages hamper production.

25Number of wardrobes in master bedroom of Hong Kong CEO Donald Tsang’s retirement home.

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HAPPY DAYS The world is a happier place today than it was four years ago and Indonesians, Indians and Mexicans appear to be the most contented people, while Brazil and Turkey rounded out the top five happiest nations, according to Ipsos Global. Hungary, South Korea, Russia, Spain and Italy had the fewest number of happy people.

THE WORLD’S MOST GLOBAL…Hong Kong tops Ernst & Young’s Globalisation Index 2011, which measures the world’s 60 largest economies according to their degree of globalisation relative to their GDP. The index’s five criteria are openness to trade, capital movements, exchange of technology and ideas, labour movements, and cultural integration. It does not measure a country’s impact on the global economy or trade. The index covers the period 1995 to 2014, and is released in cooperation with the Economist Intelligence Unit.

LIFE BEYOND THE OFFICEBritain leads the way in Europe in how staff view work/life priorities, according to a survey from Robert Half recruitment consultancy. Pay and work/life balance were cited as primary reasons why UK staff look for new jobs. It also shows that staff in Switzerland are less concerned about this balance, with just 4% seeing work/life balance as a priority.

51%INDONESIA

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…AND THIS YEAR’S CROSS-BORDER CHAMPIONS ARE1 HONG KONG

2 IRELAND

3 SINGAPORE

4 BELGIUM

5 SWEDEN

6 DENMARK

7 NETHERLANDS

8 SWITZERLAND

9 FINLAND

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12 TAIWAN

13 UK

23 US

24 AUSTRALIA

7%SOUTH KOREA

CHILE 32%UK 29%DUBAI 28%AUSTRALIA 23%

FRANCE 21%

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AUDIT RULES TIGHTENEDThe Chinese Ministry of Finance and security watchdogs have introduced new regulations for firms auditing listed companies, according to local media reports. The new rules require auditing firms to have at least 80 million yuan (US$13m) annual revenue – up from 16 million yuan – and a minimum of 200 certified accountants to serve publicly traded companies. This is seen as an effort to protect investor interests and improve audit quality for listed firms following the accounting fraud scandals in 2010 and 2011, in which many Chinese firms trading in Canada and the US had their shares suspended. Auditors must meet the new regulations by the end of 2013.

BIG FOUR ON NEW ROADThe Big Four are facing a major reorganisation of their China practices as they are being forced to abandon their foreign joint venture arrangements. Deloitte, PwC, KPMG and Ernst & Young are negotiating with Beijing to lessen the impact of the forced changes, which could mean only accountants with Chinese qualifications can be partners in their audit practices. The foreign joint venture arrangements signed in China 20 years ago by KPMG,

Deloitte and Ernst & Young are due to expire this year, and China’s Ministry of Finance is using the expiry milestone to force the firms to form special group partnerships, which in theory would mean all partners would need to hold the notoriously tough Chinese accountancy qualifications. PwC’s joint venture expires in 2017, but it is also involved in restructuring discussions.

MORE REFORM FOR MYANMARMyanmar’s president has vowed that his government will continue the sweeping reforms it has instituted over the last year. Thein Sein, who heads a nominally civilian government, says that much remains to be done and his administration will have to work hard to convince sceptics at home and abroad that it is committed to democratic reform. He has orchestrated a wave of reforms, including freeing political prisoners, signing ceasefires with armed rebel groups, easing restrictions on the press and opening a dialogue with opposition leader Aung San Suu Kyi.

INDIAN ECONOMY SLUMPSIndia’s economic growth slowed to 6.1% in the three months to December, the weakest annual pace in almost three years, as high interest rates and

rising raw material costs constrained investment and manufacturing. The dismal numbers showed the weakness in the economy was spreading beyond industry to the services sectors, and are certain to intensify pressure to stimulate the flagging economy. The figures make the official forecast for 6.9% growth in the financial year ending in March look optimistic.

SOUTH KOREA TO CURB LENDING South Korea has announced that it will curb lending by non-banking companies, including insurers, expanding its fight to contain household debt before a debt crisis cripples Asia’s fourth largest economy. The country’s average household debt amounts to about 1.6 times annual disposable income – higher than the ratio seen in the US before the 2008 financial crisis and near the top among the middle- to high-income economies. The heavy household debt, a combined legacy of the past property investment boom and falling private savings, has affected the whole range of economic policies in South Korea.

BANK STAYS FIRM ON LOANS Bank Negara Malaysia has made assurances that issues arising from the implementation of the Guidelines on Responsible Financing, which came into effect on 1 January, would be smoothed out. However, the spirit of the guidelines, which promotes prudent, responsible and transparent retail financing practices as well as ensuring that the household sector and credit market stays resilient, would remain. In a statement after a meeting with members of the automotive industry, the central bank said that access to financing would not be hampered as it would still be available to borrowers who could afford to repay their loans.

PREVENTING RISK A PRIORITYChina’s banking industry regulator said that preventing systematic financial risks has become a top priority as the global financial crisis enters a more complicated phase. The country will work to defuse local government debt

GST APPROVAL SOUGHT The Malaysian government will only implement the goods and services tax (GST) after it has received agreement from the business community, including the country’s small and medium-sized enterprises. Until then, there is no specific date for its implementation, said deputy finance minister Datuk Donald Lim Siang Chai. ‘A roundtable conference will be held with the various chambers of commerce in the middle of this year to get feedback on the matter,’ he said. ‘If the majority of them agree, we will table the bill on the introduction of the GST for second reading in parliament.’ The GST bill was tabled for first reading in December 2009.

10 News round-up

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risks and contain loan risks in the real estate sector, Shang Fulin, head of the China Banking Regulatory Commission, said in a statement. The nation’s auditing agency issued a report last June, stating that local government debt totalled about 10.7 trillion yuan as of the end of 2010, of which 17.17% will be due in 2012.

GOLD TAX TO BE SCRAPPEDSingapore is seeking to lure bullion refiners by scrapping taxes on gold, a move that could also attract trading houses to open storage facilities and transform the country into a key Asian pricing hub, industry sources told Reuters. Singapore will exempt investment-grade gold and other precious metals from a 7% goods and services tax to spur the development of gold trading, finance minister Tharman Shanmugaratnam said. The change takes effect in October and may lift demand for gold bars and coins in the fourth quarter and into 2012.

EX-PETRONAS CHIEF MOVESEx-Petronas CEO Tan Sri Hassan Marican is set to become chairman of Singapore Power in June, succeeding Ng Kee Choe who will retire in June, according to news portal EnergyAsia. Marican, 58, who left Malaysia’s national oil company in 2010, allegedly due to friction with the administration of prime minister Najib Razak, has been accepting directorships with several foreign firms in the energy sector, including Singapore government-linked companies Sembcorp Industries, Sembcorp Marine and Singapore Power, which he joined in February. He is also a director at Sarawak Energy and US oil and gas giant ConocoPhillips.

SHAKE-UP FOR OTC DERIVATIVESSingapore’s central bank is proposing to force many over-the-counter (OTC) derivative trades to be centrally cleared, a move aimed at trying to reduce the level of risk posed by one of the most opaque areas of finance. The reforms are in line with the pledges made by the

group of 20 leading economies in the wake of the collapse of Lehman Brothers. Their goal is to make it easier to supervise derivative trading and reduce the risk that one failed financial institution could pose to the wider finance system.

AMBRIN REAPPOINTED Tan Sri Ambrin Buang has been reappointed auditor-general for a year

with effect from 23 February.Ambrin was first appointed to the post for a two-year term in 2006; he was subsequently reappointed for two more two-year terms.

AEROSPACE INDUSTRY TAKES OFFAsia-Pacific nations will take delivery of 9,370 passenger jets over the next 20 years, valued at S$1.61 trillion, helping to power the aerospace industry’s growth, planemaker Airbus forecast. Sales chief John Leahy said that the rapid urbanisation of Asia’s population and sharp growth in emerging economies, compared with industrialised nations, would soon make Asia the busiest market for air travel, displacing the US. He was

speaking at the Singapore Airshow where Lion Air signed a record order for jets from Airbus’s biggest rival Boeing.

GOOGLE THINKS LOCALGoogle aims to capture a bigger slice of the mobile applications market in Asia, and its priority in Singapore and South-East Asia is in building more localised use for its Android platform. To date, the search engine giant says

that more than 11 billion applications have been downloaded from its Android marketplace. To cater for the needs of local users, it plans to develop applications that address different cultures and languages.

NEW BUSINESS BOOSTS VALUEAsian insurance company AIA Group beat estimates to report its highest-ever value from new policies in fiscal 2011, thanks to robust premium-income growth in its major markets of Hong Kong, Singapore, Malaysia and China. AIA’s new business value, a key measure of profitability for life insurance companies, surged 40% to US$932m in the 12 months to 30 November, up from US$667m a year earlier.

RMB NOT READY TO GO GLOBALThe timing is not right to internationalise the ringgit, said Bank Negara Malaysia (BNM) governor Dr Zeti Akhtar Aziz. She said that the ringgit will only be internationalised when external conditions stabilise and suitable domestic pre-conditions are in place.‘One never does these major policies during unstable times,’ Zeti told BFM Radio. ‘The unstable times, precipitated mainly by the sovereign debt crisis in Europe, are causing tremendous volatility in financial markets throughout the world. It would not be timely.’ She said the central bank wanted to first ensure that the local foreign exchange market is more developed with an increase in volume of activity as well as having a bigger range of products and services.

11AnalysisGOING, GOING, GONEThe profession is being warned to be increasingly vigilant when assessing a business’s ability to continue as a going concern, amid the volatile economic conditions which threaten to move in from the eurozone.

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BLUEPRINT FOR LIFEA sense of purpose has helped Tricor Roots Consulting founder and risk management specialist Margaret Chin FCCA fulfi l her potential, despite early dreams being dashed

12 Interview

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Margaret Chin FCCA makes for an engaging and interesting interviewee. She speaks passionately about

the things she believes in, sharing little nuggets of information about her personal and professional life, often using anecdotes to get her message across. For the founding managing director of Tricor Roots Consulting, if something is worth doing then it’s worth doing well.

‘I don’t give interviews often and when I do I make sure I do them well, because at the end of the day it’s all about sharing the passion for what you do.’ For Chin, success boils down to having both vision and passion. ‘Vision’, she explains, ‘is the ability to see things that are not there while passion is what drives you. So you have to believe in what you’re doing.’

Chin has an impressive list of achievements. As managing director of Tricor Roots Consulting’s governance, risk and compliance group, she is very much at the forefront of assisting organisations strengthen their risk management and performance management. She also grew the Institute of Internal Auditors Malaysia from 150 members to 500 within two years during her tenure as president from 1986–87. Chin was also recently appointed vice-president of the Malaysian Institute of Corporate Governance, from which she offers advocacy consulting services with regulators and industry players.

Through these achievements, Chin feels she’s garnered a reputation as a ‘hard-nosed businesswoman who is all

lead your life’. ‘Without one,’ she says, ‘you run the risk of having life pass you by.’

Penang-born Chin admits that she didn’t set out to study accountancy. ‘My father was a retailer in groceries. He died when I was a year old. Life was hard as the sole breadwinner wasn’t there anymore.

‘We moved to Kuala Lumpur when I was in high school. Assunta Convent and St John’s Institution were wonderful shapers of character and fostered the hunger for learning,’ she recalls.

Though she attained excellent results for the Malaysian Higher School Certificate exam, Chin had to forego university when her mother suffered a major stroke on the eve of her enrolment. ‘I had to give up the dream of university life and started work at ICI at the age of 19 as an accounts clerk. It was a period of disappointment and disillusionment.’

ACCA to the rescueHowever, her despondency lifted when she discovered ACCA. She describes ACCA as being her ‘professional life saviour’. ‘I was thrilled that I could study and qualify for an international accountancy qualification while I was working. I worked long hours during the day (there were no computers and we had to use Facit manual calculators) and attended classes at night.

‘I had two babies during that period, and qualified within two-and-a-half years, a record in those days. I found the ACCA course very interesting and learnt a lot, and it added value to my

The CVMargaret Chin FCCA has more than 23 years’ experience in governance, risk and compliance. She served as group internal audit manager (ASEAN) for ICI, chief manager for group audit at a major regional bank in Australia, global head of branch banking audit at Standard Chartered Bank (SCB), and deputy head of internal audit for South-East Asia at SCB.

Chin is also adviser to the Institute of Internal Auditors Malaysia, a member of the Sunway Medical Centre Independent Research Ethics Committee and vice-president of the Malaysian Institute of Corporate Governance. She received the Entrepreneur of the Year Award from the Malaysia Australia Business Council and Innovative Woman Entrepreneur of the Year in telecommunications and IT from the National Association of Women Entrepreneurs of Malaysia, both in 2004. She is also a member of ACCA Malaysia Advisory

business’. However, she wants to set the record straight. ‘I believe that it’s possible to achieve success through a more balanced approach,’ says the mother of three and grandmother of three. ‘To be successful, it does not mean that you have to be sneaky, corrupt or tell lies. It’s about integrity and believing in what you do and always walking the straight and narrow.’

She also stresses the importance of having a ‘blueprint on how you want to

‘THE TITANIC WAS THE MOST ADVANCED OCEANLINER OF ITS TIME, YET IT SANK. RISK MANAGEMENT ISN’T ABOUT FORMULAS BUT COMMON SENSE’

The tips‘Not only do young accountants have a long learning curve, they must understand the values that build their character. Integrity is essential to success.’

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job. I had double promotions within three years and was promoted to the highest non-executive rank as chief accounts supervisor,’ adds Chin, who is now a member of the ACCA Malaysia Advisory Committee.

It was during this time that Chin received invaluable advice from her boss, (now Datuk) Ismail Hashim. ‘He told me, “I recognise your talent but you need to think like the senior professional that you want to be”. He would spend lunch hours coaching me, and shared with me his own experience of having been mentored,’ Chin remembers.

‘Ismail said, “I teach you from my heart and all I ask is for you to do the same. Do it because that person is a human being, and do it irrespective of race and gender”.’ To this day, that advice still resonates with Chin, and through the years she’s nurtured young talent.

When Chin returned to Malaysia as deputy head of internal audit for South-East Asia at Standard Chartered Bank (SCB), she invented the corporate risk scorecard. ‘This is the key risk dashboard where we profiled the gross and net risks of the bank,’ she explains. ‘These are displayed in two charts. The gross risk scorecard shows the top risks which have the highest potential to impact adversely on the organisation should the controls be inadquate or fail.

‘The net risk scorecard shows the residual risks after evaluating the adequacy and efficacy of the controls. These two charts give the board and management a simple and impactful oversight of where the organisation’s vulnerabilities are, so preventive and mitigation efforts can be focused.

‘The corporate risk scorecard has proven to be extremely effective for organisations in their sustainability efforts. The requirement for risk focus is the essence of ISO 31000,’ she adds.

Out on her ownIn 1999, Chin set up Roots Consulting with her son Kenneth, a chartered accountant. After a decade of what she describes as ‘exciting and extremely hard work’, the startup joined the Hong Kong-based Tricor Group and the company was renamed Tricor Roots Consulting. A member of The Bank of East Asia, Tricor is a global provider of integrated business, corporate and investor services, and operates in 17 countries in Asia Pacific.

Among the tools used by Chin and her team is the company’s own enterprise performance scorecard called Q-Radar. Clients include DRB-Hicom, Petronas, CIMB Bank, SIRIM and Great Eastern Life Assurance.

She has also provided training to directors of public listed companies through Bursa Malaysia’s Mandatory Accreditation Programme. One of the key messages of the sessions is for directors to understand that sustainability is about ‘survival and the ability to thrive’.

‘Changing mindsets and convincing people of the need to behave and think differently is one of the biggest challenges. In my training sessions I often use the example of the Titanic. It was the most advanced ocean liner of its time, yet it sank within four hours of hitting an iceberg, killing 1,500 people.

‘Risk management isn’t about formulas or matrices but common sense. It’s about understanding your own ego and involving the team to think about what can go wrong and to never be complacent,’ she says.

Fitness franchiseDespite her many commitments, Chin entered a new business venture last year with her daughter Alison, also a chartered accountant. Together with an Australian partner, they represent the master franchise for women-only gym

The basicsTricor Roots Consulting provides consultancy ranging from board governance to internal auditing.

It offers total integrated consulting, training and IT business solutions, with more than 350 clients throughout Asia Pacific.

A comprehensive range of performance management, and governance, risk and compliance solutions assist organisations in optimising the enterprise governance process and achieving increased assurance and improved performance.

Curves in Malaysia and Singapore.‘I became interested in the health

and fitness business because it is also risk management. The most important thing is health, if you don’t take care of your health nothing else matters,’ she adds.

So what’s next for this indefatigable woman? On the professional front, Chin will be taking a more directorial and mentoring role at Tricor. More importantly she aims to balance her time to lead a meaningful life – setting aside time for business, society, family and self.

‘I would like to continuously live, love, learn and leave a legacy,’ says Chin, quoting the subtitle of American leadership guru Stephen Covey’s book: First Things First: To Live. To Love. To Learn. To Leave a Legacy.

Sreerema Banoo, journalist

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Amran Mahzan

Liew Tong Ngan

Cheong Thoong Farn

Mok Yuen Lok

Transparency, responsibility, accountability and fairness are recognised as the key principles of good governance,

especially for the charity sector. Scandals make headline news, with some organisations never recovering from the backlash.

Because a good reputation lost is often lost forever, many charities and not-for-profit organisations that depend on donations and public goodwill work hard to protect their reputation and integrity to ensure public trust.

‘Since our funds come from the people, it is only right for us to make sure that the people know where their money is being channelled to, and for what purpose,’ says Amran Mahzan, honorary treasurer of Mercy Malaysia.

The relief organisation also abides by international principles and standards such as the Code of Conduct for International Red Cross and Red Crescent Movement and NGOs in Disaster Relief, and the Principles of Humanitarian Accountability Partnership – both of which require high standards of accountability.

Other charities, such as World Vision Malaysia and the National Kidney Foundation Malaysia (NKF), concur. ‘We see ourselves as responsible stewards of our donors’ and supporters’ hard-earned money, and it is our duty to keep them informed on how their donations are put to use. Preparation of annual financial statements is key in

keeping our supporters informed and updated on how their contributions are being put to use,’ says Liew Tong Ngan, CEO of World Vision Malaysia.

‘By being transparent and setting the standards, non-profit organisations can do their bit in creating awareness among Malaysians that it is not only important to give but, in giving, it is

equally important to track how gifts are used,’ he says.

In its case, as a company limited by guarantee, World Vision Malaysia’s audited financial statements are submitted to the Companies Commission of Malaysia and made available for inspection each year.

