presentation pjb risk management seminar

Peter J Baldacchino,

Head, Department of Accountancy

University of Malta

Presentation to the Risk Management Seminar, MARM 2015

30th June, 2015

at the IT Centre , University of Malta

Copyright: PJ Baldacchino

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THE CHANGING ROLE OF MALTESE FINANCIAL MANAGERS AND

AUDITORS WITIN A RISKIER CORPORATE GOVERNANCE

The Changing Role of Maltese Financial Managers and

Auditors Within a Riskier Corporate Environment

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Introduction

Risk management is still to respond effectively to a riskier local corporate environment. Maltese financial managers and auditors are still adapting their role.

This presentation involves tackling two questions:

a) How & why has the environment become riskier?

b) What is and should be the response of financial managers and auditors to such risk changes?

PJ Baldacchino



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Part A

First, a look at the changing riskier environment.

This part will deal with the major changes in the

regulatory framework, communications,

stakeholders and their expectations, market

volatility and short-termism, the demand for

evidence of trustworthiness, the corporate

personnel and the small island-state Factor

PJ Baldacchino



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A1) THE REGULATORY FRAMEWORK /1

A plethora have arisen of changing national, EU and international laws, standards, codes, laws well as regulation both in the profession and the different industries within an environment of

(i) increased Maltese corporate investment outside Malta and

(ii) changing economic, social and political status in a number of countries such as Sirya, the Middle East and even countries such as Greece.

PJ Baldacchino



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A1) THE REGULATORY FRAMEWORK /2

These changes are too often rendering it difficult for professionals such as accountants and auditors to ensure the appropriate exercise of their practice as they cannot (or can scarcely cope) in keeping up to date with all developments as necessary. Matters simply move too fast, particularly for the smaller practices and financial managers of SME’s.

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A2) TOUCH-BUTTON COMMUNICATIONS AND THE

INTERNET/1

It is good to start from this –probably the biggest change

factor in recent years, Just fifty years ago, with sea travel still

a norm, it was expected for mail or human travel from

Europe to Australia to last a whole month. (As a young boy, I

remember my grandma writing to my uncle in Australia “I hope that when this letter arrives you will be in the same good health we have upon it leaving us.”).

PJ Baldacchino



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A2) TOUCH-BUTTON COMMUNICATIONS AND THE INTERNET/2

In contrast, now you can now communicate in just a second or two by sound, written word, photo and data. This has its obvious benefits, but has dramatically increased security risks.

Sensitive commercial information can no longer be simply physically kept under lock and key. More commonly, you are expected not to take days to answer your e-mail. With the pace of dialogue so very fast, the risk of the wrong twit or sms, or one sent to the wrong recipient is painfully high.

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A2) TOUCH-BUTTON COMMUNICATIONS AND THE INTERNET/3

Add to this is the internet Information easily placed therein, with little or no right to be removed, to be forgotten.

This has added company monitors on its website and changed the nature of trading in many industries –ticket and accommodation booking, airline ticketing etc. The company is far more vulnerable to unjustified criticism, hacking and even unfair competitions.

PJ Baldacchino



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A3 ) MORE SOPHISTICATED STAKEHOLDERS WITH INCREASED EXPECTATIONS/1

Stakeholders are no longer the basic three in a rudimentary economy, i.e. the shareholders, the Inland Revenue and the banks. Indeed, each of these groups has become more financially knowledgeable and skilful and consequently more demanding.

Yet added to this there are more sophisticated pressures and reactions from the various regulating and public auditing bodies seeking tighter compliance, quality audits and even stress testing (e.g. MFSA, NAO, IAID, Accountancy Board, EU Commission and the various authorities such as those of the planning, environment and maritime among others).

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A3 ) MORE SOPHISTICATED STAKEHOLDERS WITH INCREASED EXPECTATIONS/2

Add to this the pressures of the environmentalists, the increased expectations of civil society, the mushrooming of more independent sensation-seeking traditional and social media, the credit agencies as well as the customers themselves.

For example, while customers now positively have a much wider choice than before, this also breeds ever-less customer loyalty, as well the requirement of instant best-quality service, immediate settlement of complaints or cash refunds.

PJ Baldacchino



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A4 ) MARKET VOLATILITY AND SHORT –TERMISM/1

Given the above, whole industries can be suddenly ruined by

unexpected developments, e.g. the tourism industry

depends on political and social stability – we have seen last week.

In particular, even the political instability of our

neighbouring countries such as Libya can mean unsettled

bills, cancellation or abandonment of projects, and wasted

planning. PJ Baldacchino



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A4 ) MARKET VOLATILITY AND SHORT –TERMISM/2

In such an environment, long-term strategic planning needs to be continually revisited in the light of developments.

