uk accounting and business
TRANSCRIPT
CPDGet verifiable CPD units by reading technical articles
The magazine for fi nance professionalsABUK Accounting and Business
Think AheadThink Ahead
Natural winner Lush CFO Kim Coles on the success of ethical sourcing
Green shoots in the valleysWales is attracting big-ticket investment
Regulatory penalties Call for a single set of standardsBEPS project Why all the action points need to be embraced
CPD technical Sustainability reporting requirementsBack to basics How apps can make your life better
UK 10/2015
Taking stockHans Hoogervorst, IASB chairman, refl ects on the board’s progress
Port in a stormEffective budgeting is vital for gaining competitive advantage
UK
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Accou
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IFRS comes of age – but still has work to do
A decade has passed since International Financial Reporting Standards became the widely accepted accounting vernacular for
listed fi nancial statements. Since the transition towards European Union-wide use of IFRS began all those years ago, 116 countries have adopted IFRS in full. To say that this has been a success is an understatement if you recall some initial reactions. Many local GAAP (generally accepted accounting principles), including in the UK, were considered perfectly adequate, so why take the trouble to re-educate fi nance professionals on a different set of standards?
Of course, the benefi t of a common language for fi nancial statements is a huge draw in this globalised age. Yet some markets, such as the US, have still not fully committed to IFRS. Convergence between the Financial Accounting Standards Board and the International Accounting Standards Board has failed for certain projects, such as fi nancial instruments, insurance and leases (while some successes can be celebrated in signifi cant areas such as the revenue standard). As IASB chairman Hans
Hoogervorst points out on page 36, IFRS is important to the US and the IASB needs to be patient. In this exclusive interview he explains why the past 10 years of IFRS is a cause for celebration and why there was a need to issue a recent document addressing some misconceptions about the work of the IASB.
A single set of standards is also being called for in the area of regulation. As our feature on page 59 points out, regulation varies hugely around the world, including within the EU. We hear that 25% of senior executives in the fi nancial services sector cite a single set of global regulatory standards as being the most important factor in maintaining an effective regulatory system. We look at the effect of the increasing severity of fi nes and consider if behaviour can be improved within companies by emphasising the positive outcomes of good performance instead of focusing on the negative outcomes of bad conduct.
And with many eyes likely to be glued to the Rugby World Cup throughout October, we have an exclusive video with Steve Brown FCCA, managing director of England Rugby 2015. You can fi nd out more on page 10 and via our hub at www.accaglobal.com/ab.
Jo Malvern, editor, [email protected]
Welcome
Accounting and BusinessThe leading monthly magazine for fi nance professionals, available in six different versions: China, Ireland, International, Malaysia, Singapore and UK.
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3Welcome
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News6 News in pictures A different view of recent headlines
8 News roundup A digest of all the latest news and developments
Focus14 Interview: Kim Coles The Lush FD on how the cosmetics company has blended scrupulous ethicality with spectacular expansion
19 Take that! The tough deterrent regime for the financial services sector looks here to stay
Practice22 The view from Daniyal Syed of Deloitte UK; plus snapshot of forensic accounting