‘Donors and sponsors can refer to our website for the latest annual review or, if they choose, can make an appointment with our finance director for a more detailed review,’ says Liew.

‘As part of a global partnership, internal audits are carried out to assess and address risks. Then every three years, peer reviews [where offices are checked by other offices] are conducted to make sure that we live out our aspiration to be accountable and transparent,’ he adds.

Chua Hong Wee, CEO of the NKF agrees, saying that it is crucial for a charity to be prudent, transparent and accountable for its finances. Chua, who previously held a senior management position in a financial institution, likens the reputation of a charity to that of a bank. ‘It’s a very delicate matter…banks can collapse due to a poor or bad reputation and a charity is the same,’ he says.

Mixed pictureWhile these three charities are clearly an example to others, gaps exist in the sector as a whole. A recent survey found a lack of consistency

ACCOUNTABLE PHILANTHROPYMany charities take transparency seriously, but the quality of fi nancial reporting in the sector could be improved with a specifi c reporting framework, say commentators

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in the preparation of accounts and financial statements. The authors of Financial Reporting Practices of Charity Organisations: A Malaysian Evidence, found that while all the charities surveyed submitted their balance sheets to the Registry of Societies (ROS), only 60% presented a cashflow statement and just 59% had their financial reports externally audited. The findings of the Universiti Teknologi MARA paper were based on the annual reports of 32 charities from 2003 and 2004.

Although charitable organisations are required by law to submit a set of annual reports to the ROS within a stipulated period, Datuk Alwi Ibrahim, deputy secretary general of the Ministry of Home affairs, recently revealed that only 38,000 out of the 107,000 organisations nationwide submitted annual reports, putting the remainder at risk of deregistration.

Most charities in Malaysia are established under the Societies Act 1966. They are required within 60 days after their annual general meeting, or if no annual general meeting is held, within 60 days after the end of each calendar year, to forward to the ROS the accounts of the last financial year, together with a balance sheet showing the financial position at the close of the last financial year.

While charitable organisations are required to prepare their financial reports according to the requirements of the Societies Act, Cheong Thoong Farn, audit partner at Deloitte Malaysia, points out that the act does not explicitly require what accounting standards are to be adopted.

What’s more, public practitioners familiar with the preparation of financial statements for charities say general accounting standards do not take into account the context and circumstances relevant to the charity sector.

Mok Yuen Lok, regional executive director for Asia Pacific at Crowe Horwath, explains that under the Income Tax Act 1967, charitable organisations must spend at least 70% of their income for charitable purposes as a condition of tax exemption. In the event the charity establishes a special fund, for instance a building fund for the acquisition or construction of a new building, Financial Reporting Standard (FRS) 101, Presentation of Financial Statements, insists that the funds raised for this special purpose be recognised in the income statement.

‘However, the corresponding “spend” [on the cost of construction of the building] is not recognised in the income statement as an expense, but is instead recognised in the balance sheet as an asset,’ he explains, adding

that given that the charity has to spend at least 70% of its income to preserve its tax-exempt status, the charity will have failed to meet this requirement. The charity may then be subject to a withdrawal of its tax-exempt status although it has done nothing wrong.

Therefore, a charity that embarks on fundraising for a specific purpose is caught between a rock and a hard place. Should it adhere to the accounting guideline and risk its tax-exempt status? Or opt out of the guideline that may then raise the question of its transparency? Given these issues, those familiar with the financial reporting of charities say that accounting standards specific to the charitable sector should be introduced.

Charities commissionMok, who served as a council member of Hospis Malaysia, also believes that a charity commission should be established to register and regulate the sector. He sees merit in a regulatory body which oversees all charities, irrespective of how they’ve been incorporated (by company limited by guarantee or a society).

‘Such a body should also be responsible for stipulating the accounting standards applicable for charities,’ he adds.

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Regulatory authorities for the charity and not-for-profit sector already exist in countries such as the UK, New Zealand, Australia and Singapore. News reports also suggest that Hong Kong is exploring a regulatory regime for charities to build public trust and promote good governance and management practice.

But James Chan, partner at Crowe Horwath, concedes that the setting up of such a body in Malaysia may take time and encounter resistance, given that a number of charities in Malaysia are faith-based and are governed by specific religious rulings.

Too many frameworksWhile both Chan and Mok see value in the introduction of accounting standards specific to the charity sector, not all public practitioners are in favour of such a move.

‘We already have three frameworks (Malaysian Financial Reporting Standards, Private Entities Reporting Standards and FRS) and it may not be a perfect idea to have another set for a specific industry,’ says Lock Peng Kuan, partner at Baker Tilly Monteiro Heng.

‘The cost of training and resource management would be an additional task to manage as a firm, which will only be beneficial if the sector can be a significant part of new business,’ he explains.

He is however in favour of the establishment of best practice guidelines for charities, for example covering how funds should be utilised and the treatment of funds not used. The role of the accountancy profession also cannot be understated, he adds.

‘While as auditors it’s not our role to differentiate the nature of expenses, we can emphasise greater analysis of those expenses and put more focus on the controls.’

Crowe Horwath’s Chan adds that segmental reporting and disclosures, in particular disclosures of liquidity risks, should also be encouraged.

Mok also believes that the profession can encourage best practice by playing a more active role in charities.

‘At Crowe Horwath for example, we encourage our partners to sit on the boards of charitable organisations to ensure there is emphasis on accountability,’ he adds.

Andrew Heng, executive partner of Baker Tilly Monteiro Heng, who is also president of Kiwanis Taman Desa, says charitable organisations with accountants as members usually insist on a financial reporting system and the preparation of a full set of accounts.

Room for improvementPublic practitioners agree that one of the limitations of charitable organisations is the lack of manpower and their dependence on volunteers. These limitations result in the preparers of financial statements not being familiar with international accounting standards.

Dr Yap Kim Len, technical director of Deloitte Malaysia, believes that the Malaysian Institute of Accountants (MIA) has an important role to play in heightening the awareness of the latest developments in financial

reporting requirements. ‘MIA should establish communication

with all the charities on financial reporting-related matters and provide seminar training to the employees of the charities,’ she suggests.

Mok believes that charities should also implement key performance indicators to strengthen their accountability. Charities should show the percentage of income spent on charitable purposes, he suggests. This is also one of the ways watchdog groups rate and review charities.

He also says that it’s high time stakeholders in this sector, in particular donors, insisted on charities being professionally run and managed.

‘The donating public needs to respect charities that are well run. For example, a healthy balance sheet is not something to be ashamed of because charities should keep cash for a rainy day, but [potential] donors when they see that a charity has cash, they feel less inclined to give,’ he adds.

Sreerema Banoo, journalist

Charities acknowledge that the economic climate has an impact on fundraising activities. ‘However, we can never underestimate human compassion. The drive to give to charity has always come from the heart and I believe that is why we still see a lot of people donating even when times are difficult,’ says Amran Mahzan, honorary treasurer of Mercy Malaysia.

At World Vision Malaysia, CEO Liew Tong Ngan says the current economic climate means that ‘we have to dig deeper, work smarter and leaner so that we can live out our promise to the children and communities we seek to help and to our donors and sponsors who trust us to carry out what we said we would’.

For the National Kidney Foundation (NKF), fundraising during a downturn is especially important, as it provides care to patients with kidney failure and those with various kidney-related diseases.

Once just a dialysis treatment provider, over the years the NKF has become a one-stop national resource centre for all kidney-related matters.

‘Compared to other charitable organisations, the responsibility to kidney patients is lifelong,’ says CEO Chua Hong Wee, adding that the foundation, which has some 1,400 patients at 24 dialysis centres nationwide, needs RM10m a year to keep going.

*GIVING IN A DOWNTURN

our promise to the children and communities we seek our promise to the children and communities we seek our promise to the children and communities we seek our promise to the children and communities we seek our promise to the children and communities we seek our promise to the children and communities we seek our promise to the children and communities we seek our promise to the children and communities we seek our promise to the children and communities we seek our promise to the children and communities we seek our promise to the children and communities we seek to help and to our donors and sponsors who trust us to to help and to our donors and sponsors who trust us to to help and to our donors and sponsors who trust us to carry out what we said we would’. carry out what we said we would’. carry out what we said we would’.

during a downturn is especially important, as it provides during a downturn is especially important, as it provides care to patients with kidney failure and those with care to patients with kidney failure and those with care to patients with kidney failure and those with care to patients with kidney failure and those with care to patients with kidney failure and those with care to patients with kidney failure and those with various kidney-related diseases. various kidney-related diseases. various kidney-related diseases. various kidney-related diseases.

the NKF has become a one-stop national resource centre the NKF has become a one-stop national resource centre the NKF has become a one-stop national resource centre the NKF has become a one-stop national resource centre the NKF has become a one-stop national resource centre for all kidney-related matters.for all kidney-related matters.

responsibility to kidney patients is lifelong,’ says CEO responsibility to kidney patients is lifelong,’ says CEO responsibility to kidney patients is lifelong,’ says CEO responsibility to kidney patients is lifelong,’ says CEO responsibility to kidney patients is lifelong,’ says CEO responsibility to kidney patients is lifelong,’ says CEO Chua Hong Wee, adding that the foundation, which has Chua Hong Wee, adding that the foundation, which has From top: James

Chan, Lock Peng Kuan and Dr Yap Kim Len

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AB Asia Ads_Apr12.indd 2 02/03/2012 17:49

Across the board, revelations that Olympus Corporation had hidden losses from bad investments came as

a surprise. However, the biggest surprise was not that one of the most famous and well-respected Japanese electronics companies had concealed its actions from auditors, shareholders and regulators, but that financial jiggery-pokery had been going on for at least 13 years and that it involved US$1.7bn.

That Olympus got away with such a huge fraud for so long has raised new red flags over corporate governance in Japan, with prime minister Yoshihiko Noda weighing in on the debate, telling the Financial Times in an interview in late October that he feared the outcry over the scandal could lead to the

assumption that such problems are rife throughout Japanese companies.

‘What worries me is that it will be a problem if people take the events at this one Japanese company and generalise from that to say Japan is a country that [does not follow] the rules of capitalism,’ he said. ‘Japanese society is not that kind of society.’

The problems at Olympus were first detailed in a story in the investigative journal Facta, issued on 20 July last year. The five-page story claimed that the company had used over-priced acquisitions and exorbitant consultancy fees to recover losses that it had made in investments in the years of Japan’s ‘bubble economy’ of the 1980s, but then went bad.

The convoluted scheme included a number of questionable payments,

for the acquisition of three Japanese companies that were essentially worthless, and then US$687m to a little-known financial advisory company in the Cayman Islands when it purchased Gyrus ACMI, a British manufacturer of medical instruments, for US$2bn in 2008. Possibly because of the scale of alleged fraud, rumours have suggested the behind-the-scenes involvement of ‘anti-social forces’, a polite way of saying underworld gangs (yakuza), although this is something which the company denied at a meeting with its creditors in November.

Michael Woodford, the English chief executive who had worked for the company for 30 years and had only been made president on 1 April 2011, said he was ‘incredulous’ when he read the story, but that sense of disbelief deepened when he went into his office on the Monday and no one mentioned it.

Summoning a board meeting for the following day, he sensed an immediate change around the table when he got the magazine out and asked what was going on. The response from former president Tsuyoshi Kikukawa was that Woodford had not been told about the matter because he was ‘so busy’.

Over the coming days, the board attempted to persuade Woodford to drop the matter. He responded by commissioning an external report by PwC into the fees paid to the company’s advisers that revealed ‘a shameful catalogue of errors’, he said. Presenting it to the board, he requested the resignation of Kikukawa and Hisashi Mori, the executive vice president.

LIMITED EXPOSUREThe refusal by the former president of Olympus to cover up the company’s wrongdoing is to be applauded. But what now for corporate governance and whistleblowing in Japan?

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Olympus president Shuichi Takayama bows in apology at the start of a news conference in Tokyo on 7 December 2011

At the board meeting on 14 October, convened ostensibly to discuss ‘concerns over governance’, Kikukawa announced that the agenda had been altered and the only thing to discuss was the termination of Woodford’s contract.

Woodford was not allowed to address the board, was ordered to hand over his mobile phones and computers and

told to vacate his apartment over the weekend. To add insult to injury, he was told he could not use a company car to get to the airport so he would have to take the bus.

Out in the openInstead of going quietly, however, Woodford went public. The story appeared on the front page of the Financial Times on 15 October and, for the board of Olympus, the genie had escaped from the bottle.

Kikukawa resigned 11 days later but the new president, Shuichi Takayama, attempted to defend the board’s actions by blaming Woodford for leaking secret information that damaged the company’s share price.

Nevertheless, the company admitted on 8 November that its accounting practices had been ‘inappropriate’ and that funds had been used to cover its investment losses.

Investigations have been launched by the UK’s Serious Fraud Office, The FBI in the US and in Japan, both the Financial Services Agency and the Tokyo Metropolitan Police.

Olympus’s stock market valuation, valued at 673 billion yen on 13 October, had fallen to 422 billion yen by the close of trading three days later and shareholders in Japan and overseas are reportedly initiating investigations that will lead to legal action against the company.

For its part, Olympus set up an initial investigation panel, made up of five independent lawyers and a Japanese certified public accountant. It issued The Third Party Committee’s Investigation Report, which ran to 259 pages and identified where the losses had occurred and the efforts to conceal them, concluding that the case was a ‘complete failure of corporate governance’ and that the entire event

‘has been very unfortunate for the credibility of corporate Japan’.

The report also examined the responsibility of the auditors, and cleared KPMG Azsa LLC and Ernst & Young ShinNihon LLC of culpability for the fiasco, although it has concluded that five current and former corporate statutory auditors are culpable.

Future implicationsWhile the investigations continue and the legal cases are prepared, the key questions are, what will become of the company and what are the implications for corporate governance in Japan?

For Olympus, the prognosis appears reasonably good.

‘Their losses have now been realised and sorted out, meaning that the black hole in their accounts has been dealt with,’ says a Tokyo-based lawyer. ‘So now the question becomes whether the company can maintain the confidence of the people that deal with it, and in Japan that means the banks.

‘They have to be concerned about their banks as their debts are very high and, if they lose the confidence of Sumitomo Mitsui Banking Corporation then they are in trouble,’ he says. ‘But I don’t think that has happened and I don’t think it will.’

And as far as consumers are concerned, Olympus makes good products and there would only be an

‘NOW THE QUESTION IS WHETHER THE COMPANYCAN MAINTAIN THE CONFIDENCE OF THE PEOPLETHAT DEAL WITH IT; IN JAPAN THAT’S THE BANKS’

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Unless after-sales service is affected, consumers are still likely to buy Olympus products

‘NO ONE IN JAPAN WANTS TO GO INTO A COMPANYAND BE THE BAD GUY BECAUSE THAT’S A VERY UN-JAPANESE THING TO DO, TO UPSET THE GROUP’

impact on retail sales if there was a fear that the company was going under and after-sales service would be affected. At present, that is an unlikely scenario.

So with Olympus likely to survive, perhaps with a capital injection and a potential team-up with another firm, the focus will inevitably turn to how Japan can prevent another failure of corporate governance on such a massive scale.

‘There were two main causes of the scandal,’ says Nicholas Benes, representative director of The Board Director Training Institute of Japan, a not-for-profit public interest organisation certified by the Japanese government.

‘Firstly, the lack of at least three truly independent directors, and a more effective audit committee structure manned solely by them. To say the same thing in reverse, the “statutory auditor” system has some strong points, but overall it is obsolete. The presence of statutory auditors allows Japanese directors to think they do not have to worry much about the financial statements.

‘And secondly, Japan is one of the few countries in the world that has absolutely no rules or accepted practices about director training, either

requiring it or requiring disclosure of company policy about it,’ he adds.

Japanese companies promote experienced managers and engineers to their board, but without effective training these people do not really understand their role and are not fully aware of the huge personal liability they are taking on if they are not appropriately inquisitive and sceptical about the actions of the board, Benes explains.

‘They essentially view being a director as just another promotion, that the president and chairman are still their bosses, and it is better to not say much if they want to be promoted,’ he says.

‘Japanese corporate governance has been far too trusting of Japanese managers in an increasingly complex and risky world,’ Benes adds. ‘On

average, individual managers in Japan can be trusted at a high level and, unlike some other countries, they are far less led by monetary motives.

‘However, as long as companies and

their auditors do not realise that the combination of long-term employment with hierarchical management bureaucracies can easily create dangerous “group-think” patterns, and countervail this with effective external training programmes, new legal rules and structures will continue to have limited positive impact,’ he says.

Government interventionMeanwhile, Naomi Fink, Japan equity strategist for Jefferies (Japan), says that a proposal by the Ministry of Justice to revise the Companies Act to require large companies to have at least one outside director ‘is not enough’.

‘If made legally mandatory, appointing outside directors would be of symbolic importance, but practically of limited impact,’ she adds. ‘Without a stricter definition of independence,

application of the amended law might be watered down.’

And such a change would not have had an impact in the Olympus case anyway, she points out, as the

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company had no fewer than four outside directors.

Another option that is being considered, according to a source involved in the investigation, is rotation of auditing firms at companies.

Japan’s auditing regulators and the industry are ‘still gathering their wits’ about the most effective steps that might be taken to rebuild the trust of the public and investors, according to Benes, who would like to see ways for his organisation to work more closely with accountancy firms in Japan and

groups, such as the Association of Certified Fraud Examiners, to improve training and identify practices that can be improved.

‘In Japan, business is so much about connections,’ says a legal expert. ‘And no one in Japan is going to want to go into a company and be the bad guy because that’s a very un-Japanese thing to do, to upset the group.

‘Looking at Japanese financial statements, they’re immeasurably better compared to 20 years ago,’ he adds. ‘Big companies that list in the

US or Europe have moved to tighten stuff up. It’s the smaller, family run companies where I suspect change will take time to come through.

‘There is one school of thought that all this will be forgotten about in six months and people will continue in the same old way,’ he adds.

‘My take is that something will get done. It may not be immediately perfect, but it will be a step in the right direction.’

Julian Ryall, journalist

The Olympus story might never have seen the light of day had it not been for the actions of one of those rare creatures of the Japanese corporate world, the whistleblower.

The source of the information that served as the basis for two stories that appeared in the Facta journal, first published on 20 July, remains unknown. Yet Michael Woodford, the former chief executive of Olympus, has paid tribute to the man or woman who provided the damning details of the firm’s operations, describing the original whistleblower as ‘brave’.

‘That person is a hero’, he said in a press conference on 26 November.

New legislation designed to protect whistleblowers went into effect in April 2006, and the question today is whether the attention this case has attracted will encourage more employees of Japanese firms to reveal the wrongdoings of their management, or whether would-be whistleblowers sense it is better to keep quiet.