Most investors are won by short-termism (“In the long term we are all dead”) believing very little in the long term, and even less in getting worse before getting better – they want results, and they want them now.

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A5) CONTINUOUS DEMAND FOR EVIDENCE OF TRUSTWORTHINES

Being a qualified professional is now far less an automatic key success and the public cannot simply be assumed to place its trust in you. With the various means of communications, longstanding pillars of traditional services such as the nearby doctor, lawyer, notary and even parish priest have been largely swept away and replaced by the best national and sometimes, international experts.

Continued accountability and transparency is therefore the name of the today’s game. Information being produced not necessarily used. (Look at the ever-thickening annual reports) Clients demand regular evidence of competence and integrity as a prerequisite for their trustworthiness.

PJ Baldacchino



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A6) THE CORPORATE PERSONNEL

The make-up of today’s corporate personnel also poses new risks. Employees on an indefinite appointment are becoming a rare breed, particularly at the higher managerial echelons, where the three-year contract is becoming the norm with the clause of “position of trust” and therefore not eligible for permanence.

Consequently, we have less loyalty even on the part of employees, more turnover, and more stress-inducing uncertainty about continuity, all this further inducing short-termism - despite most Business Continuity Policies. While the higher percentage of females in the working force is a positive development, as yet companies have seldom well adjusted to this with the appropriate flexible hours and tele-working, these bringing in their own risks, besides blurring the line between the private and working lives of the employee

PJ Baldacchino



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A7) THE SMALL ISLAND-STATE FACTOR/1

Most of the above are not peculiar to the Maltese corporate sector. But the fact that Malta is a small European island-state, with small institutions, small regulators, small-sized companies has its own bearing. Research indicates the main advantage of corporate flexibility and responsiveness but also the additional risks.

These include a higher tendency towards conflicts of interest and a lack of independence , more tendency towards the informal disclosure of confidential information, resistance towards official whistle-blowing , personal networks that may at times influence to limit the due disciplinary process as well limitations in benchmarking and official inter-company information being scarcely forthcoming.

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A7) THE SMALL ISLAND-STATE FACTOR/2

Gatekeeping and hat-changing may impede progress, and

behavioural factors may override economic considerations in

decisions such as changing managers and app

It is difficult to discuss tackling all these risks within a short

time and I have no panacea, but I will look into the major issues.

People know it all unofficially, but hesitate to use it

officially - “rajt ma rajtx, smajt ma smajtx” is still ingrained

in the Maltese mentality, impeding progress. Things have improved

somewhat in the past decade, especially with the effects of EU

accession and wider travel, but this risk factor still remains

relevant. PJ Baldacchino

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Part B

This second part will now deal with the actual and potential response of financial auditors to such risk changes. It is difficult to discuss tackling all these risk changes within a short time and I have no panacea, but I will look into the major issues.

I shall now go into encouraging teamwork and specialization, enhancing training and ethical behaviour, improving corporate risk structures, whistle-blowing, compensation issues, balancing stakeholder needs , and strengthening the public watchdogs.

PJ Baldacchino



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B1) ENCOURAGING TEAMWORK AND SPECIALISATION, YET FLEXIBILITY/1

As for the regulatory framework, the lone professional and financial manager is in a fix. Teamwork is much more important than before. Team building and team member compatibility is essential. Seeking and engaging the best brains is even more significant than before. We see these efforts in the engagement by professional; audit firms of the best graduates at the University, resulting in contracts being graduate-led rather than employer-led.

Furthermore, specialist consultants who are to be readily available are becoming a sine qua non as despite all you know, there is more to know for the wisest decisions. The style of management is therefore more participative, though still to be led by able leaders who know how to take a decision.

PJ Baldacchino



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B1) ENCOURAGING TEAMWORK AND SPECIALISATION, YET FLEXIBILITY/2

At the same time, financial managers and auditors have to be more flexible in their time schedules and location. As for their work schedules, they need to dedicate much time to listening throughout prior to making their decisions or forwarding their advice.

Financial managers have to be more careful to build up inter-professional links: they need to get to grips in their meetings in with the perspectives of the other professions such as marketing, operations and human resources. As for their location, they also have to be accept mobility, be willing to rotate to other locations and even jobs to gain wider perspectives. As for external audit partners, research also indicates that easy external client accessibility to such partner is essential to the auditor/management relationship, and that soft skill/ communication abilities of such partner are having a more significant role.