24 Big fish, small pond Is KPMG’s entry into the SME market a game-changer for SMPs?
Comment25 Jane Fuller Questionable values can prevent good governance
26 Peter Williams Europe’s adopton of IFRS is a remarkable sucess story
27 Alexandra Chin ACCA’s new president looks ahead to what her term of office holds in store
28 Robert Bruce Corporate reporting is disillusioning the profession
Insight30 Dodging the FX burn In the second of three articles in association with WorldFirst, we look at how foreign currency hedging works
35 Graphics A look at women’s global
AB UK Edition October 2015Volume 18 Issue 9Editor-in-chief Jo [email protected] +44 (0)20 7059 5818
Asia editor Colette [email protected] +44 (0)20 7059 5896
International editor Lesley [email protected] +44 (0)20 7059 5965
Ireland editor Pat [email protected]
Digital editor Jamie Ambler
Video production manager Jon Gilmore
Sub-editors Dean Gurden, Peter Kernan, Jenny Mill, Eva Peaty, Vivienne Riddoch
Digital sub-editors Rhian Stephens, Eleni Perry
Design manager Jackie [email protected] +44 (0)20 7059 5620
Designers Bob Cree, Robert Mills, Zack Starkey-McGrath
Production manager Anthony [email protected]
Advertising Richard [email protected] +44 (0)20 7902 1221
Head of ACCA Media Chris [email protected] +44 (0)20 7059 5966
Printing Wyndeham Group Pictures Corbis
ACCAPresident Alexandra Chin FCCADeputy president Brian McEnery FCCAVice president Leo Lee FCCAChief executive Helen Brand OBE
ACCA ConnectTel +44 (0)141 582 2000Fax +44 (0)141 582 [email protected]@[email protected]
Accounting and Business is published by ACCA 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. The publication of an advertisement does not imply endorsement by ACCA of a product or service.
Copyright ACCA 2015No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA.
Accounting and Business is published monthly by Certified Accountant (Publications) Ltd, a subsidiary of the Association of Chartered Certified Accountants.
ISSN No: 1460-406X
29 Lincoln’s Inn FieldsLondon, WC2A 3EE, UK+44 (0) 20 7059 5000 www.accaglobal.com
Audit period July 2013 to June 2014 162,798
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representation at senior management level
36 State of play We talk to IASB chairman Hans Hoogervorst about the fi rst decade of IFRS
39 Planning ahead Cynicism about budgeting leads companies to neglect its real value
41 All or nothing Companies should not pick and choose from the OECD’s BEPS action points
44 Careers Dr Rob Yeung on what make people eminently employable; plus the perfect CV
46 Once upon a time Storytelling can play a key role in strategic and fi nancial decision-making
48 Agile methodsHow scrum communication can speed up projects
Technical49 Green standards Sustainability reporting requirements and practices
52 Technical update The latest on audit, tax and fi nancial reporting
58 A decade of IFRS How annual reports and accounts have changed under IFRS
59 UK GAAP Get ready for FRSs 101 and 102
61 Pensions Three strategies for supporting auto-enrolment for clients
Corporate63 The view from Karen Shaw of Waterfall Catering; plus snapshot of media and entertainment
64 Wales The up-and-coming location for shared fi nancial service centres
68 Under pressure A CFO moving into an SME should expect challenges
Public70 The view from Edith Yembra of YMCA North London; plus snapshot of defence expenditure
71 Transformation Does public spending on IT deliver?
People72 Interview: Chris ForrestThe FD of Christie’s Decorative Arts on how he balances the interests of buyer and auction house
Back to basics75 Apps All you ever wanted to know
ACCA77 News A new ACCA report looks at the fi nance function’s role as a driver for growth
79 CAWS Celebrating 50 years of female advocacy
80 Diary Events around the country
82 Update The latest ACCA/IMA survey of global economic conditions
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▲ New face Jeremy Corbyn’s election as Labour leader has received a mixed reaction from business, including a cautious welcome for his plan on infrastructure
▲ The royal weQueen Elizabeth II broke the record to become Britain’s longest-serving monarch. Brand Finance estimates the Royal Family’s value at £57bn
► Fryscraper tops worst building listBuilding Design magazine awarded London’s Walkie Talkie, which has melted cars and singed shopfronts, the 2015 Carbuncle Cup
▲ Race overFormer jockey and trainer Charlie Swan was forced to pay almost £90,000 in bills, interest and fines as part of a wider investigation into tax defaulters
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▼ Top of the blocksLEGO surpassed Barbie-maker Mattel as the world’s biggest toymaker. It reported an 18% leap in first-half sales to 14bn Danish kroner (£1.38bn)
▼ Star role A new United Nations campaign, featuring stars such as Beyoncé, will highlight its new goals to eradicate poverty, fight inequality and combat climate change
▼ On the move As refugees, mainly from Syria, continue to make the treacherous journey to Europe, the United Nations predicts that 400,000 will arrive by sea this year
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News roundup This issue’s stories and infographics from across the UK, as well as a look at the latest developments affecting the fi nance profession around the world
Tax agencies improveTax collection agencies are becoming more effi cient and have cut collection costs through greater use of digital technologies, according to the Organisation for Economic Co-operation and Development’s Tax Administration 2015 report. The survey of 56 advanced economies found substantial organisational restructuring is taking place. Some 40% of agencies are undergoing signifi cant changes in their operations, including mergers with other government bodies and the undertaking of additional business activities. Meanwhile, 60% of the agencies are cutting staff. Despite this, most agencies have improved their tax collection performance.