Corporate governance specialists have expressed concern that, while firms in Japan are paying lip service to the requirement that they enable whistleblowing and protect those who do reveal illegal activities, it seems their employees are not in as strong a position as they are in other jurisdictions.

Britain safeguards ‘protected disclosures’ through the Public Interest Disclosure Act 1998, while the US has the Dodd-Frank Wall Street Reform and Consumer Protection Act, but both have differences to the rules in Japan.

The US act, for example, makes it possible for a whistleblower to receive as much as 30% of the fines levied on a company over US$1m by Department of Justice, after it is found guilty of wrongdoing.

‘There are no incentives for whistleblowers in Japan, so the reason they come forward is because they want the right thing to happen, they are ethical and they don’t want

their company to be in the wrong,’ says Nicholas Benes, representative director of The Board Director Training Institute of Japan.

‘Japanese people have a great deal of loyalty to their organisation and hierarchy, but if a person fails to act out of a sense of loyalty and that leads to years of malfeasance, how is that helping the company?’ he asks. There is, he points out, no way of sugar-coating serious wrongdoing, whether that is a firm’s falsification of accounting records or links to organised crime groups or rigging bids.

Despite the lack of incentives, Stuart Witchell, senior managing director of FTI Consulting’s Global Risk and Investigations practice in Asia Pacific, says there has been a gradual increase in the number of whistleblowing cases in the last five years.

‘I would say that the strongest single reason for the gradual increase has been the ‘demonstration effect’ of other individuals taking cases against major companies over mistreatment after whistleblowing and winning their cases in court, although the compensatory amounts tend to be relatively paltry,’ he says.

Yet reports of whistleblowers being ostracised by colleagues will inevitably discourage others, he points out, while the ‘relatively narrow breadth of the current legislation’ – which only applies to private sector employees while business partners, suppliers and customers cannot act as whistleblowers – is another drawback.

But fear remains the single biggest obstacle. In a survey by the Consumer Affairs Agency in October 2010, the most common reason given by employees for not stepping forward was the fear of being on the receiving end of unfair treatment in the workplace.

Some 44% of the 3,000 workers replying to the survey said they would not think of reporting illegal actions within their companies.

*BLOWING THE WHISTLE: THE THEORY AND THE PRACTICE

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Undaunted by events like the global financial crisis and the Arab Spring, Islamic finance looks poised to maintain its

blistering growth this year. ‘The industry recorded double-digit

growth last year as of end-2011, and the average compounded annual growth rate (CAGR) of the top 500 Islamic banks maintained double-digit growth as well while conventional banks were struggling,’ says Anita

PILLAR OF STRENGTHWith the Islamic fi nance industry expected to continue to grow, KPMG’s Anita Menon sees the enforcement of standards and stringent banking reform as key challenges

Menon, executive director of KPMG Business Advisory.

According to a government report, Malaysia’s Islamic banking assets rose 15% to RM389.3bn (US$123bn) in the first seven months of 2011,

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strengthening the country’s position as the global hub for sharia-compliant financing. Analysts at Deutsche Bank predict that global Islamic banking assets could reach US$1.8 trillion by the end of 2016 – up 90% on the

US$939bn of assets in 2010. The fascination with Islamic finance

is expanding in step with its growth. ‘In different parts of the world, there is increasing interest,’ she says. Aside from Japan and South Korea, Menon

cites Nigeria, with the Central Bank of Nigeria introducing a framework for non-interest banking just last year. Turkey’s (Islamic) banks continue to thrive. Meanwhile, Australia is reviewing its tax laws to allow for a level playing

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‘In itself, the aspect of ensuring more transparency as far as contracts with customers are concerned would minimise some of the risks, particularly the excessive risks undertaken by the conventional banks,’ says Menon.

Impediments to progressDespite an impressive track record, future progress in Islamic finance won’t be entirely smooth. Issues remain, such as the standardisation and enforcement of standards and contracts across jurisdictions, and the more stringent capital and liquidity requirements to be imposed by the upcoming Basel III framework.

‘There were issues around defaults, as far as sukuk were concerned. Perhaps this goes back to the issue of standardisation of contracts, and what happens particularly when you’re talking about crossborder transactions and there are disputes. Which laws would prevail?’

In terms of accounting standards, will there be convergence for IFIs? Or does it look like IFIs might be subject to a different set of standards, such as those championed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)? ‘Standardisation is always a challenge, but in Malaysia, as in many other markets where Islamic finance is practised, the general approach is to use International Financial Reporting Standards (IFRS) or local generally accepted accounting principles, and see how best we can work with those standards. In Malaysia we’re using IFRS, so it’s not much of an issue.’

‘Predominantly, in the Gulf Cooperation Council (GCC) countries, and dare I say perhaps in Bahrain mainly, the AAOIFI has issued various

The tipsExposure is vital for young accountants keen on breaking into Islamic finance. ‘For those who don’t have the basics, it’s best to get attachments or internships with institutes that specialise in Islamic finance,’ Anita Menon advises.

Examples would be Big Four firms like KPMG. ‘The alternative would be to work in an Islamic bank or takaful (Islamic insurance) company.’

Aspiring Islamic finance professionals should also be self-starters who ‘are probably trying to read up as much as possible on their own’. It also helps to become professionally certified.

The basicsKPMG Malaysia provides audit, tax and advisory services. Established in 1928, the firm is the oldest KPMG firm in the Asia Pacific region with approximately 1,600 staff in 10 offices nationwide.

KPMG Malaysia has worked extensively with the Islamic finance industry, conducting audit assurance for key local and foreign Islamic banks. The firm has also advised on the establishment of pioneering Islamic financial institutions (IFIs), as well as business development and financial risk management strategies for local and international IFIs.

areas and Islamic finance is a key growth area for many of these banks.’

Islamic finance’s relative immunity from the meltdown of the banking sector in developed markets has also spurred interest in adopting the model, as stakeholders call for a return to sustainable and ethical banking.

‘Some feel that Islamic finance may have helped to avert some of the crisis because of the prohibition of riba (interest) and gharar (uncertainty).

‘ISLAMIC FINANCE IS QUITE INCLUSIVE. YOU DON’THAVE TO BE CAST IN THE TRADITIONAL MOULD TOBE A PROFESSIONAL IN THIS INDUSTRY’

field should Islamic financial products be introduced.

In the comparatively mature Islamic finance market of Malaysia, regulators are tightening governance and industry players are looking abroad to grow the Islamic finance pie. ‘We are recognised as a country that has the right framework and building blocks for the growth of Islamic finance.’

‘On top of this, Bank Negara Malaysia (BNM) has introduced the Shariah Governance Framework (SGF), aimed at improving governance standards in Islamic financial institutions (IFIs),’ says Menon.

Malaysian banks are also eyeing Indonesia’s retail banking market as the next frontier. ‘Everyone deems Indonesia as the sleeping giant and the next big market, just by virtue of the size of the population where 80% to 90% are Muslims,’ she adds. ‘Banks like Maybank and CIMB have indicated in their plans, for the next five years or so, that about 40% of their revenue will be generated from this region. Indonesia would be one of the sizeable

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sets of sharia and accounting standards. However, as the volume of transactions grows, I anticipate that the situation will be one where the International Accounting Standards Board tries to accommodate some of the specifics to Islamic finance within IFRS rather than [issuing a different set of standards].

‘I don’t necessarily see AAOIFI standards being globally accepted to a point where it becomes an issue in markets where they use IFRS. So in terms of accounting standards for IFIs, I would see convergence to international accounting standards.’

Meanwhile, Menon singles out liquidity reforms as a significant challenge for Islamic finance institutions. ‘This is a key issue under Basel III, which is recognised by the Islamic Financial Services Board and BNM, as well as in other markets. The new Basel regulations are fairly stringent as far as liquidity standards are concerned, and they’ve introduced two new ratios that banks need to look into as far as liquidity is concerned.’

These are the short-term liquidity coverage ratio (LCR) and the long-term net stable funding ratio (NSFR), which will take effect in 2015. To meet the LCR means a bank’s ratio of high-quality liquid assets to total net cash outflows over a 30-day period should be no lower than 100%.

‘The LCR addresses short-term liquidity and requires the IFI to have a buffer for up to 30 days. The requirements are for banks and IFIs to have high-quality liquid assets.

‘This is a problem because there are very few short-term assets and very few rated assets; the requirement is that they need to be either sovereign, sukuk – previously rated quite highly unless you’re holding Greek bonds and after Dubai – and AA+-rated papers. So how

many of those AA+ papers are there, especially in Islamic finance?’

In response, the industry set up the International Islamic Liquidity Management Corporation (IILM). ‘The IILM’s role would be to issue short-term papers which banks can then hold as liquid assets. If that is successful and there are enough papers, then BNM and other regulators may perhaps take the approach of implementing these [liquidity requirements].’

It will also be tough for Islamic banks to meet the NSFR, where the ratio of the available amount of stable funding to the required amount of stable funding should exceed 100%. IFIs typically lack longer-term instruments, exacerbated by the lack of short-term liquid instruments, and the fact that depositors can withdraw their profit-

sharing investment accounts (the equivalent to term deposits) at short notice. To counter this, many IFIs require sizeable cash buffers which can be an expensive exercise and holding massive amounts of cash can adversely affect returns on investment.

‘Additionally, the question remains as to what should be the direction for IFIs to ensure greater internationalisation and assimilation in markets that hitherto may have had cultural sensitivities that work against Islamic finance,’ says Menon.

Talent crunchTalent is another issue facing the Islamic finance sector. To optimise growth in Islamic finance services, the industry needs people with the right skillsets.

While a knowledge of fiqh muamalat (Islamic rules on transactions) is desirable, accountants need not be sharia scholars. ‘What is required is a basic understanding of sharia. Essentially, what are the main pillars of Islamic finance, what do Islamic finance contracts look like specifically, and what types of structures are permissible?’

Although it is challenging for non-Muslims to break into Islamic finance, it is not impossible. Through professional development and self-study, the necessary terms and expertise can be picked up.

Menon herself does not speak Arabic, although she understands the principles of Islamic finance and has worked extensively with clients in the GCC and Malaysia. ‘The beauty of Islamic finance is that it’s quite inclusive. You don’t have to be cast in the traditional mould to be a professional in this industry,’ she concludes.

Nazatul Izma Abdullah, journalist

The CVAnita Menon is a partner and executive director of KPMG Business Advisory, head of Financial Risk Management (FRM) services and also heads the strategic management team within FRM.

She is also a member of KPMG’s Global Islamic Banking and Investments Group, and leads KPMG Malaysia’s Islamic finance advisory practice.

She has worked extensively with clients locally and globally in the financial services sector and her areas of specialisation include business strategy, risk management, performance management and feasibility studies.

Menon holds an honours Bachelor’s degree in science from Universiti Putra Malaysia and an MBA from the University of Nottingham, UK.

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AP_F_IFIs.indd 27 09/03/2012 12:26

Some debates, it seems, go unresolved for years despite their importance. The future of corporate reporting is one.

It is now more than five years since the leaders of the biggest six accounting firms declared that the reporting system was ‘broken’. They called for quarterly static financial reports to be replaced by real-time reporting, bringing in a much wider range of performance measures. And they argued that more non-financial information, customised to the user and more easily accessible, would have to be issued by companies as part of a process of bringing corporate reporting into the digital era.

In many ways, of course, 2006 seems like a different world. Post-global financial crisis, the pressing issues for companies have moved on from the boom days, and debates on financial reporting may not be top of the immediate agenda for many.

But with more pressure than ever on corporate performance, ACCA recently took another fundamental look at whether the time and effort that still goes into company reports is justified. We surveyed 500 investors and other users in the UK, US and Canada to see whether their views on the usefulness of the annual report had changed since the global financial crisis broke.

More scrutinised than everGiven the resource they expend on the annual report, companies may find it reassuring that 50% of respondents still named the annual report as their primary, or indeed only, source of information about a company. Clearly, those who argue that the traditional annual report no longer has any value

are guilty, at least, of exaggeration. In fact, a majority (57%) of users said they now tended to read reports more carefully than before the crisis.

Nonetheless there were many criticisms of annual reports: 47% said they were too long; 40% too general to be useful; and 35% backward-looking. In addition, 35% said reports were too complex, with more than two-thirds of them blaming reporting standards, as well as legal requirements, for making

them so. This follows the pattern of previous research (in a 2009 ACCA report, Complexity in Financial Reporting, respondents clearly indicated they found International Financial Reporting Standards overly and unnecessarily complex) but suggests standard-setters still have much work to do.

Discouragingly, more respondents disagreed than agreed that information provided in annual reports was clear and concise. This is worrying given that the issue of clarity was rated highly in the survey. Is this just the poor state of reporting practice or is the format of the report itself causing the problems? Either way it is an indictment of the current state of reports, given that so many respondents still rely on them.

So what did the users want to see? The biggest single answer (71%) was enhanced reporting on risks, which may not be surprising but is definitive nonetheless. A clear statement of a company’s key risks and how it intended to mitigate them was the

most pressing issue. Regulators such as the UK’s Financial Reporting Council have put this at the top of their agenda – a wise move, our study would suggest. The FRC’s ‘cutting clutter’ initiative to reduce the amount of non-essential material in reports would also appear timely.

Despite standard-setters asserting that investors are the primary audience for the annual report – a view that ACCA would strongly endorse – there was still a belief that the variety of audiences using the report had led to a lack of focus by companies. And, more worryingly, just as many respondents disagreed as agreed that standards themselves encouraged companies to provide a correctly balanced view of their performance – ie to include bad news as well as good. Almost half the respondents believed too much promotional material had crept into annual reports, undermining the concept of neutrality that must underpin any meaningful report.

But more is needed to make the annual report truly fi t for purpose, says ACCA’s Ian Welch

STILL ESSENTIAL READING

50% OF RESPONDENTS STILL NAMED THE ANNUAL REPORT AS THEIR PRIMARY, OR INDEED ONLY, SOURCE OF INFORMATION ABOUT A COMPANY

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AP_F_annualreport.indd 28 06/03/2012 12:32

*INFORMATION SOURCESThere were some interesting findings in terms of ‘emerging issues’. Notably, while the value of social and environmental data had declined in immediate importance for many investors, the advent of integrated reporting appeared to bring genuine hope of reversing this trend. Including such information in an integrated report (IR) would add value, most said. This finding will encourage the International Integrated Reporting Committee (IIRC) as it tries to deliver an IR framework by the end of 2013.

A move closer to more timely information was also favoured by most, indicating that the 2006 aspirations of real-time reporting are still valid even if not enough has happened over the past five years to take them forward. The report was used by many respondents in conjunction with other sources such as quarterly reports, brokers’ reports and press releases. ACCA believes the profession needs to address how such information – especially given the emergence of social and mobile media platforms offering immediate data – can be assured. This might be key to the future of corporate reporting.

But in the meantime, what conclusions should we draw? First, investors should be repositioned as the primary audience for the report and be better engaged in its evolution. Second, more emphasis on risk and forward-looking information is needed. And third, a determined effort to prune and simplify annual reports would help all stakeholders.

ACCA’s study Reassessing the Value of Corporate Reporting is available at www.accaglobal.com/researchandinsights

Ian Welch is ACCA’s head of policy

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29

AP_F_annualreport.indd 29 06/03/2012 12:33

While International Financial Reporting Standards (IFRS) convergence and

compliance might have been frustrating for many stakeholders, due to the complexity of accounting standards and a lack of the requisite level of accounting proficiency among readers of financial reports, it has been embraced by value investment analysts such as Jimmy Vong, founder and managing director of regional independent equities research portal EquitiesTracker.com.

‘I like the complexity and sophistication that has been introduced in accounting reports. As a prolific user of financial statements, we read more than 1,000 reports a year from Malaysia, about 800 from Singapore and another thousand more from Australia,’ explains Vong, whose company operates in three markets – Malaysia, Singapore and Australia.

‘IFRS is a good thing in terms of standardisation in definitions and financial presentations and compliance with generally accepted accounting principles. It is a globalising move. When you pick up a set of accounts in both country X and country Y that have adopted and implemented these standards, there can be a higher degree of certainty that the interpretation is based on the same assumptions used to prepare the underlying figures.

‘This removes a considerable amount of work from the old formats, where we had to try to determine what each country’s reporting meant and redo the numbers for comparative analysis,’ he adds.

Accounting valuationsWhile he ardently supports convergence, Vong believes that the accountancy profession can do much more to improve financial reporting and thus facilitate investors’ decision-making. He singles out the issue of accounting valuations, ‘which have remained at the heart of financial analysis for a long time’.

‘Concepts such as cash accounting versus accrual accounting have been debated for a long time but are yet to achieve practical accounting application,’ he says.

Should financial reports be restricted to reporting on a historical value basis versus reporting on current values or even future value projections? Might auditors go a step further by providing assurance on current and future values? Traditionally, investment analysts are the ones generating future value projections which are extrapolated based on historical data, Vong says.

‘Whether it is within the purview of the accounting profession to rise and expand its scope of coverage is something that the profession itself must address, or face the criticism of

losing substantial ongoing relevance. Or should it be left to the investment analysis profession to come up with the formats and the numbers?’ queries Vong.

Of course, it could also be argued that reporting on current and future valuations might breach confidentiality agreements between the profession and its clients, and that regulatory guidance and further legislation might be needed if financial reporting is to expand its scope.

Nonetheless, Vong acknowledges that ‘despite all shortcomings in the product offerings of the accounting profession, there is no current substitute for the third-party validation and authentication that financial statements offer, and upon which investors must rely upon as an indispensable starting point. If you take this away, what will we analyse?’

Meanwhile, Vong would also like to see other key factors incorporated into the presentation of financial statements. These include inflation, deflation, monetary expansion, currency exchange effects and other quantifiable factors that ‘currently cannot be incorporated meaningfully into the financial statements, but will be needed in investment analysis’.

He adds that the ‘quality of data is really dependent on audit standards. As the end user we will never know the extent of compliance.’ However, analysts like Vong have learnt to

WELCOME COMPLEXITYEquitiesTracker.com’s Jimmy Vong explains why IFRS convergence is good news for investment analysts and ponders how the profession can aid investor decision-making

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AP_F_JimmyVong.indd 30 06/03/2012 13:13

recognise the red flags of dubious data, such as ‘the lack of accounting notes that enable us to decipher the mystery of the numbers. And as data providers, our major tool against embellishment and distortion of numbers is to use statistical tools to see if trends exist. If numbers are unreliable, they cannot be taken into account in the formation of trends.’

An accountant by training, Vong argues that the skillsets unique to accountants make them ideally suited to become investment analysts. Oddly enough, most accountants gravitate towards the traditional routes of assurance, audit and tax as well as industry, leaving many non-accounting professionals to take up the mantle of investing. ‘Many financial analysts from a non-accounting background think that they know accounting, and as a

result, are unable to catch incidents of creative accounting. IFRS is tough for most analysts, and is beyond a lot of analysts who are grounded in other disciplines. Accounting knowledge is a very important starting point for analysis,’ he says.