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B2) ENHANCING TRAINING AND STRENGTHENING ETHICAL BEHAVIOUR/1

Continued Professional Development Training is becoming much more important, particularly to keep up to date with the regulatory framework. Yet, more helpful than knowing the formal standards, codes of ethics and of corporate governance is the acquisition of training in their application, a process that should have started from school and university. In one’s professional training this can be done by balancing theory and practice, particularly through the wider use of case studies

Professional networks can help expand the sharing of mutual experiences, both in solving ethical dilemmas and deciding on conflicts of interest. We all know that proper ethical behaviour, in particular goes far beyond knowing the rules. One needs to build and retain a strong sense AWARENESS of ethical dilemmas, the prudence to apply wisdom in DECIDING the fairest course of action, and courage to IMPLEMENT such decisions.

PJ Baldacchino

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B2) ENHANCING TRAINING AND STRENGTHENING ETHICAL BEHAVIOUR/2

No code, for example, teaches you courage. No code teaches you wisdom, justice and prudence But these qualities need to be inculcated by conviction earlier on among the young, and consolidated by the sharing of experiences as we go through our career that the appropriate ethical behaviour is the winning way forward - for the professional himself, for his professional peers, and for society as a whole. Furthermore, in a recent study presented abroad last month, we have found WORK EXPERIENCE as being one of the major factors acting against dysfunctional behaviour in audit firms. Its sharing can indeed reduce the risks involved.

But are we doing for the inexperienced applicants to our companies? What weight do we give to other major factors influencing dysfunctional behaviour, say, do we seriously examine the applicant’s ethical disposition (e.g. level of ethical reasoning, locus of control etc) deciding on his/her engagement?

PJ Baldacchino

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B3) IMPROVING CORPORATE RISK STRUCTURES

In most local organisations we are still learning on how to set the best structures to deal with risk in local organisations. For example, in one large local organisation I know about, the Risk Management Unit (RMU) is the risk champion identifying, assessing how each office is managing the risks involved and reviewing most risks involved, the Legal Office doing the same with the contract risks while the Internal Audit Office evaluates the effectiveness of the whole risk management process. The system seems to work well enough, yet the overall coordination of the different risks across the organisation is still subject to debate. In my opinion, at the top a single Board sub-committee of the Board of Directors, (probably simply called the Audit Committee) rather than a Management Committee is best placed to oversee such risk management process.

Yet irrespective of the actual structures the most important issue is the realistic assessment and regular reporting of the impact and likelihood of the risks involved. In my experience, we need more expertise in this

PJ Baldacchino

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B4) INVESTING IN WHISTLE-BLOWING

My experience of whistle-blowing is that there has been continuously hidden resistance to it over the years, except for a few large foreign-owned companies where whistle-blowing is an extension of international group policy.

The Protection of the Whistleblower Act, 2013 is helping to change this culture in the bigger companies Whistle-blowing needs patience and investment as false alarms may be plentiful, but the few genuine reports normally makes it worthwhile in timely risk reduction

PJ Baldacchino



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B5) COMPENSATION ISSUES

The optimal performance-based compensation schemes have as yet eluded financial managers and their advisers.

Yet, in contrast to mere time-related pay, such schemes aimed at bringing congruence between management and Board of Director objectives are worth launching and tend to reduce risks of management apathy and disinterest to shareholders (agency theory).

Yet, here, in Malta, few CEO’s and top managers are as yet really engaged on this basis.

PJ Baldacchino

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B6) BALANCING STAKEHOLDERS –SIMPLIFIED REPORTING AND READINESS TO FACE THE MEDIA

Balancing the needs of the various stakeholders is a difficult job both for financial managers and their auditors. One clear issue is that the thicker annual reports are not doing the job. Sometimes I doubt whoever reads the long reports sent to shareholders.

I think that while the financial information being produced at present still has to remain available for expert comparability and verifiability, simplified timely versions of the company’s performance and position must be made available on company websites and in the media in order to increase shareholder understandability and minimise shareholder misconceptions. Prompt press releases throughout the year will also help dispel false rumours.

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B7) STRENGTHENING THE PUBLIC WATCHDOGS

Finally, in the public sector, the NAO and the IAID need to inter-relate more and avoid both duplications and gaps in their coverage of departments, public authorities and government-owned entities.. Additionally, the Public Accounts Committee (PAC) must see that its findings are reported to and debated in Parliament.

In addition, Regulators, (e,g, the Accountancy Board and MFSA) need to be legally clearly able to communicate more with each other. The various types of regulators may also at times need more support and provision of expertise from parallel foreign bodies. Finally, the Regulators could make better use of the media more to give regular timely feedback to the Maltese taxpayer.

PJ Baldacchino



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PJ BALDACCHINO

presentation pjb risk management seminar

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