SFO to look at QuindellThe Serious Fraud Offi ce (SFO) has launched an investigation into business and accounting practices at Quindell. The Financial Reporting Council (FRC) announced that as a result of the decision of the SFO, it has discontinued its own investigation. In a statement, Quindell said: ‘In light of the positive actions taken by the directors in correcting the identifi ed errors, amending accounting policies and providing their undertakings, the [FRC] is closing its review of the 2011 and 2012 report and accounts.’ Quindell has appointed Indro Mukerjee as its new group chief executive.
Co-op Bank censured The Co-operative Bank has been censured by the Financial Conduct Authority
(FCA) for misrepresenting its fi nancial position. A joint investigation by the FCA and the Prudential Regulation Authority (PRA) found the bank ‘fell short of its responsibility to be open with its regulators’. The bank also failed to manage its affairs responsibly, nor did it have adequate risk management, said the PRA. The FCA had found the bank had misrepresented its fi nancial position in its report for 2012 when it said ‘adequate capitalisation can be maintained at all times’. An investigation is continuing to take place into senior former individuals at the bank.
PwC investigates GRG PwC is to conduct a review of RBS’s Global Restructuring Group in relation to allegations that the division closed down viable businesses to allow RBS to obtain undervalued assets. The allegations were set out in a report written for the then business secretary Vince Cable by his adviser Lawrence Tomlinson. A spokesman for RBS confi rmed that the review is taking place but said it was less far-reaching than a previous investigation conducted by RBS’s lawyers, Clifford Chance. The Financial Conduct Authority has commissioned an independent review.
Banking fines riseThe world’s largest banks have been penalised US$260bn as a result of regulatory and legal challenges since the onset of the fi nancial crisis, analysis by Morgan Stanley has revealed. The report predicts a further US$60bn of litigation costs will
be borne by the fi ve largest US and 20 biggest European banks over the next two years. The top fi ve US banks – Bank of America, Morgan Stanley, JP Morgan, Citi and Goldman Sachs – have borne the brunt of the penalties, at a cost of US$137bn. The fi gures were compiled using reported fi nes and penalties, plus provisions for future years’ costs. See also the feature on regulatory penalties on page 19.
ESG boosts performanceCompanies that adopt sustainability standards achieve demonstrable fi nancial benefi ts, according to the Global Ethical Finance Forum.
Research undertaken for the Forum by the University of Oxford and Arabesque Asset Management found clear evidence that the use of sustainability standards lowers the cost of capital – a conclusion of 90% of relevant studies. The report also found that operating in accordance with sound environmental, sustainability and governance (ESG) principles achieved better operational performance – a fi nding of 88% of research projects.
IIRC releases guidanceThe International Integrated Reporting Council (IIRC) has released a ‘competence »
Toshiba fallout continues
Toshiba overstated its profi ts by around US$2bn over a period of seven years, the company has reported. The admission came when Toshiba published restated fi nancial results, following an acknowledgement of accounting irregularities. The roots of this lay in a culture of subservience and led to chief executive and president Hisao Tanaka resigning in July. The company has now lost more than a third of its market value. EY Japan is reportedly undertaking its own internal investigation into its audits of the company’s results. EY declined to comment.