To succeed as a financial analyst, Vong stresses the importance of seven basic skillsets: accounting, statistics, mathematics, economics, behavioural sciences, law, and modern finance. In addition, analysts need a broad and in-depth understanding of technology and need to thoroughly understand the company and sector under investigation.

Given the synergies of accounting with investment analysis, accountants are perhaps the perfect candidates to explore career diversification as private equity professionals, says Vong.

Optimising returnsVong also touches on future investment trends, noting that informed analysis and knowledge will be vital to minimising risks and optimising returns in a global environment where markets remain volatile and visibility impaired.

In his view, higher volatility could see retail investors veering more towards investing on fundamentals, especially as they expand their knowledge of value investing. ‘Profitability and dividends will count heavily going forward. Where higher risks are to be assumed, investors will have to be compensated by profitable business growth and the payment of those profits back to investors.’

Delinquent corporate behaviour on a growing scale also means that investors are becoming increasingly aware of the need to allocate capital more prudently. Might retail investors be more leery of speculative investment after being burnt by the consequences of poor corporate behaviour? While market volatilities are likely to continue at historical rates,

‘IFRS IS BEYOND A LOT OF ANALYSTS WHO AREGROUNDED IN OTHER DISCIPLINES. ACCOUNTINGKNOWLEDGE IS AN IMPORTANT STARTING POINT’

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AP_F_JimmyVong.indd 31 06/03/2012 13:13

notes Vong, ‘Large investors cannot totally assume that retail market players will remain totally speculative driven by fear and greed and make mincemeat out of them.’

Another bugbear for investors chasing returns is unfettered money creation, such as the quantitative easing programmes being unleashed in the US to stimulate growth. ‘The pressure that is being exerted by huge and compounded money creation on a global scale, if not directed towards productive sectors, will be reflected by diminishing returns in the real sectors, thereby affecting stock markets.’

As a result of poor performance in developed markets, might investors divert more capital to smaller and emerging markets? ‘The direction of governmental monetary and fiscal policies for smaller and emerging markets will be important to determine if they will continue to support real growth and expansion and private sector profits rather than being redistributive in nature,’ says Vong, in an indirect dig at Malaysia’s fiscal policies aimed at achieving social re-engineering.

‘Thus, markets with less governmental emphasis on redistributive policies will become much more attractive to investors if the elements for wealth creation remain in place despite the higher risks.’

To succeed in today’s markets, Vong highlights the ‘critical need’ for investor education. ‘Money affects everyone and inflation is a factor that everyone will face in their lives. Building real wealth over the long term is key and for that, training, education and the application of knowledge are vital.’

Vong champions financial literacy education which should ideally be offered at school level, he says, and will go a long way to educating the public on how to read financial reports. In fact, EquitiesTracker.com has since made it part of its mission to offer investing courses for novice investors in an effort to reduce what Vong calls ‘innumeracy’.

Nazatul Izma Abdullah, journalist

Jimmy Vong’s love for stocks was ignited when he was just 11 years old. ‘My uncle had brought me to the Kuala Lumpur Stock Exchange (which

still featured the open-cry system) and I was amazed at how transactions could get done in all the hue and cry,’ reminisces the founder and managing director of EquitiesTracker.com.

With his knack for numbers, Vong was in the first batch of accounting students at the then University of Singapore, once accounting programmes had been transferred there from Singapore Polytechnic. Subsequently, he practised as a registered accountant, compiling data on stocks in his free time.

Technology in the shape of early computing systems in the 1980s proved to be a boon. ‘It was affordable to run numbers through the computer and analyse them,’ he explains.

Vong began digitising financial data in 1988, and eventually began to market his products to institutional investors and wholesale clients via the business platform of EquitiesTracker.com.

From its early beginnings as an equities research portal, EquitiesTracker.com has since branched out to providing services to retail investors as well as investor education programmes in English and Mandarin.

EquitiesTracker.com also offers investor education programmes carrying CPD points to ACCA members in Malaysia. Courses ran from mid-2010 to the end of 2011, and are due to start again in June.

Although Vong is now in semi-retirement, he still dreams big – to ultimately establish and differentiate Malaysia as an export hub for private equity investment professionals. ‘The challenge for us is to develop sufficient private equity professionals and turn the country into an export base from which investment consultancy services can be exported remotely on a global scale,’ Vong enthuses.

He adds that the rapid greying of Asia, the escalation of internet technologies, the hollowing of government pension schemes and the growing regional need for retirement planning mean that prospects look bright for this sunrise sector.

*PASSION FOR STOCKS

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Comment

In many ways, changing the law to provide for the establishment of the Audit Oversight Board (AOB) was the easy part. The Securities Commission Act 1993 was amended in 2010 to insert Part IIIA, which covers the board’s structure, functions and powers.

The AOB is a unit of the Securities Commission (SC) and the act specifies three functions relating to audit oversight: to promote and develop an effective and robust audit oversight framework in Malaysia; to promote confidence in the quality and reliability of audited financial statements; and to regulate auditors of public interest entities (PIEs). The act then goes on to list eight responsibilities of the board in assisting the SC in discharging these functions, including the registration, inspection and monitoring of PIEs.

These are the broad strokes; the challenge is to translate statutory provisions into action. In its first year, beginning April 2010, the AOB focused primarily on registration and inspection, to ensure that only fit and proper persons are permitted to audit PIEs. It’s now time to look at improving the performance of audit.

A key topic of discussion these days is professional scepticism. This stems from criticism that auditors had not been exercising sufficient professional scepticism and is seen not just in Malaysia.

For example, in January this year, the Hong Kong Institute

Taken with a pinch of salt[In order to be able to effectively challenge assumptions and judgments, auditors must stay acutely aware

of the importance of maintaining a healthy dose of professional scepticism, says Errol Oh

of Certified Public Accountants issued an alert to members on professional scepticism and audit of mainland China companies, noting that ‘it is important that auditors are able and prepared to challenge assumptions made and judgments reached in the preparation of a company’s financial statements’.

It’s also significant that on 29 February, the staff of the International Auditing and Assurance Standards Board (IAASB) came out with a question-and-answer

document on professional scepticism in an audit of financial statements.

‘The public expects high-quality audits. While what that means depends on one’s perspective, a defining feature is the exercise of professional judgment together with a “healthy dose” of professional scepticism by the auditor. A sceptical attitude enhances the auditor’s ability to identify and respond to conditions that may indicate possible misstatement due to error or fraud and critically assess audit evidence,’ IAASB technical director James Gunn said in a press release.

Closer to home, in a speech last October, AOB executive chairman Nik Mohd Hasyudeen Yusoff stressed ‘that application of professional scepticism

and maintenance of professional values are preconditions for high-quality audit’.

The difficulty here is that professional scepticism is an attitude or a mindset. The regulators can prescribe circumstances which call for professional scepticism, but it will always be hard

to determine the right amount that

should be exercised in a given situation.

Nevertheless, it’s a good start if auditors are acutely conscious of the need for professional scepticism,

and of the consequences if they fail to demonstrate that they have been sceptical enough. This can

only come about via constant engagement between regulators and auditors.

Errol Oh is executive editor of The Star

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AP_COM_EO.indd 33 07/03/2012 14:39

DIVERSITY IN ADVERSITY

In today’s unpredictable economic climate, diversity has become more than a recruitment requirement. Once represented

by a tick-box survey completed with every job application, diversity today is increasingly seen as critical to success in global business.

More than just a consideration of gender, ethnic background and sexual orientation, diversity now encompasses not only visible differences, but the things that make people unique: life and work experiences, views and beliefs. Diversity in this wider sense is about harnessing different perspectives and inputs, encouraging productive collaboration, innovation and creativity. Companies grappling with the challenges of a changing global economy are increasingly seeing it as something they need to embrace.

In a new ACCA report, Building a Better Business through Finance Diversity, 12 international diversity, HR and finance experts give their views on the importance of diversity in finance. And, they say, the bottom line is that the global business environment not only demands that diversity be taken into account, but also that success depends on it.

In a scary time for business, the finance function has a pivotal role in steering companies away from

turbulent waters. More than ever before, the onus is on CFOs to make sure the ship stays afloat. Companies are re-evaluating their investment strategies and many of the assumptions on which they once based their business – it’s an exercise where dexterity and diversity of thinking will pay dividends.

Companies need creative finance professionals who can devise new solutions to new problems. This changes

the way finance professionals are recruited, but also the job of the CFO. ‘The role of CFO is becoming more of a trusted adviser, providing insight into the business, driving a lot of the strategy and with a very important seat at the table,’ says Carlos Passi, assistant controller of business transformation at IBM. ‘And with that change, the skills required are also different.’

The logistics of extending business into a global market are forcing CFOs to adapt. Professor Mansour Javidan of Thunderbird School of Global Management explains: ‘Move the company into one extra market and the CFO has the same role to perform but now has to ensure there is capital market access beyond the domestic market. The CFO’s job now is not just to follow domestic rules and regulations but also rules and regulations in the second country.’

An impressive finance background is no longer enough for tomorrow’s

Businesses increasingly see harnessing diversity as a way of dealing with globalisation and economic challenges, but what does that mean for the fi nance function?

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AP_INT_F_diversity.indd 34 09/03/2012 12:21

ACCA DIVERSITY REPORT: FOR THE MAIN FINDINGS OF BUILDING A BETTER BUSINESS THROUGH FINANCE DIVERSITY, GO TOwww.accaglobal.com/en/ri

DIVERSITY IN ADVERSITYCFO. ‘When we look for finance leaders, we try to play down their functional strengths once they reach a certain level and get them more rounded in term of business experience,’ says Datin Badrunnisa Mohd Yasin Khan, group chief talent officer at Axiata. ‘Of course, we’re looking for people who have grown up with the finance discipline but that alone is not enough.’

The jugglerProfessor Javidan agrees – CFOs require a more varied CV than ever before. ‘As a company globalises and the CFO gets more globally exposed, hard technical skills are still necessary but no longer sufficient,’ he says. ‘You have to become an expert in balancing the contradictory forces coming at you – and particularly in positions like finance and accounting.’

Finance leaders must develop broad experience in developed and emerging markets and while CFOs are expected to adapt to disruptive innovations and new business models, their teams also need to keep pace. This is where diversity of thought and experience can be a vital tool for staying ahead of the competition. Recruiters should be looking to bring individuals with fresh ideas into the finance function.

Roberto Mello, CFO of GE Healthcare China, welcomes the challenge. ‘The opportunity to tap into talent from different cultures and backgrounds is a powerful tool because it gives us the chance to have different points of view,’ he says. ‘There is incredible opportunity and strength for the business to be found in the differences between people.’

Of course, harnessing these differences can be challenging. ‘If you

don’t understand the depth of the differences you may violate people’s strongly held views without realising it,’ warns Peter Reilly, director of HR research and consultancy at the UK’s Institute for Empowerment Studies.

Each new market has its own customs, culture, regulatory, environment and governance strategies to consider. These must be understood and incorporated into the existing corporate model. ‘Once you have respect for and an appreciation of differences, not necessarily thinking of one as better than the other, then you can really start working on getting the

best out of people,’ Mello adds. A potential pitfall of diversity,

warns Kathryn Komsa, chief diversity officer at Marsh & McLennan, is the patience and time required to consider numerous opinions during decision-making. ‘When people with diverse backgrounds, experiences, ways of interpreting things come together, it may take longer to get a solution,’ she says. ‘But you will inevitably get to a better solution.’

Komsa’s colleague, CFO Vanessa Wittman, says debate in decision-making may shake the traditional hierarchy of the finance team, but can

* External changes are demanding greater diversity in the finance function.

* Changing the roles and responsibilities of the finance function requires CFOs to think more broadly about the skills and background of their team.

* The demands on the finance function are growing as companies expand further overseas.

* In a global economy, the ability to understand differences in cultures and perspectives is a prerequisite for the finance function.

* Diversity of thinking encourages innovation.

* In order to derive benefits from diversity, business leaders must be comfortable with being challenged.

* There can be a tension between diversity and the need to develop standard processes across geographies.

* A broader perspective on recruitment can play a valuable role in creating a more diverse finance function.

* Finance executives should be encouraged to develop experience outside the finance function.

* Finance leaders must develop broad geographical experience in both developed and emerging markets.

*FINANCE DIVERSITY: WHY AND HOW

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deliver immeasurable benefits. ‘The understanding that debate leads to better answers aligns with the ultimate finance goal of challenging the business,’ she says. ‘Any CFO who is searching for views that only echo their own shouldn’t be a CFO.’

As many companies consolidate their finance teams into regional hubs or outsource processes to cut costs, diversity may seem a pipe dream. Globalisation swells the financial information companies need to manage, forcing them to shrink in-country finance teams and migrate commoditised activities to shared service centres. This boosts productivity and saves costs by standardising processes for routine transactions.

At the same time, companies must comply with local financial and governance regulations in the jurisdictions where they operate. This encourages a shift to a process-driven approach that assures compliance and improves accountability. ‘More than any other function, finance demands sticking to the rules and doing the same thing in a very standardised business model,’ says Reilly. ‘There’s an argument that the greater the standardisation applied, the harder it is to benefit from diversity.’

But not everyone agrees. Stevan Rolls, head of HR at Deloitte, believes that standardisation and diversity can work together. ‘Some activities in the finance function need to be robust and repeatable and so are good candidates for standardisation regardless of where you are,’ he says. ‘Others require local treatment or are more complex and so require on-the-ground expertise. Finance is a function in which there are places where you want innovation and places you don’t want innovation. The key is deciding which is which.’

Even if it overcomes these potential pitfalls, a company can end up with diversity without the benefits. Businesses can benefit only if the workforce is empowered to express its diversity – otherwise, companies end up with teams who look different, but think the same. ‘It’s diversity of thought that brings the real business advantage,’ Rolls explains.

So simply hiring a team of people from different backgrounds with varied experience is not enough. Employees need to feel free to express their creativity and difference in thought and opinion – and their seniors must allow themselves to be challenged. The shift from the consensus-driven management style to one that embraces differences is critical.

Harnessing the powerFinance leaders and HR professionals need to tap the potential of diversity, strive to foster diverse thinking across the organisation and encourage the open discussion of views and ideas. Companies need to be open to recruiting

‘Equal opportunity is important to ensure that talent gets the opportunity to fulfil its potential regardless of background. But you can still have a workforce with representatives from a wide range of backgrounds and not have diversity. It’s diversity of thought that brings the real business advantage.’ Stevan Rolls, head of human resources at Deloitte

‘When people with diverse backgrounds, experiences, ways of interpreting things and tools come together, it may take longer to get a solution, but you will inevitably get to a better solution.’ Kathryn Komsa, chief diversity officer at Marsh & McLennan

‘As a company globalises and the CFO gets more globally exposed, hard technical skills are still necessary but no longer sufficient. You have to become an expert in balancing the contradictory forces coming at you.’ Mansour Javidan, professor at Thunderbird School of Global Management

‘Once you have respect for and an appreciation of differences, not necessarily thinking of one as better than the other, then you can really start working on getting the best out of people and situations wherever you are based.’ Roberto Mello, CFO at GE Healthcare China

‘When we look for finance leaders, we try to play down their functional strengths once they reach a certain level and get them more rounded in term of business experience. Of course, we’re looking for people who have grown up with the finance discipline but that alone is not enough. We really want someone with a more developed business sense.’ Datin Badrunnisa Mohd Yasin Khan, group chief talent officer at Axiata

‘The understanding that debate leads to better answers aligns with the ultimate finance goal of challenging the business. Any CFO who is searching for views that only echo their own shouldn’t be a CFO.’Vanessa Wittman, CFO at Marsh & McLennan

staff from different sectors, regions or professional backgrounds.

Finance executives must be encouraged to develop greater experience through secondment or job rotation and leaders should resist the urge to retain good staff members in one position for too long.

‘It’s never easy, because if you have a great person in the team you don’t necessarily want them going off to do something else,’ says Rolls. ‘But in the long term, they’ll come back with different skills and a wider view on their role. Ultimately, you get a lot more out of them by letting them go.’

Kate Jenkinson, ACCA journalist

*EXPERT VIEW HIGHLIGHTS

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Q What are your top priorities when you start work each day?A I always print out my diary and get the more straightforward emails out of the way.

Q How do finance professionals in energy contribute to corporate performance?A My role focuses on production finance; supporting management and budget-holders so that they can make sound decisions, understanding and navigating round spending implications for their own areas of responsibility and the wider business. Most oil and gas projects demand rigid financial discipline, a robust, calculated approach to risk and timely information that anticipates business needs.

Q What challenges do Australian oil and gas companies face in the current economic climate?A Meeting substantial demand from new and growing Asian export markets is placing strain on the country’s exploration and production capacity. Sustainability issues add another dimension; energy companies have to continually produce highly valuable commodities while safeguarding the environment and communities.

Q How easy is it for you to maintain a work-life balance?A Managers here recognise that a happy, healthy workforce is productive and motivated. Taking a lunch break isn’t frowned on.

Q How do you unwind?A I’m a keen astronomer. Viewing the night sky instils a sense of perspective.

FAST FACTSLives: PerthEducated: Murdoch UniversityFormer roles: Trained as a capital business adviser with Alcoa World Alumina Minerals; management accountant with AngloAmerican

The view from: Australia: Susana Jardim ACCA, project accountant, Woodside, Perth

BYD PROFIT DRIVEN DOWN BYD Co, the Chinese car and battery-maker partly owned by Warren Buffett’s fund Berkshire Hathaway Inc, said it will report a 44% drop in annual profits – 1.4 billion yuan, down from 2.52 billion yuan in 2010 – as it continues to face intense competition in China. It said it posted a slight increase in operating income in its auto business as its sales and marketing officials cited an improvement in its second-half sales of new models. Despite the gloomy profit announcement on 29 February, its shares rose 2.4% to HK$25.50 that day. However, analysts say the company will continue to face difficult conditions at the lower end of China’s auto market after Beijing withdrew subsidies and consumers were drawn to cars made by alliances between global carmakers and their Chinese partners.

BANK’S PROFIT SOARS IN ASIAStandard Chartered grew its annual pre-tax profit by 11% to US$6.78bn in 2011, thanks to strong performance in Hong Kong and Singapore. The bank is also expecting double-digit profit growth in 2012. Making more than 75% of its profits from the Asian region, Standard Chartered withstood a rise in staff costs of 15% during the year and profit falls in India (where there had been a series of interest rate hikes) and South Korea (due to staff strikes). Its Hong Kong arm contributed pre-tax profit of US$1.55bn, up 41% from 2010, and Singapore’s pre-tax earnings rose by 40% to US$1bn.

37 Corporate The view from Susana Jardim of Woodside; how the outsourcing space can be a land of opportunity

41 Practice The view from Wilson Cheng of Ernst & Young; assessing an entity’s ability to continue as a going concern

37Corporate

AP_YCORP_Intro.indd 37 08/03/2012 16:34

THE OUTSOURCING INDUSTRY IS EATING INTO THE TALENT POOLS AVAILABLE TO A HOST OF OTHER ACTIVITIES AND INDUSTRIES

That the global business environment is in a state of transition, and that outsourcing is a major contributing factor to that transition, should not be a surprise to anyone. What may be less obvious is that outsourcing itself is undergoing enormous change.

A perfect storm is brewing for organisations and professionals in every corner of a sector which is swiftly expanding and changing, due to the confluence of accelerating trends. Those trends encompass the proliferation of new technologies, the evolution of disaggregated organisations and the emergence of new sourcing destinations. They also include the development of unexpected capabilities in verticals and processes, better understanding among practitioners, greater sophistication on the part of providers, the rapid rise of new and potentially disruptive pricing models, and a snowballing quantity of data and quality of analysis.

Blistering progressThe rate at which outsourcing’s complexity and sophistication is advancing is phenomenal, as is the pace with which outsourcing is breaking new ground in terms of functions. The drivers are numerous but at the fore stand increased technological capability and suppliers’ need for differentiation, competitive advantage and continued growth in an evermore crowded market. Having proved itself in the fields of IT and finance and accounting (F&A), a mature and sophisticated outsourcing model is now being applied to almost every aspect of business.

Key to this expansion is a growing understanding of what outsourcing is, and the benefits it can bring. Outsourcing has established itself as a viable model and been embraced by

some of the world’s largest and most successful companies. It now has a seat at the table at the great organisational feast, and those in charge of organisational strategy can consider implementing it in almost every corner of their fiefdoms, from customer service and legal, through facilities and fleet, to recruitment, procurement and marketing.

Whether or not they do so, of course, depends on a welter of factors including each organisation’s core business – its ‘what we do’ – but the

opportunity is undoubtedly there. It may be a case of horses for courses, but organisations considering the outsourcing route can at least be reassured that the horses in question are tried and tested – and in many cases thoroughbred champions.

Ensuring that the right jockeys are in the saddle is clearly crucial. The increasing complexity of the outsourcing model, the rapid change visible across the space, means that the role of the dedicated outsourcing professional has ever greater prominence. The basics of outsourcing may be simple, but the intricacies of, for example, carrying out a transformation, understanding the challenges involved, appreciating the relative strengths of the different solutions (and providers) available are unlikely to be grasped immediately by the layperson – or indeed by a seasoned professional with years of experience in their function of choice.

Outsourcing has grown into a multibillion-dollar industry in a

comparatively short space of time. An understanding has developed that it needs to be populated and driven as such by professionals dedicated to their tasks rather than dilettantes, however capable.

This requirement for specific knowledge and skills has given rise to the evolution of outsourcing provision as a genuine profession. The extremely valuable career opportunities now on offer in the sector have been one of the most noteworthy developments in the space over the last few years. There

has also been a proliferation of roles on the periphery of outsourcing, or dealing with specific aspects of it, which require significant expertise and may be considered to sit within the category of outsourcing professional. A further development has been the emergence of a vast cohort of sourcing advisory organisations – from one-person-bands to some of the world’s largest consultancies – providing guidance on all aspects of the outsourcing process.

Greedy for talentThese developments have contributed to one of outsourcing’s biggest impacts on the business world at large (and the finance community in particular, given that finance has been at the forefront of the outsourcing revolution): an intensification of the war for talent, as the various participants struggle to recruit key enabling professionals.

As a result of my relatively privileged perspective I interview figures from right across the outsourcing space.

Land of opportunityOutsourcing isn’t just about benefi ts for business. For career-driven professionals, the fast-developing sector can offer a big break, says Outsource magazine editor Jamie Liddell

38 Corporate

AP_INT_YCORP_outsource.indd 38 08/03/2012 14:54

Despite the ostensible and often very marked differences in their roles, what many of my interviewees – from group chief procurement officers to heads of shared services to IT directors – have in common, is that they consider the battle for talent one of their primary challenges now and going forward.

The compensation, incentives and career progression on offer within the industry are increasingly attractive, and the effort going into attracting the best people is becoming more intense. The outsourcing industry is eating into the talent pools available to a host of other activities and industries – and so ramping up the ongoing talent wars in those industries too.

Potential hires can see a dynamic, rapidly expanding space and the potential for rapid advancement which simply might not exist in more traditional areas of business. This is particularly the case for areas more recently coming into the outsourcing field of play, such as the legal industry, where long-standing career progression paths are being seriously disrupted (frequently to the great benefit of more proactive legal professionals) by the rise of legal process outsourcing.

And, of course, thanks to the maelstrom of disruptive forces

This is the first of a quarterly series of articles from Outsource magazine, a leading channel for strategy and thought leadership.

ACCA has formed a relationship with the publication with the aim of promoting its outsourcing, shared services and finance transformation research. Editorial content will be shared and marketing support provided.

‘I’m delighted to be able to bring ACCA’s insights and research findings to the Outsource audience,’ says editor Jamie Liddell.www.outsourcemagazine.co.ukwww.accaglobal.com/transformation

*OUTSOURCE MAGAZINE AND ACCA

services and finance transformation research. Editorial services and finance transformation research. Editorial services and finance transformation research. Editorial services and finance transformation research. Editorial services and finance transformation research. Editorial services and finance transformation research. Editorial services and finance transformation research. Editorial services and finance transformation research. Editorial services and finance transformation research. Editorial services and finance transformation research. Editorial

highlighted at the beginning of this article, once within the outsourcing space, the opportunities for rapid advancement (and entrepreneurial success outside the confines of organisations in the space) abound more than ever.

Personal advancementWhat this all means is that the evolution and proliferation of the outsourcing model isn’t just exciting for organisations – it’s a potentially thrilling development for individuals too. Professionals with the right skills and the appropriate mindset now have

a whole new arena in which they can ply their trade and flourish.

For finance professionals in particular, the huge array of F&A-focused outsourcing suppliers and advisers provide career opportunities aplenty, in fields which simply didn’t exist just a few years ago. It might require taking a step into the comparative unknown, especially when set against what can often be viewed as relatively conservative professions and organisations, but the outsourcing space can now genuinely be a land of opportunity for those professionals willing to take that step.

39

AP_INT_YCORP_outsource.indd 39 08/03/2012 14:55

Comment

In January, KPMG Hong Kong resigned as auditor of Hong Kong-listed China Forestry Holdings, a US company operating in China. Refreshingly, the Big Four firm sent a letter that detailed the circumstances behind its decision, which under stock exchange rules then required the company to make a disclosure to the bourse.

KPMG had issued a disclaimer of opinion on China Forestry’s 2010 financial statements after uncovering what it said were ‘irregularities with respect to the group’s accounting records and transactions’. The firm decided not to stand for reappointment and in its letter explained that this was because China Forestry had failed to extend the scope of the probe so as to discover everyone who was involved, trace what happened to the proceeds of the company’s US$200m initial public offering (IPO) in 2009, and reconcile the details of its recorded plantation assets. China Forestry has not publicly commented on KPMG’s assertion, and has hired Crowe Horwath (HK) CPA as its new auditor.

Regrettably, such candour has been rare in Asia. In 2009, KPMG’s Japanese member firm stepped down as auditor of camera-and-medical-equipment giant Olympus. Olympus said that KPMG had completed its term of service and noted that ‘the retiring auditor’ did not have ‘any opinion to express regarding this matter’, referring to Olympus’s move to replace it. Indeed, KPMG issued an ‘unqualified clean opinion’ on the company’s accounts.

It has now been revealed that

A call for candour[KPMG sent a letter to a client detailing why it was withdrawing from an audit engagement, but

it was less forthcoming on the Olympus case. Transparency should come fi rst, urges Cesar Bacani

KPMG had serious concerns. A panel of independent experts appointed by Olympus found that KPMG questioned the rationality of the company paying 73.4 billion yen (US$962m) for three tiny Japanese enterprises and US$687m as financial advisory fees to acquire British corporation Gyrus ACMI. However, it relented after Olympus presented a report

by an external panel that appeared to rule out any illegality. KPMG ‘carelessly relied on the outside experts’ report’, concluded the investigators, adding that the report ‘was far from something that can be trusted as an opinion of a neutral...third party’.

KPMG chairman Michael Andrew has stressed that it stands by KPMG Japan’s actions. Olympus had considered suing KPMG, but eventually decided against it after another independent panel it formed concluded that KPMG complied with

its legal obligations in carrying out the audit.

Two members of the same

auditing group, two different companies, two

diametrical effects on disclosure. Had

KPMG stood its ground and sent a letter detailing its concerns to

Olympus, it would have forced the company to report it to the Tokyo

Stock Exchange as a material event that could affect the stock price.

There are many reasons for keeping quiet about audit engagements, not least the confidential nature of the client-auditor relationship. No one is asking auditors to hold press conferences, but they can still be transparent by writing letters to the client setting out their concerns. If the company is listed, it will be forced under stock exchange rules to disclose the contents. If it is privately held, the letter can alert the board of directors and shareholders.

Times are changing, and it is now time for audit firms to do it the China Forestry way.

Cesar Bacani is editor-in-chief of CFO Innovation Asia

40

AP_COM_Cesar.indd 40 07/03/2012 14:39

Q What’s currently in your inbox?A A number of things but I see all of them as opportunities. I’ve even received some requests from our website from people who need help.

Q What are your expectations for 2012?A With the elections in Hong Kong and a change of leadership in China this year, I expect a lot of changes in terms of policies and tax revenues. I hope the new Hong Kong government will propose some new measures to help the economy.

Q What is the most challenging tax problem you have tackled lately?A Section 39E [of the Inland Revenue Ordinance]. The drafting of the law was so broad that it accidently caught certain transactions [involving lease arrangements by Hong Kong companies for machinery sent to their factories in China].

Q If there was to be a comprehensive review of Hong Kong’s tax system, what would be the first thing you would reform?A At the top of my list would be the incorporation of some incentive schemes. The tax system does not point to how we want the Hong Kong economy to be, such as encouraging innovation, research and development.

Q How does being an ACCA member help in your work?A The technical updates I receive are very important. ACCA also provides a way to serve the community, such as when I joined the assistance programme to help people complete their tax returns.

FIRM FACTSNumber of staff (Hong Kong): 2,000Typical clients: Multinational companiesCurrently reading: The Leader Who Had No Title, by Robin Sharma

INSOLVENCIES UP 13.8%Insolvency and corporate restructuring experts can expect to have more work on their plates as more Australian businesses are likely to collapse this year, according to accountancy firm Taylor Woodings. The trend has already begun: in January 2012, the number of corporate failures was up 13.8% on the figure for January 2011, at 518, and 10.9% above the five-year average for January, according to the firm’s analysis of insolvency data from the Australian Securities and Investments Commission. Between July 2011 and January 2012, insolvencies were up 13.4% at 6,068 compared with the same period a year earlier. Low consumer confidence and the high Australian dollar will continue to challenge many Australian businesses this year, and these conditions are likely to prompt further failures among smaller retailers, pubs and cafes, transport operators, small manufacturers and builders, Taylor Woodings said.

TAX INSTITUTE LAUNCHEDIn February, KPMG launched a new KPMG Tax Institute in Singapore. This initiative is part of the firm’s global institute network, and is intended to assist CFOs, senior tax executives and other tax professionals and practitioners keep up to date on current and emerging tax issues. In addition to its role as an information resource, the institute will offer access to a range of events, such as roundtables, seminars and forums.

The view from: Hong Kong: Wilson Cheng FCCA, partner, tax & business advisory, Ernst & Young

41 Practice The view from Wilson Cheng of Ernst & Young; assessing an entity’s ability to continue as a going concern

37 Corporate The view from Susana Jardim of Woodside; how the outsourcing space can be a land of opportunity

41Practice

AP_YPRAC_Intro.indd 41 08/03/2012 15:07

‘IT IS DURING THESE TIMES THAT THERE WOULD LIKELY BE HIGHER INCIDENTS OF MISSTATEMENTS, FRAUD AND RISKS OF GOING CONCERNS’

As the storm clouds of economic turmoil emanating from the eurozone drift menacingly to other parts of the world, including East Asia, regulatory bodies have started warning the profession to remain alert during the current uncertain economic landscape and stay the course in performing their professional duties.

On 28 December last year, the International Auditing and Assurance Standards Board (IAASB) issued a press release highlighting challenges and guidance for auditors in light of the global economic slowdown. The IAASB pointed out that such conditions make it challenging for the management of entities, those charged with governance, and auditors to fulfil their responsibilities, including assessing an entity’s ability to continue as a going concern (see box overleaf).

Closer to home, the Malaysian Institute of Accountants (MIA) also issued a similar circular in January to its members, advising auditors to be vigilant. In the circular, MIA executive director Ho Foong Moi said: ‘Auditors in Malaysia similarly should take cognisance of the currently challenging global economy and accordingly must remain alert throughout the audit to identify and critically examine evidence of events or conditions that may exist nationally or globally which may cast significant doubt on an entity’s ability to continue as a going concern.’

Members of the profession who spoke to Accounting and Business highlighted going concern assessment, professional scepticism and talent development as critical factors for auditors as companies today grapple with the trials of coping with internal and external forces that affect business sustainability.

MIA president Datuk Mohd Nasir Ahmad says that although Malaysia

has not yet experienced any significant impact as a result of the eurozone crisis, auditors may face challenges when auditing multinational European companies, irrespective of whether these are holding or subsidiary companies, as well as clients that have substantial transactions with European companies.

‘Malaysian auditors may face challenges including test of recoverability if the customers of audit clients are European companies; shortage of important supplies if the suppliers of audit clients are European companies; test of impairment in the value of investment if audit clients’

subsidiaries are in Europe; and loss of financial support if their holding companies are in Europe, among others.’ All of these challenges may potentially be associated with the issues of going concern, Mohd Nasir says. He adds that the going concern assumption should be considered from a group-wide perspective, including audit engagements involving multinational companies, irrespective of whether it is a holding or subsidiary company.

Tang Seng Choon, head of audit at BDO Malaysia, envisages greater challenges once the full brunt of the eurozone crisis hits Malaysian shores. Malaysian auditors may face difficulty in assessing and accepting cashflow and profit projections prepared by management for various purposes, such as going concern assessment, impairment of assets and deferred tax recognition, he says.

The level of uncertainty associated with an economic downturn has made audits more challenging as it can affect company operations, profitability and financial reporting, which in turn have implications on audits of financial statements, says Dr Nordin Mohd Zain, executive director at Deloitte Malaysia.

‘Malaysian auditors are faced with companies that are more likely to experience difficulties in meeting financial commitments or managing cashflows or meeting debt covenants, and there is increased pressure to achieve certain financial results that could lead to biases in management

judgments for a particular outcome. It is during these times that there would likely be higher incidents of misstatements, fraud and risks of going concerns,’ he offers.

Need for scepticismIn light of the increasingly complex environment for businesses, auditors have been advised to exercise professional scepticism to weed out potential problem areas. Audit Oversight Board (AOB) executive chairman Nik Mohd Hasyudeen Yusoff says that, for auditors, there is always the need to debate and challenge management assumptions, particularly in areas such as determining fair value, and asset impairment, especially in challenging economic times.

Indication of financial distress, such as negative operating cashflows, adverse key financial ratios, substantial operating losses, capital deficiency

Extinction evaluation During an economic slowdown, auditors face greater pressure to exercise professional scepticism and judgment when assessing an entity’s ability to continue as a going concern

42 Practice

AP_YPRAC_auditing.indd 42 06/03/2012 12:30

position, inability to comply with the terms of loan agreements, shortage of important supplies and the loss of a major market, among others, should raise red flags, says Mohd Nasir.

‘Auditors must continue to exercise professional scepticism and judgment in evaluating financial statement disclosures and the implications for the auditor’s report when a material uncertainty exists relating to events or conditions that individually or collectively may cast significant doubt on the entity’s ability to continue as a going concern,’ he says.

Tang says that it is also important to learn from the past. ‘Fresh lessons learnt from the global financial crisis of 2008 would certainly serve as a reminder for auditors to challenge the management to adjust projections to reflect the dynamics of the present economic conditions,’ he says.

‘There will also be a need to assess reliability of fair value measurement and disclosures arising from elevated historical volatility of asset prices which serve as a major input to valuation models in one way or another,’ he adds.

‘Auditors would do well to consider potential effects of volatility clustering and the degree of reliability of sources of fair values in arriving at an opinion on the reasonableness of the fair values used by management in preparing the financial statements.’

Tang also notes that random and unexpected economic or capital market events are more commonplace now, and auditors would need to quickly consider such events in depth, together with the management, before signing the auditor’s report.

While the technical aspects are central to ensuring high-quality audits, ACCA Malaysia country head Jennifer Lopez raises a pertinent observation on the need for talent attraction and retention in such times.‘The business landscape is constantly changing, especially with fewer global trade barriers and introduction of new regulations,’ she says. ‘All this means that the auditor must make the effort to invest in learning and development to ensure that their capabilities remain relevant and valuable.’

Lopez recommends that auditors train outside of accounting and finance

to strengthen their roles as business advisers, and also be sensitive to the needs of their employees in order to motivate them. This approach would tie in with the need for auditors to be more responsible for the direction of the profession by being proactive in ensuring that the quality of their work remains top-notch, she adds.

Audit quality improving Since the establishment of the AOB in 2010 by the Securities Commission to ensure high-quality audits, particularly on public interest entities (PIEs), there is consensus that it has brought improvements. Lopez believes that the AOB has been stringent in its monitoring, especially for large and medium firms, and the positive effects of the enforcement are apparent.

The AOB’s Nik Hasyudeen says that the auditing framework in Malaysia is comparable to global best practices. ‘Overall, the quality of the financial reporting ecosystem is sound as Malaysian audit firms have generally put in place good control mechanisms, policies, procedures, systems and infrastructure, to implement the

43

AP_YPRAC_auditing.indd 43 06/03/2012 12:30

standards and embed the principles of quality auditing.’

He says that through the AOB’s yearly exercise of inspecting audit practices, the board is working to build a strong foundation for the enhancement of professionalism among auditors in Malaysia and this has definitely helped to prepare auditors for greater challenges ahead.

Mohd Nasir agrees that audit quality for PIEs may have improved over the last two years, with deficiencies identified through due process and conveyed to the respective top-tier audit firms in Malaysia. Nevertheless, he noted that there is room for Malaysian auditors to improve on their audit quality, especially compliance with the International Standard on Auditing 230, Audit Documentation.

A high-quality audit is one of the essential elements in maintaining credibility of the financial reporting chain and ensuring that the public gets reliable financial information on companies, regardless of the economic climate. However, the volatile state of the global economy presents amplified challenges for all players within the business landscape and, as noted by the IAASB, if risks are not managed

properly, there are wide-ranging financial reporting implications that often extend beyond national borders.

In view of such heightened risks in the present operating environment,

auditors must play their roles to the best of their abilities to avert potential financial mishaps.

Asha Gopalan, journalist

The International Auditing and Assurance Standards Board (IAASB) has reminded auditors of their important responsibilities under the International Standards on Auditing (ISAs).

In a statement last December, professor Arnold Schilder, chairman of the IAASB, said: ‘Difficult economic conditions give rise to many important audit considerations, but none more important than evaluating management’s assessment of an entity’s ability to continue as a going concern and determining the appropriate auditor reporting in the circumstances. Auditors must remain alert throughout the audit for evidence of events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.’

As guidance, Schilder pointed auditors to the 2009 IAASB Staff Audit Practice Alert, Audit Considerations in Respect of Going Concern in the Current Economic Environment.

The alert addresses factors relevant to the assessment of going concern; the period of time considered in making a going concern assessment; financial statement disclosures; forming an opinion on the financial statements; and the implications for the auditor’s report.

‘While this alert was released in context of the 2008–09 credit crisis, many of the matters addressed in it are equally relevant today,’ Schilder added.

‘For example, an entity may be experiencing a decline in its financial health, or may have material uncertainties arising from direct or indirect exposures to sovereign debt of distressed countries.’

*AUDITORS REMINDED OF DUTIES

44 Practice

AP_YPRAC_auditing.indd 44 06/03/2012 12:30

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INTERNATIONAL

IFRS FOR SMES

The International Accounting Standards Board (IASB) intends to undertake a post-implementation review of the IFRS for SMEs in the second half of 2012.In the period since it was first issued, the SME Implementation Group (SMEIG) has issued a number of clarification Q&As. Three have been finalised and a further seven are in the process of being completed. As part of the IASB’s post-implementation review, it will consider whether the Q&As should be incorporated into the next version of the IFRS for SMEs. The SMEIG does not expect to issue many, if any, further Q&As before the review is complete.

PROFESSIONAL SCEPTICISMFollowing the financial crisis of 2008–09, audit inspection reports in a number of jurisdictions have highlighted the need for auditors to better demonstrate professional scepticism. The International Auditing and Assurance Standards Board (IAASB) has therefore decided that it would be in the public interest to remind auditors and others of its importance and has issued a staff Q&A publication.

This focuses on the considerations in International Standards on Auditing (ISAs) and the IAASB’s quality control standard (ISQC1) that are particularly relevant and

address the following:

* What is professional scepticism?

* Why is it important in audits of financial statements?

* What can be done by audit firms and auditors to enhance awareness?

* At what stage in the audit process is it necessary?

* How does it relate to the auditor’s responsibilities with respect to fraud?

* Are there other aspects of an audit where it may be important?

* How can its application be evidenced?

* Do regulators, oversight bodies and those charged with governance have a role to play?

Yvonne Lang, director, Smith & Williamson

MALAYSIA

MORE ENTRY POINT PROJECTSOn 17 February 2012, the government announced an additional 69 entry-point projects (EPPs) under the Economic Transformation Programme (ETP). These were ascertained from 60 business opportunities and, if successful, will be carried out alongside the existing 131 EPP projects, amounting to RM12.22bn, in line with the government’s objective to transform Malaysia into a high-income economy by 2020. For more, go to http://etp.pemandu.gov.my

LLP ACTOn 9 February 2012, the Limited Liability Partnerships

(LLP) Act 2012 was gazetted. The effective date has not been announced.

The LLP is a new business vehicle which is a hybrid between a company and a conventional partnership. It offers protection of limited liabilities as well as flexibility in the internal management of the business.

The act provides for the registration, administration and dissolution of an LLP. Key areas are:

* Fundamentals of an LLP.

* Formation and registration.

* Management.

* Conversion.

* Foreign LLPs.

* Winding up, dissolving and striking off.

PUBLIC RULING NO 1/2012On 27 January 2012, the Inland Revenue Board (IRB) issued Public Ruling (PR) No. 1/2012: Compensation for Loss of Employment. This PR, which is effective from year of assessment 2012 and subsequent years of assessment, provides an explanation on the characterisation of lump-sum payments received by employees on termination of employment as compensation for loss of employment and the related tax treatment pertaining to that compensation.

For more, go to www.hasil.gov.my/pdf/pdfam/PR1_2012.pdf

REQUEST FOR VIEWSOn 29 February 2012, the Malaysian Accounting Standards Board (MASB) issued a request for views

(RFV) that aims to seek feedback from constituents on the financial reporting future of private entities.The MASB is issuing the RFV in light of the comments received from its previous exposure drafts (ED): ED 52, Private Entity Reporting Standards; ED 72, Financial Reporting Standards for Small and Medium-sized Entities; and ED 74, Amendments to Financial Reporting Standards Arising from Reduced Disclosure Requirements. ED 52 was issued in 2006 while ED 72 and ED 74 were issued in 2010.

The public is encouraged to provide their views by 29 June 2012. For more, go to www.masb.org.my

SINGAPORE

2012 BUDGET STATEMENT The Budget statement was delivered by deputy prime minister and minister for finance, Tharman Shanmugaratnam, on 17 February 2012. It sets out the directions that the government has embarked on to build an inclusive and stronger Singapore. The two strategies are:

* Sustaining economic growth by continuing to upgrade and restructure the economy, to increase productivity.

* Building a fair and inclusive society. Budget 2012 marks a significant step up in supporting three groups:

(i) Older Singaporeans A comprehensive set of measures has been set up to help Singaporeans

A monthly round-up of the latest from the standard-setters

46 Technical update

AP_T_update.indd 46 07/03/2012 10:58

work, build up savings, stay healthy and have a greater sense of security in retirement.

(ii) Singaporeans with disabilities Various measures have been put in place to help maximise their potential at each stage of their lives.

(iii)Lower-income Singaporeans More has been done to support children’s education, to help adults acquire skills, hold good jobs and improve incomes. GST vouchers have also been introduced.

For more, go to www.mof.gov.sg and www.singaporebudget.gov.sg

MAS CONSULTATIONThe Monetary Authority of Singapore (MAS) issued a consultation paper in February 2012 proposing an extension of the MAS Corporate Governance (CG) Framework to all direct insurers and reinsurers incorporated in Singapore. This is in line with MAS’s emphasis on the importance of effective corporate governance.

Key recommendations are:

* To categorise locally incorporated direct insurers and reinsurers into two tiers based on the size of total assets or annual gross premiums.

* To subject tier 1 insurers to higher CG standards. The regulations currently applicable to significant insurers will be applied to tier 1 insurers.

* To require tier 2 insurers to have a board

comprising at least one-third of directors who are independent.

* To extend CG guidelines to all locally incorporated reinsurers.

* To introduce a disqualification rule for an insurer’s directors, executive officers and employees. The insurer will be required to obtain MAS’s written consent to employ persons disqualified under the rule.

The recommendations on the appointment of new independent directors are targeted to take effect no later than from the first annual general meeting (AGM) held on or after 1 January 2015. The other recommendations are targeted to take effect no later than from the first AGM held on or after 1 January 2013. The proposed disqualification rule is targeted to take effect in mid 2013. For more, go to www.mas.gov.sg

SECOND PROTOCOL ON UK DTAThe governments of Singapore and the UK signed a second protocol amending the agreement for the avoidance of double taxation (DTA) on 15 February 2012.

The second protocol revises certain terms in the current DTA, such as updating Article 5 (permanent establishment) and lowering the withholding tax rates in article 10 (dividends), article 11 (interest) and article 12 (royalties). The second protocol will enter into force after ratification by both

countries. For more, go to www.iras.gov.sg

Joseph Alfred, policy and technical adviser, ACCA Singapore

HONG KONG

TAX PROPOSALS IN BUDGETThe financial secretary delivered the 2012–13 Budget on 1 February 2012 in which a package of tax measures were proposed. One of the measures is a 75% reduction of profits tax, salaries tax and tax under personal assessment for the year of assessment 2011–12, subject to a ceiling of HK$12,000 per case.

In addition, the financial secretary proposed:

* To waive business registration fees for 2012–13.

* To abolish capital duty levied on local companies.

* To waive rates for 2012–13, subject to a ceiling of HK$2,500 per quarter for each rateable property.

* To increase personal allowances from HK$108,000 to HK$120,000.

* To increase dependent parent or grandparent allowance from HK$36,000 to HK$38,000.

* To raise child allowance from HK$60,000 to HK$63,000.

* To increase the deduction ceiling for elderly residential care expenses from HK$72,000 to HK$76,000.

* To extend the number of years of deduction for

home loan interest from 10 to 15 years.

* To increase the maximum amount of deduction for mandatory contributions to Mandatory Provident Fund schemes from HK$12,000 to HK$15,000.

These measures will take effect from the year of assessment 2012–13.

Sonia Khao, head of technical services, ACCA Hong Kong

MAINLAND CHINA

NARRATIVE DISCLOSURE Shanghai Stock Exchange has released the fifth memorandum regarding the 2011 annual report of listed companies – Requirements for Preparation of Management’s Discussion and Analysis – which provides guidance on narrative disclosure.

The memorandum moves from a focus on historical information to future development. Listed companies should disclose more on personalised information, fully revealing potential risk.

The specific requirements are to: provide dynamic information; highlight significant information and uncertainties; focus on analysis; stress the company’s personality; make it easy to understand; and involve management in preparing the ‘management discussion and analysis’.

Sophia Zhao, technical manager, ACCA Beijing

47

AP_T_update.indd 47 07/03/2012 10:58

Leases: operating or fi nance?Complex lease terms mean that it is often diffi cult to determine how they should be classifi ed. Graham Holt examines IAS 17 and sheds some light on the matter

Leases are classified currently under IAS 17, Leases, as finance or operating leases at inception, depending on whether substantially all the risks and rewards of ownership transfer to the lessee. Under a finance lease, the lessee has substantially all of the risks and reward of ownership.

Situations that would normally lead to a lease being classified as a finance one include the following:A the lease transfers ownership of the

asset to the lessee by the end of the lease term

B the lease term is for the major part of the economic life of the asset, even if the title is not transferred

C at the inception of the lease, the present value of the minimum payments amounts to at least substantially all of the fair value of the leased asset

D the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made

E if the lessee is entitled to cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee

F gains or losses from fluctuations in the fair value of the residual fall to the lessee

G the lessee has the ability to continue to lease for a secondary period at a

rent that is substantially lower than market rent.

All other leases are operating leases.The lease classification is made at the

inception of the lease but a lessee and lessor may agree to change the provisions. However, changes in estimates – for example, in the residual value of a leased property or in circumstances such as default by the lessee – do not give rise to a new classification. If the changes would have resulted in a different classification had they been applied originally, then the revised agreement is treated as a new lease over the remaining term. The original accounting entries are not retrospectively amended.

Often, lease indicators may not always point in the same direction causing classification to be difficult. Leases of specialised assets will usually be structured as finance leases. If an asset is specialised, then this implies that no other entity has a use for it. Consequently, the lessor will only achieve its return on investment through the lease payments and it will structure the lease as a finance lease accordingly.

If a lessor can sell or lease non-specialised assets to other parties at the end of the lease and is willing to accept the financial risk on this then this could be an indicator of an operating lease.

Assets of a non-specialised nature may become specialised. For example, leased plant and equipment may be permanently installed in a building and its removal at the end of the lease may be impractical or too expensive for the lessor. Often, specialised assets may have a significant remaining life at the end of the lease; sometimes this may be the major part of the economic life of the asset and therefore this will point to it being an operating lease.

However, it may be appropriate to disregard this indicator. Normally, for there to be an operating lease with a significant part of the asset’s life remaining, there needs to be some realisation of funds through sale or further rentals. In the case of a specialised asset, however, this will not normally occur because it is of value only to the lessee. In these cases, the asset will normally transfer to the lessee at the end of the lease for a nil or nominal payment and be treated as a finance lease.

Where an asset has been leased several times during its economic life, and the lease is the last one to take the asset to the end of its life, then many of the indicators may point towards a finance lease. For example, the present value of the minimum lease payments may approximate to the fair value of the asset at the inception of the final

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48 Technical

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GET VERIFIABLE CPD UNITSAnswer questions about this article onlineStudying this article and answering the questions can count towards your verifi able CPD if you are following the unit route and the content is relevant to your development needs. One hour of learning equates to one unit of CPD

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AP_INT_T_HoltCPD.indd 48 07/03/2012 14:40

OFTEN, LEASE INDICATORS MAY NOT ALWAYS POINT IN THE SAME DIRECTION, CAUSING LEASE CLASSIFICATION TO BE DIFFICULT

lease, and there is unlikely to be an option to purchase the asset at fair value or to extend the lease at a market rent because the asset has reached the end of its life.

However, the asset will obviously be non-specialised and the final lease will not be for the major part of the economic life of the asset. The lease

will be for the entire remaining useful life of the asset but IAS 17 focuses on economic life as an indicator of a finance lease. The lessor is recovering the investment through a number of leases and the substance of each of those will normally be an operating lease. Thus, if the final lease were to be classified as a finance lease simply because of its position in the chain, this would normally be unacceptable.

Where an asset is leased and rents are nominal, the agreement is still a lease under IAS 17. The total value of the rents will fall short of the fair value of the asset, thus indicating an operating lease. Often, the rents are low because a premium will have been paid upfront which may be equivalent to

substantially all of the fair value of the asset. In this case, the lease is probably a finance one. Where rents are very low and no premium has been paid, the lease does not have a commercial basis and it would appear that the lessor is indifferent to the risks and rewards of ownership. In this case, classification is better judged by looking at the

substance of the arrangement and the intentions of the lessor in granting a lease on such terms.

The presence of an option to extend the lease at substantially less than a market rent implies that the lessor expects to achieve its return on investment solely through the lease payments and therefore is content to continue the lease for a secondary period at a nominal rental. This is an indicator of a finance lease. It is reasonable to assume that the lessee will extend the lease in these circumstances.

However, an option to extend it at a market rental may indicate that the lessor has not achieved its return on investment through the lease rentals

and is therefore relying on a subsequent lease or sale to do so. This is an indicator of an operating lease as there will be no compelling commercial reason why the lessee should extend the agreement. The absence of any option to extend does not provide evidence either way as to an operating or a finance lease, and other factors will need to be considered to determine the classification.

In some cases, fluctuations in the fair value of the residual interest in the leased asset are passed back to the lessee. This indicates that the lessee is bearing the residual value risk, and the lessor’s return on investment is effectively fixed.

These indicators provide evidence of a finance lease. If the lease also requires the lessee to make good to the lessor any shortfall between the sale proceeds and a fixed ‘residual’ amount, then again this is evidence of the lessor’s return being fixed. Where the lessor retains the proceeds of the eventual sale of the asset, the lessor is bearing the residual value risk and where the sale proceeds are significant, then this could be evidence of an operating lease.

Issues sometimes arise in lease contracts where an asset is held on a finance lease and then it is all or partially sub-let to another party on

49 TO GET THE QUESTIONS GO TO www.accaglobal.com/ab_tech

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AP_INT_T_HoltCPD.indd 49 07/03/2012 14:40

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ISSUES SOMETIMES ARISE WHERE AN ASSET ISHELD ON A FINANCE LEASE AND IT IS SUB-LETON IDENTICAL TERMS AND CONDITIONS

identical terms and conditions. This can occur where several entities intend to share leased accommodation and arrange for one entity to lease the whole asset and sub-let the relevant parts to the others. The issue that arises here is whether the lead entity

should recognise the finance leases on a gross basis in its accounts or whether it should net off the transactions.

In this case the entity should look at the derecognition requirements of IAS 39, Financial Instruments: Recognition and Measurement. The treatment will depend on the terms of the individual transaction. If the two transactions are separate to the extent that the lead entity is liable to pay its rentals under the head-lease regardless of whether it actually receives its sub-lease rentals, then the derecognition requirements will not be met and it will need to account for the two leases on a gross basis.

A contingent rent is such amount that is paid as part of lease payments but is not fixed or agreed in advance at

the inception of the lease; rather, the amount to be paid is dependent on some future event. However, it is not an interest payment as it is not connected with the passage of time, therefore time value of money is not an issue. Contingent rent is commonly

connected with an increase or decrease in future sales by the lessee, increase or decrease in the use of the asset, or inflation or deflation. Under IAS 17, contingent rents are excluded from minimum lease payments and are accounted as expense/income in the period in which they are incurred/earned.

If a lease contains a clean break clause, where the lessee is free to walk away from the agreement after a certain time without penalty, then the lease term for accounting purposes will normally be the period between the commencement of the lease and the earliest point at which the break option is exercisable by the lessee. If a lease contains an early termination clause that requires the lessee to make a termination payment to compensate

the lessor such that the recovery of the lessor’s remaining investment in the lease was assured, then the termination clause would normally be disregarded in determining the lease term. Similarly, the same principle applies if the lease agreement states that the lease can only be terminated in remote circumstances, with the permission of the lessor or on entering a new lease agreement for the same or equivalent asset.

The International Accounting Standards Board is preparing a standard that may clarify and change some of the above aspects of lease accounting. The current models lead to a lack of comparability and undue complexity because of the distinction between finance and operating leases. As a result, many users of financial statements adjust the amounts presented in the statement of financial position to reflect the assets and liabilities arising from operating leases, which makes the deliberations of companies regarding classification of leases a somewhat futile exercise!

Graham Holt is an examiner for ACCA, and associate dean and head of the accounting, finance and economics department at Manchester Metropolitan University Business School

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50 Technical

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Joined-up thinkingMalaysia is well on the way to integrated reporting. Ng Kean Kok explores the IIRC’s pilot programme and what companies need to do to ensure they are on track

IT IS NOW INCREASINGLY RECOGNISED THAT MERELYREPORTING ON CORPORATE SOCIAL RESPONSIBILITYAND SUSTAINABILITY ISSUES IS INSUFFICIENT

As reported in the March and November 2011 issues of AB Malaysia, recent financial crisis and financial scandals have underscored the need for a different type of corporate reporting.

Traditionally, corporate reporting has consisted mainly of financial information, made up of the balance sheet, income statement and directors’ report. However, in the past decade, there have been significant changes. Companies have begun to include greater disclosures of non-financial information, and information about the effect they have on the environment and the wider society.

These have taken the form of corporate social responsibility (CSR), environmental, social and governance (ESG), corporate responsibility (CR) and environmental, safety and health (ESH) reports.

However, it is now increasingly recognised that merely reporting on CSR and sustainability issues is insufficient. Investors and other stakeholders now demand not only non-financial information, but also details that allow investors to identify the link between non-financial and financial information, allowing them to make sense of all the reports available to stakeholders. This method is known as integrated reporting.

Better communicationSimplistically, integrated reporting is about better communication between

companies and stakeholders. It attempts to provide an integrated representation of a firm’s performance in terms of non-financial and financial results. An integrated report provides disclosures on a range of information that demonstrates their interaction via provision of:a) Relevant information about the

firm’s strategy, business model, the environment in which the firm operates and the related risks.

b) A holistic picture of a firm’s performance and prospects.

c) Clear and concise information about the most material issues.

Such information should enable users to better understand the pressures that the firm is operating under, and ascertain whether the firm is able to achieve the performance measures and be sustainable in the short, medium and long term. In short, integrated reporting seeks to present a clear, concise and joined-up account of a business.

To this end, the International Integrated Reporting Council (IIRC) seeks to create a globally accepted framework for accounting for sustainability, and bring together environmental, financial, social and

governance information in an integrated format.

The IIRC has set out five guiding principles and six content elements for an integrated report:

Guiding principles

* Strategic focus.

* Future orientation.

* Connectivity of information.

* Responsiveness and stakeholder inclusiveness.

* Conciseness, reliability and materiality.

Content elements

* Organisational overview and business model.

* Operating context, including risks and opportunities.

* Strategic objectives.

* Governance and remuneration.

* Performance.

* Future outlook.The IIRC is currently piloting a

project to test the principles and practicalities of integrated reporting, and to provide feedback for the creation of a new global standard in integrated reporting.

The pilot run is made up of three phases:

Joined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinkingJoined-up thinking

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MY_T_integrated.indd 51 07/03/2012 16:49

a) Dry run. This has been completed. Companies were asked to undertake a walk-through of the IIRC’s draft integrated reporting framework, identify opportunities and challenges of implementation, and provide feedback on the IIRC’s discussion paper on the framework.

b) Pilot cycle 1. This kicked off in Rotterdam in October with a meeting of programme participants. Some 60 companies from around the world will be reporting using the draft integrated reporting framework for reporting cycles between October 2011 and September 2012.

c) Pilot cycle 2. This will build on experiences from the first year.

Developments in MalaysiaMalaysia is currently awaiting the outcome of the work of the IIRC. Emphasis continues on sustainability reporting until more complete guidance is provided by the IIRC. Following the development of the CSR Framework in 2006, Bursa Malaysia launched its sustainability portal and guide for directors in 2010. Bursa Malaysia recognises that the sustainability agenda needs to be driven from the boardroom and be embedded within a corporate strategy. The ESG Index is scheduled to be launched later this year and represents Bursa Malaysia’s mission to further drive sustainability strategies

and disclosures by Malaysian-listed companies.

There has been a lot of support from the regulatory authorities for integrated reporting in Malaysia. In a written response to the IIRC’s discussion paper, the Accountant General’s Department of Malaysia said that large companies would be able to better communicate all the required and material information as needed to stakeholders and represent their value creation process and thus, remain competitive in the global market. The department also agreed that the underlying concepts behind integrated reporting would be equally applicable to small and medium-sized enterprises, the public sector and not-for-profit organisations.

In addition, the Securities Commission of Malaysia (SC), has made several announcements which relate to integrated reporting. On 12 April 2011, the Capital Market Masterplan 2 (CMP2), the blueprint for the development of the Malaysian capital market over a 10-year period, was launched. To ensure its successful development, CMP2 emphasised the importance of investor protection and governance.

On 11 June 2011, the SC followed this up with the launch of its five-year Corporate Governance Blueprint. It aims to raise the standards of corporate governance by strengthening self-regulation and market discipline, and promoting greater internalisation

of the culture of good governance. Overall, it seeks to promote good corporate governance through the deepening of the relationship of trust between companies and stakeholders.

One of the themes covered in the blueprint is disclosure and transparency, which seeks to promote a more effective disclosure of non-financial information. The SC has commented that while Malaysian companies do provide a description of their CSR activities, companies still do not provide an assessment of the impact of their business operations on communities.

Integrated reporting is seen as a solution to this problem. Companies would report on the positive and negative impact of the companies’ operations from an ESG perspective and how they then seek to manage the negative aspects of the business operations. Such reporting is also seen as being in line with the expectations of socially responsible investing.

However, the SC recognises that integrated reporting is still at the developmental stage. As such, it plans to establish a taskforce to review the developments in integrated reporting, promote its awareness and its adoption (on a voluntary basis initially).

Additionally, the topic of integrated reporting was included as part of its programme discussions during Corporate Governance Week 2011, organised by the SC and Bursa Malaysia.

52 Technical

MY_T_integrated.indd 52 07/03/2012 16:49

IT IS ONLY A MATTER OF TIME UNTIL THE SC ANDBURSA MALAYSIA MAKE THE IMPLEMENTATIONOF INTEGRATED REPORTING COMPULSORY

Guidance for companiesIt appears that it is only a matter of time until the SC and hence, Bursa Malaysia, make the implementation of integrated reporting compulsory for companies.

The following points attempt to help companies lay the foundations for integrated reporting:

a) Engage with and obtain the commitment of top management to ensure the successful implementation of integrated reporting. Management must understand that the implementation process may take several years.

b) Ensure that sustainability is the main anchor of any business strategy that the firm identifies and adopts. Sustainability should be embedded in all of the firm’s primary processes, from research and development, inward processes, manufacturing and production, to outward processes.

c) Set up a special taskforce to identify and understand the aspects of the firm’s performance that are material to stakeholders.

d) Consult stakeholders – step c) may be facilitated through discussions with stakeholders.

e) Review internal management reporting and controls to identify what is currently being measured and monitored, their suitability for integrated reporting and determine what changes need to be made.

f) Appoint someone to coordinate and oversee the implementation of integrated reporting.

g) Make use of existing activities such as risk management, internal audit, legal and compliance, to collect data, monitor risk and report.

h) Improve on existing performance systems and set key performance indicators (KPIs) that are aligned with the firm’s business profile, business strategy and environment that it operates in.

i) Implement ESG reporting if this has not already been done, especially sustainability reporting as a first step towards integrated reporting.

j) Expand on existing ESG reporting – companies that already produce some form of ESG reporting are advised to determine what is currently produced and to use these as the foundation to improve. This may take the form of expanding the scope of reporting or by attempting to integrate separate reports.

k) Produce integrated reports for internal purposes, especially board meetings. This can instil the internal discipline for executives to identify material ESG metrics that create and enhance shareholder value.

l) Produce an external integrated report once management is comfortable with the quality of the internal integrated report.

ConclusionMalaysia is still adopting a wait-and-see approach towards integrated reporting, although regulatory support appears to exist.

It is envisaged that at some point in the future, companies will inevitably have to implement integrated reporting, as it has already been alluded to in the SC’s CMP2 and Corporate Governance Blueprint.

For companies that have yet to begin the journey towards integrated reporting, taking baby steps such as placing sustainability as a key consideration in any business decision as advocated by Bursa Malaysia and later, participating in Bursa Malaysia’s ESG Index to benchmark the firm’s progress, are advised.

Indeed, increased awareness about integrated reporting, its challenges and early preparation is ultimately key to effective implementation.

Ng Kean Kok is an assistant professor at Universiti Tunku Abdul Rahman

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Covering all eventualitiesLisa Weaver writes on how the International Accounting Standard Board’s Practice Statement on Management Commentary, and IFRS 7, affect the reporting of risk

USING BOILERPLATE DISCUSSIONS WILL NOTENHANCE THE USEFULNESS OF INFORMATION, FOR EXAMPLE, DISCUSSING RISK IN GENERAL TERMS

It is crucial that readers of companies’ published financial statements are presented with useful and understandable information. It has long been required under some jurisdictions that to enhance the usefulness and understandability of financial statements, there should be a narrative discussion provided by management (eg directors’ reports or management’s discussion and analysis).

In December 2010, the International Accounting Standards Board (IASB)published its Practice Statement on Management Commentary, which sets out principles for entities to follow in relation to such disclosures.

An area of particular interest is the reporting of risk. The global economic

problems of the last few years prompted many to question whether risk is properly highlighted to the users of financial information. The IASB’s statement contains specific guidance on reporting risk. But this is not the first IASB document to address risk disclosure. IFRS 7, Financial Instruments: Disclosures, contains extensive disclosure requirements in relation to risk exposure.

The stated objective of the statement is to assist management in presenting

useful management commentary that relates to financial statements that have been prepared in accordance with International Financial Reporting Standards (IFRS). It does not mandate which companies should provide commentary, or how frequently it should be produced. When it is presented it should be clearly identified as such and the extent to which the IASB’s principles have been followed should be explained.

The purpose of commentary is as follows: ‘Management commentary should provide users of financial statements with integrated information that provides a context for the related financial statements. Such information explains management’s view, not only

about what has happened, including both positive and negative circumstances, but also why it has happened and what the implications are for the entity’s future.’

The fact that both positive and negative circumstances are mentioned indicates that the commentary should present a balanced view – exploring for example the reasons for increases in revenue or profitability, but also the risks that may have been taken to achieve such results. Specifically the

statement states that one of the factors that will help users to assess the performance of the entity and the actions of its management is information on the entity’s risk exposures, its strategies for managing risks and the effectiveness of them.

In terms of presentation, commentary should not duplicate information given in the notes to the financial statements, and should be consistent with the related financial information.

The statement does not prescribe a format for the commentary, or even the elements that must be included. It does however suggest that commentary should include information that is essential to an understanding of:A The nature of the business.B Management’s objectives and its

strategies for meeting them.C The entity’s most significant

resources, risks and relationships.D The results of operations and

prospects.E The critical performance measures

and indicators that management uses to evaluate the entity’s performance against objectives.

Disclosures on riskFocusing on c), management should disclose an entity’s principal risk exposures and changes in those risks, together with its plans and strategies for bearing or mitigating those risks, as well as disclosure of the effectiveness of its risk management strategies. This disclosure helps users to evaluate the

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It is crucial that readers of companies’ useful management commentary that statement states that one of the

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54 Technical

AP_T_riskmgmt.indd 54 09/03/2012 15:55

nature of an entity’s risk exposure, and how management plans to overcome or mitigate that risk. Management should distinguish the principal risks and uncertainties facing the entity, rather than listing all possible risks and uncertainties, thereby focusing the users’ attention on the main areas of risk exposure.

Management should disclose its principal strategic, commercial, operational and financial risks, which are those that may significantly affect the entity’s strategies and progress of the entity’s value. The classification of risks on this basis is not compulsory, but it may help users to better understand the nature of risk exposure. Risks can be internal or external and it may also help users’ understanding if this is clarified. In some cases risk exposure can create reactions which are potentially beneficial to the entity, so the commentary should be balanced in discussing negative consequences but also potential opportunities.

Risks should be discussed in a specific way. The statement suggests that using boilerplate discussions will not enhance the usefulness of financial information, for example, discussing ‘financial risk’ in general terms. Three broad categories of financial risk may be relevant to an entity – credit risk, liquidity risk and market risk. These categories can then be divided into more specific risk categories such as interest rate risk and currency risk. Commentary can only be useful if it

provides a discussion of a specific risk. However, the problem that can arise here is the potential duplication of information that is required to be disclosed under IFRS 7. Nonetheless as a basic principle, commentary should be used to discuss risk exposure at a company-wide, holistic level, whereas the notes to the accounts should focus specifically on the requirements of the accounting standard.

IFRS 7: disclosuresIFRS 7 contains extensive disclosure requirements in relation to financial instruments, many of which focus on risk exposure. Examples of some common financial instruments that fall within the scope of the standard are cash and cash equivalents, trade payables and receivables, loans, investments, and derivatives.

The stated objective of IFRS 7 is to require entities to provide disclosures in their financial statements that enable users to evaluate: A The significance of financial

instruments for the entity’s financial position and performance.

B The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks. The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information

about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. Together, these disclosures provide an overview of the entity’s use of financial instruments and the exposures to risks they create.

Looking at the qualitative disclosures, a narrative is required for each of the risks to which an entity is exposed – namely credit risk, liquidity risk and market risk. This should:

* Identify the risk exposures of financial instruments and how they arise.

* Identify the objectives, policies and processes for managing the risks and methods used to measure risk.

* Describe any changes from the previous reporting period.

Essentially, an entity should describe why it is exposed to risk, how management aims to control and mitigate the risk, and whether there have been changes to this in the preceding year. For example, a typical disclosure in relation to currency risk may discuss the entity’s international operations which expose it to risk, and may specify which currencies in particular create risk exposure. The disclosure would then go on to describe management’s strategy in relation to the risk, for example the use of foreign exchange forwards to manage exposure to currency fluctuations.

This type of disclosure was seen as unusual when IFRS 7 was first

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nature of an entity’s risk exposure, and provides a discussion of a specific risk. about the extent to which the entity

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THE DISCLOSURES SHOULD BE AS STREAMLINED ASPOSSIBLE, BUT SHOULD AVOID DUPLICATION OFINFORMATION WHICH DETRACTS FROM USEFULNESS

introduced, as it was the first accounting standard to specifically require a detailed discussion in the financial statements regarding management’s monitoring of risk, and strategy towards risk. It mirrors the thinking behind other standards (such as IFRS 8, Operating Segments) in its aim of enabling users to view financial statement disclosures, in this case disclosure specific to financial instruments and risk management activities ‘through the eyes of management’.

In addition to qualitative disclosures, IFRS 7 requires extensive quantitative disclosures. For each category of risk, entities must disclose summary quantitative data on risk exposure at reporting date, based on information provided internally to key management personnel and any concentrations of risk. The requirement that information should be as provided to key management (typically board level) echoes the point made above regarding information being made available to users of the financial statements as seen ‘through the eyes of management’.

Specific requirements attach to each risk category. For example, in relation to credit risk, analysis of the age of financial assets that are past due but not impaired is required. This could include for example an analysis of outstanding receivables. In relation to market risk, there is an onerous requirement relating to sensitivity analysis. A sensitivity analysis is required for each type of market risk

(currency, interest rate and other price risk) to which an entity is exposed at the year-end. This should illustrate how profit or loss and equity would have been affected by ‘reasonably possible’ changes in the relevant risk variable, as well as the methods and assumptions

used in preparing such an analysis. Continuing the example relating to foreign exchange risk, an entity could quantify the impact on profit and equity if an exchange rate relevant to currency risk exposure were to increase or decrease by 10%.

Practical considerationsConfusion may be caused if the discussion of risk factors differs in the commentary compared to the notes to financial statements. For example, different sensitivities may have been used to illustrate risk exposure in the two. To avoid this problem, the disclosures should be as streamlined as possible, but should avoid duplication of information which detracts from overall usefulness.

It is also important that users understand that the notes to the financial statements focus solely on risk exposure relating to financial instruments, whereas the commentary

will be broader in its discussion of risk.In order to produce meaningful

information, the entity should determine key user groups, as the disclosure should be focused on their needs. Groups may include analysts, credit rating agencies and regulators

as well as shareholders and investors, and they may have varying needs in terms of the level of sophistication of the information provided.

Finally, entities need to ensure that there is an audit trail. The notes to the financial statements will clearly be audited and so controls must be in place to ensure errors are detected. Controls need to be in place not only over calculations, but also assumptions made, such as the determination of concentrations of risk as required by IFRS 7, and principal risks as stated in the statement. Management commentary is outside the scope of detailed audit work, but it should be consistent with the financial information on which the audit opinion is provided.

Lisa Weaver is an examiner for ACCA, teaching fellow at Aston Business School, and freelance lecturer and writer

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56 Technical

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57Technical

Accounting solutionsIn their new regular column, PwC authors answer technical questions, this month on put and call over minority interest, and impairment testing for a listed associate

Q ABC plc acquired a controlling 75% holding in DEF Ltd. At the acquisition date, ABC and the non-controlling interest (NCI)

shareholder (‘the NCI shareholder’) entered into an agreement whereby the NCI shareholder could require ABC to purchase and ABC could require the NCI shareholder to sell – a put and call option – the NCI. Both options are exercisable three years after the acquisition date, with the price, payable in cash, being the NCI’s fair value at exercise date. How should ABC account for the put and call option?

A The put and call options here are symmetrical, so the contract is in substance a forward contract – that is,

ABC will be required to purchase the NCI shareholder’s 25% interest at the determined date. In accordance with paragraph 23 of IAS 32, Financial Instruments: Presentation, an entity that enters into a contract that contains an obligation for the entity to deliver cash for its own equity shares is a financial liability. The 25% of DEF held by the NCI shareholder is classified as equity in ABC’s consolidated financial statements, and it is ‘own equity’. The put option meets the definition of a financial liability, as ABC does not have an unconditional right to avoid delivering cash. This is the case even though the payment is conditional on the option actually being exercised by the holder. A financial liability is recorded on the balance sheet at the date of the acquisition and is recognised at the

Q ABC has an investment in a listed associate whose market value has significantly declined in the economic

downturn. Management is performing its annual impairment review: how should it test the associate for impairment?

A ABC should apply IAS 39 to identify potential impairment indicators in its associate accounted for under IAS

28, Investments in Associates. If any indicators exist, the investment is subject to an impairment test under IAS 36, comparing the asset’s carrying amount to its recoverable amount. These requirements are applied to the investor’s equity interest in the associate and other long-term interests that form part of the investor’s net investment in the associate, all of which are financial interests in the associate.

The carrying amount is not automatically written down to the current share price. The price decline is an indicator and establishes the fair value less costs to sell (FVLCTS) of the associate. However, IAS 36 requires the recoverable amount to be established; this is the higher of value in use (VIU) or the FVLCTS.

VIU is estimated with assumptions of cashflows, taking into account the economic environment. The associate might be unwilling to provide a cashflow forecast to a single investor or might be prohibited from doing so by legislation. ABC may therefore need to create its own estimated cashflows using publicly available data or possibly analysts’ forecasts. The future expected dividend streams from the investment in the associate could also be used in measuring the associate’s VIU. Both cashflow sources should in principle produce a similar result.

present value of the amount payable. The discount is subsequently unwound as a finance charge through ABC’s income statement over the contract period, up to the final amount payable. Any adjustment to the liability for the changes in estimated cashflows for the amount payable (that is, changes in the eventual exercise price), in accordance with IAS 39, Financial Instruments: Recognition and Measurement, paragraph AG8, is recognised in the income statement. ABC also needs to consider the treatment of the NCI, including its recognition and allocation of profits and dividends.

This month’s solutions were compiled by Michelle Amjad, Harivadan Patel and Peter Holgate of PwC’s Accounting Consulting Services. Keep up to date on International Financial Reporting Standards (IFRS) developments with PwC’s twice-monthly email update, with a summary of the latest issues and links to further guidance. Email corporatereporting@uk.pwc.com requesting ‘subscription to IFRS mailshot’ or visit pwc.com/ifrs to sign up to the RSS feed.

AP_INT_T_AccSolutions.indd 57 09/03/2012 12:33

‘THE MAIN THING IS TO ALWAYS BE IN TOUCHAND CONSTANTLY KEEP YOUR CONTACTSUPDATED. YOU HAVE TO EARN TRUST’

Sometimes it isn’t what you know but who you know – not least when you’re looking for job-related support, where speed and reliability are of the utmost importance. Today’s professional needs other professionals who can help them produce the desired results. Networking – beyond one’s own profession and comfort zone – is essential, and those with an effective network can expect to move ahead faster.

One area of professional expertise that many call on is in writing – an example of where networking just cannot be ignored. A freelance writer of over 12 years’ standing, Chan Li Jin specialises in health-related articles. ‘It started with sporadic online articles, then went on to health, women’s issues and parenting,’ she explains.

‘Eventually, I got into corporate writing and found it a full-fledged business with unlimited potential. People are always looking for writers! I’ve also become a “connector” of people, opportunities and partnerships, while strengthening my own networks.’

Undaunted that she had no contacts in the industry, Alexandra Wong started by pitching articles to various publications. One editor was impressed enough to send her on an assignment, and later recommended her to other editors in her network. These days, she says, ‘almost 100% of my work is referral, or from repeat clients. On top of that, clients often request other types of writing – such as annual reports, press releases or even speeches and video scripts. It pays to have a network of writers you can refer to when you want something as specialised as these.’

While these are two examples from a completely different profession, many lessons can be drawn from them

when building your network. For a start, you should not limit yourself to colleagues in the same profession. Consider everyone a contact and potential client.

Accountants have to deal with many things in the course of business. As a result, more and more areas are falling under their purview. One of these is reports and, under the new

International Financial Reporting Standards (IFRS) regime, more concise documentation. However, accountancy firms will attest to the difficulty of finding a writer – more specifically, one who understands the subject and can bridge the gap between industry jargon and normal people-speak.

Two-way streetWhile most of us expect to benefit from our networks and take advantage of the extended expertise and shared information that they offer, we often neglect to consider what we can offer in return. A great deal of successful networking depends on reciprocity. First, you have to be good at what you do. That means cultivating a reputation for honesty, integrity, reliability and professionalism.

It is worth noting that word-of-mouth recommendations – which are mostly the case when it comes to networks – come with a higher degree of expectation where performance is concerned.

Wong puts it succinctly: ‘A network recommendation is [still] an unknown entity, and that equals high risk! Recommendations may carry weight,

but there will always be the fear of non-delivery.’

One of the advantages of a network recommendation is that a third party vouches for you. ‘Clients are usually happier to work with a recommended professional, rather than pick someone off the street,’ says Chan.

Writers – especially freelancers – can set up a website where clients can view

their work. Accountants, however, may not find this practical for their own businesses, for confidentiality reasons. The onus is therefore on the individual to go out and physically network.

‘Make it a point to go out and meet someone new,’ Chan advises. ‘Even if it doesn’t work out, you would have encountered something different.’

That is exactly what financial consultant Susanna Leow did when she decided to go into the financial planning business – and succeeded in building an entirely new network based on her old one. ‘When I changed industries, from IT to financial planning, I contacted friends, former colleagues, even relatives, and updated them on what I was doing.

‘I made it a point to attend conferences, seminars, workshops – any event where I could collect business cards, and I cold-called,’ she recalls. ‘Rejection was common; it still is! But I am surprised at how productive cold-calling can be sometimes. You just have to take the initiative. The main thing is to be always in touch and constantly keep your contacts updated; you have to earn trust.’

Get connectedDeveloping a network that extends beyond the accountancy profession has the potential to pay huge dividends in terms of both fi nding support and extending your client base

*NETWORKING GOES GLOBAL

58 Careers

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Reap and sowThe bottom line with networks is that you get out what you put in. Networking is good, but it’s not a magic wand.

Perhaps the ‘prosper thy neighbour’ theory should be applied when it comes to networks, which is what Brian Lariche did. Kuala Lumpur-based Lariche started working with the visually impaired in the early 1980s, gradually building a contact base that now numbers in the thousands, including well over 1,000 non-governmental organisations (NGOs) at home and abroad. He realised that many big corporations were interested in setting up community service programmes

How far can networking go? Worldwide, in the case of McMillan Woods Global. In less than two years, this network of accountantancy firms has expanded to more than 30 countries, with 12 offices in Malaysia alone. ‘The benefits are many,’ says group president, Dato’ Raymond Liew. ‘The network is shared by members who contribute a small fee. This allows them access to a dynamic global network, including the clients of members in other countries.’

The network, with its many members, widens the outreach of firms and individuals, allowing them to offer their particular speciality to more clients, and to be ‘seen’ by a wider audience locally and abroad. Membership is particularly helpful to small firms that want to grow and keep pace with clients’ changing needs but perhaps lack resources.

Accountants are able to add to their expertise almost immediately by referring their clients to other members, without losing them to a larger firm with better resources. And while firms may not be able to meet clients’ needs when they grow or expand abroad, being able to recommend a trusted network contact may make all the difference and ensure client loyalty regardless of size.

*NETWORKING GOES GLOBALas part of their

corporate social responsibility (CSR)

efforts and, using his contacts among NGOs, other volunteers and friends in the corporate world, he started a service that matches firms’ CSR objectives with deserving causes.

Lariche travels extensively with his matching service, consulting on CSR programmes, training and identifying needs, resources and partners, as well as developing NGO strategies, so that more communities can benefit from corporate altruism. And the more he trains, he says, the wider his network grows!

Majella Gomes, journalist

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MY_C_networks.indd 59 07/03/2012 15:09

Young and ambitious[Yang Jidong, 27

Department of Public Offering Supervision, CSRC

Q How would you describe a typical day?A Every morning I keep a close eye on press releases about the macro-economy and relevant information about listed companies from the major financial newspapers. My duty is to verify the application materials of shares issuance by Chinese enterprises as well as supervise relevant issuance and listings. Q Why did you want to become an accountant?A The operation status, financial management and internal control of a company can all be reflected in its financial statement. An accountant can identify the company’s real value by analysing the financial statements. I was an auditor at the start of my career. Later on I realised that financial knowledge plays a very important role in my auditing work and during the review of listed companies. Q What challenges and opportunities do you anticipate this year?A I will consider improving the review quality of refinancing application materials, and spend more effort on the formulation and revision of the bond system. Certainly there will be some cases I’ve never encountered, and continuous innovation is needed during the formation of the system, but I am very proud to make a contribution to the capital market in China. Q What advice would you give to young accountants starting out in their career?A One should broaden his or her horizons, but not limit oneself to accounting-related knowledge. It is important to understand the development of the macro-economic environment and the financial market so as to get a comprehensive understanding of the capital market as a whole.

Q Where would you like your career to be in five year’s time?A I will try to have a good understanding of the financing method and process in the capital market, and the optimisation of the asset allocation by the enterprises. I would also like to familiarise myself with the key aspects of reviewing initial public offering and financing projects.

FAST FACTSLives: Beijing, ChinaAverage hours per week: 35If I wasn’t an accountant I’d be… …a university lecturer

60 Careers

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During an economic downturn, companies batten down the hatches and concentrate on managing their finances to navigate through the tough times. And, as companies feel the pressure to do more with less, some may even reduce their focus on risk management. However, that is not wise, as often an economic slowdown increases the level of risk companies are exposed to.

Therefore, during challenging times – as the global economy is expected to face this year – there is a greater need for organisations to reprioritise and assess their risk exposure in every area of their business.

The global financial crisis brought risk management into sharper focus. While it isn’t possible to avert all crises, organisations can work out how to manage risks should they materialise, or take steps to avoid them in the first place. A dysfunctional culture, leadership failure and the behaviours of individuals are the main reasons why risks are not dealt with effectively, according to a new ACCA report on risk management. Rules for Risk Management: Culture, Behaviour and the Role of Accountants, says that businesses need to work harder to spread responsibility for risk management across the whole organisation.

Risks do not always arise as a result of individual decisions. Sometimes the combination of a series of seemingly innocuous decisions can create huge risks. So instead of leaving risk management to an individual or a compartmentalised risk team, the alternative is an integrated risk management approach, where risks are identified and managed as part of core management processes. It requires risk awareness among key decision-makers, and among those providing the data for decision-makers. Integrated risk management has been consistently recognised as good practice but is far from universally implemented.

As accountants provide decision support, this approach to risk management puts them in a vitally important position. Most ‘risky’ decisions in companies have some sort of financial aspect, and it is most often accountants who are asked to estimate the financial implications of alternative courses of action. With their analytical skills, objectivity and curiosity, accountants are well suited for a key role in managing risk.

Unfortunately, as the survey revealed, risks often materialise when the objective information and analysis normally provided by accountants are over-ridden by personal or collective bias, and often the pressure to do this increases during an economic downturn.

Accountants understand risk issues. The survey indicated they are keen to use their skills more to contribute to integrated risk management. It would very much be in the best interest of organisations and their stakeholders to allow them to do so.

The survey’s findings have been used by ACCA to develop an online ‘risk health check’ for businesses. By using this resource, businesses can compare themselves to those featured in the survey, and identify areas for improvement. Risk management will be one of the key topics at our CFO Summit in Kuala Lumpur on 5 July, we hope you’ll join us.

Devanesan Evanson is president of the ACCA Malaysia Advisory Committee

[ Accountants are keen to contribute their skills to risk management, says Devanesan Evanson, but management must allow them to do so

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ACCA 61

MY_A_pres.indd 61 07/03/2012 15:08

We’re all familiar with training and development budgets being trimmed down so this month we’ll show you how to gain the most from professional development at little or no cost. Here, we look at how continuing professional development (CPD) can help you keep your edge in your present role, and it can help you to move on.

ACCA’s CPD requirementsACCA’s leading-edge CPD programme offers a policy that is flexible, allowing you to develop through a variety of means such as structured courses, qualifications, e-learning, reading, research, coaching and mentoring and learning from undertaking new tasks in the workplace. The CPD requirement has been designed to:

* help you plan and identify relevant professional development

* help demonstrate to your employer that you keep yourself up to date and employ an ethical approach

* offer a measurable and transparent approach to CPD; and

* provide you with an accessible range of services.

What counts?It’s a common misconception that CPD can only be obtained through structured courses and seminars. But there are many ways to obtain CPD, often where you least expect – for example, through your everyday work.

There are three very simple questions to ask yourself when undertaking any CPD activity:1) Is the learning relevant to your role?2) Are you able to apply the learning?3) Can you provide evidence of that

learning?If you can answer yes to all three, then the learning is verifiable CPD.

Sourcing cost-effective CPDCost-effective CPD can come in different forms; we’ve highlighted a small number of them below. These are examples to get you started: don’t feel limited to this list.

Planning is key A little advance planning is one way to ensure that your CPD is focused, tailored and cost-effective. Following a plan will make certain you derive the maximum benefit for your time and money, while developing those areas that are likely to have the biggest impact.

In these demanding times more is expected of finance professionals. In order to keep up with those demands it’s vital to keep up to date and continue to build on the capabilities that make you attractive and highly valuable to employers. And, as you will have seen above, this needn’t be expensive.

Activity

Explore discussion boards and forums at work and on the web. Download podcasts

Visit ACCA’s e-learning gateway for technical updates. www.accaglobal.com/elearning

Run staff inductions, introduce knowledge sharing or be an ACCA Workplace Mentor

Experience new learning through team projects – or present on a topic that is new to you

Join work committees or steering groups; or attend ACCA networking events

Put yourself forward for free courses and seminars

In-house training can be worthwhile not just for the delegates but also for the trainer

Resource

Technological

E-learning

Coaching and mentoring

Research and reading

Networking

Seminars and courses

In-house training

Quality, low-cost CPDWe look at how reasonably priced CPD can help to give you the edge in your current role – and beyond

62 ACCA

AP_INT_A_CPD.indd 62 07/03/2012 14:55

[Diversity isn’t about buffi ng up the corporate image, says ACCA president Dean Westcott, it’s about building a better business

More than a PR exercise

ACCA is an organisation that has long campaigned on the importance of diversity in the workplace, so I was delighted to see our new report on the issue. Its key finding is that adopting an effective diversity policy doesn’t just make a company look good, it actually improves its performance.

For too long too many organisations have treated diversity as a PR exercise. Finding the number of women in senior positions or the breakdown of ethnic backgrounds in the workforce is a reasonable starting point in the drive for greater diversity, but it isn’t enough.

The term ‘diversity’ is overused and its real purpose underconsidered. All too often a business’s chief consideration is how diversity or corporate social responsibility can help to make it look good.

Diversity should not purely be a presentational device. Our report, Building a Better Business through Finance Diversity, shows that leading companies such as IBM, GE China and Shell see diversity as less about how they look and much more about how they think, how their processes work and how they manage their most precious asset – their human capital.

And that’s the key: diversity is about a company ensuring it does not miss out on the talent it has.

The report recommends that finance leaders work to understand cultural differences for each market in which they operate and how to integrate working practices into a corporate model, and encourage teams around the world to express differing views.

They should also look outside the finance function when recruiting and be open to candidates from non-traditional backgrounds. By bringing in individuals from different sectors, regions or professional backgrounds, finance teams will be better able to execute their expanding and increasingly complex roles and responsibilities.

In the same way, job rotation should be used to help develop the finance leaders of the future. Managers need the opportunity to spend time in different markets or departments, where possible.

Given the increasingly globalised nature of finance professionals’ work, embedding diversity into everything we do is much more than good PR – it’s about being truly effective.

Dean Westcott is finance lead at West Essex Clinical Commissioning Group

63ACCA

AP_INT_A_pres.indd 63 08/03/2012 15:06

01 Proton Holdings’ management with

the company’s Approved Employer certificate

02 Jennifer Lopez presents BDO’s

certificate to managing partner Dato’ Gan Ah Tee

01 Members hear about the MBA opportunities available for them at

Oxford Brookes University

PROTON AND BDO WELCOMED AS APPROVED EMPLOYERSProton Holdings has been added to the ACCA Approved Employer list, an acknowledgment of the carmaker’s dedication in providing valuable support to its employees seeking the ACCA Qualification, and providing relevant learning and development opportunities to ACCA trainees and members.

This recognition was also once again given to BDO Malaysia, which had its ACCA Approved Employer certification renewed for another three years. Jennifer Lopez, country head of ACCA Malaysia, presented the certificates earlier this year.

Currently, more than 200 ACCA members, affiliates and students are working with BDO Malaysia, which has achieved platinum level in the ACCA Approved Employer trainee development stream and is also an ACCA Approved Employer for professional development.

Proton – which has about 20 ACCA members, affiliates and students – obtained gold level in the ACCA Approved Employer trainee development stream and is also an ACCA Approved Employer for professional development.

MEMBERS ENCOURAGED TO GAIN MBA FROM OXFORD BROOKES UNIVERSITYMore than 30 ACCA members recently attended a leadership masterclass, given by Barbara Hocking from the business school at the UK’s Oxford Brookes University.

Hocking, deputy MBA director at the university, also briefed them on the university’s global MBA programme – a valuable qualification for members.

ACCA news64

MY_A_news.indd 64 06/03/2012 14:40

There is ‘no turning back’ from finance shared services and outsourcing (SSO) as a future delivery model for the finance function. Transforming the finance function is a key priority for many finance leaders as they seek to deliver reduced finance costs, drive finance process efficiency and enhance the effectiveness of the finance function as a true business partner to the organisation.

SummiT highlighTS

• unique insights and perspectives on finance transformation, the challenges, issues and opportunities in the transformation space

• Showcase of best-practice approaches by leading global organisations• A look at the finance transformation journey and evolution of the shared service model• Facilitated discussions and debate around specific SSO issues.

Visit www.accaglobal.com/en/asia-finance.html for full programme details.Register online at www.accaevents.com.my/key-events

Asia finance shared services and outsourcing summit 2012

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AB Asia Ads_Apr12.indd 4 02/03/2012 17:49

64 News Proton and BDO become Approved Employers; members briefed on UK university’s MBA programme

63 Dean Westcott Diversity should be embedded into everything we do, says the ACCA president

62 Cost-effective CPD There are many ways to access quality CPD on a budget

61 Devanesan Evanson Organisations must let accountants fl ex their risk management muscles, says ACCA Malaysia’s president

Inside ACCA

Results from the ACCA examinations in December 2011 show there continues to be strong demand for a professional accountancy qualification in times of economic uncertainty. More than 190,000 students sat papers, with over 6,000 taking a major step towards membership. Candidates around the world took more than 363,000 papers, with 6,313 students successfully completing their final ACCA exams.

At the Fundamental level, pass rates were particularly good. The pass rate for paper F7, Financial Reporting, at 56%, was significantly higher than in recent times. All other pass rates at the Fundamental level remained close to their historic averages.

At the Professional level, the results for the Essential papers remained strong while results for the Options papers were not as positive. The result for paper P5, Advanced Performance Management, was very disappointing at 29%. In response to a number of sessions of poor performance in the Options papers, ACCA has carried out work to offer a range of support for students taking these papers to help improve the pass rates. This will be available shortly.

Clare Minchington, ACCA executive director – learning, said: ‘We congratulate those who have succeeded in their exams – and we are delighted to see that more than 6,000 have completed their examinations, having been able to demonstrate the financial knowledge and professional skills which are needed by organisations in challenging economic conditions.

‘We look forward to welcoming them to ACCA membership on completion of their practical experience requirements.’

In December 2011, ACCA’s new Foundations in Accountancy suite of awards was first examined as paper-based and computer-based exams (CBEs). This is an exciting and significant milestone. Almost 13,000 paper-based Foundation in Accountancy exams were sat in December 2011 in addition to more than 34,000 exams sat as CBEs that month.

Exam success

THINKING SMALLAccounting and Business has published a special edition looking at the challenges and opportunities for small and medium-sized enterprises (SMEs) around the world.

Written by SME specialists at ACCA and other experts, the 20-page publication tackles regulation, access to finance and the future for small accountancy practices. It also looks at microfinance, innovation and the development of finance functions in SMEs. Rosana Mirkovic, head of SME policy at ACCA, says: ‘SMEs have a critical role to play in global economic recovery and it is vital that their needs, and the challenges they face, are fully explored and understood.’

Find the publication at www.accaglobal.com/ab

For ACCA’s small business research, go to www.accaglobal.com/smallbusiness

Exam success

THINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALLTHINKING SMALL

Clare Minchington

Rosana Mirkovic

66 ACCA news

MY_A_backpage.indd 66 09/03/2012 10:45

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