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matrix’ to assist practitioners understand the skills and experience they need in order to be effective with integrated reporting. The aim is to help organisations achieve consistency in their skills provision. The matrix uses a principles-based approach to explain what practitioners should have learnt, while building on their existing professional reporting skills. The IIRC is emphasising the close relationship between corporate governance and reporting.
Accountants targetedAccountants and other professionals who assist criminals to launder money are being targeted under a new government initiative. ‘Money
laundering is heavily reliant on access to the professional skills of, among others, lawyers, estate agents, accountants and company agents,’ said the National Crime Agency (NCA). The NCA has established an International Corruption Unit to tackle cross-border criminality. In a speech in Singapore, Prime Minister David Cameron said measures will be introduced to increase transparency of business and property ownership to clamp down on foreign criminals’ use of the UK to launder the proceeds of crime.
Conciliation approvedACCA’s conciliation service has been given approval by the Chartered Trading
Standards Institute to become a regulator. This means that clients of ACCA members and fi rms who have exhausted internal complaints processes can now seek assistance via the conciliation service of ACCA. From October, members and fi rms regulated by ACCA will be required to direct their clients towards the ACCA’s assessment department, which will evaluate a complaint for its suitability for conciliation.
IFRS ‘contrary to law’IFRS breaches UK and EU company law by permitting companies to distribute unrealised gains as dividends, argues a legal opinion obtained by the Local Authority
Pension Fund Forum. George Bompas QC advised the forum: ‘Mark-up-to-market accounting with international accounting standards results in realised profi ts and losses and unrealised gains being mixed up, with the effect that unrealised gains are passing off as “profi ts”, which is contrary to the requirements of UK and EU company law.’ The Financial Reporting Council said it stood by its legal advice that ‘the presentation of a true and fair view remains a fundamental requirement of fi nancial reporting’ and that IFRS meets this requirement.
Demand for staff rises There has been a 12% rise in demand for fi nance and accounting professionals, according to data collated by the Association of Professional Staffi ng Companies (APSCo). Recruitment consultancy Morgan McKinley reported an even higher – 56% – increase in job vacancies for fi nancial services workers in London. It said employers had delayed recruitment during the general election period, but were now hiring again. APSCo said that pay for fi nance professionals had risen by 5.5% in a year.
Women earning fifth lessWomen professionals earn more than a fi fth less than men doing similar work, according to the Chartered Management Institute. Using data from the National Management Salary Survey 2015, the CMI and salary specialist XpertHR calculate that women working in equivalent full-time roles earn 22% less than men, meaning that they are unpaid for one hour and 40 minutes a day – a total of 57 working days every year. Male professionals earn on average £39,136 and women £30,612.
Reports obscure detailFTSE companies’ annual reports often obscure detail
Fraud on the up
The total cost of fraudulent activity in the fi rst half of 2015 was £385m, an increase of 22% compared to the same period last year, according to KPMG’s latest Fraud Barometer. It also found that family fraud has increased ‘as Britain’s elderly are preyed on by younger relatives’. Also on the increase is supply chain fraud, as middle-men pass themselves or their products off as genuine. And white-collar crime has surged: frauds totalling £262m were committed by those in positions of responsibility or management. See the full results of the survey at bit.ly/KPMG-fraud
Value by age of perpetrator
28% 36-45 years
7% Grandparents
15% Same generation
78% Parents
33% 46-55 years
39% 55> years
Value by generation targeted
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with their density, according to PwC’s report Searching for Buried Treasure. Banks’ reports are the most diffi cult to handle, at an average of 339 pages. Asset managers’ reports are comparatively thin at a ‘mere’ 109 pages on average. ‘Reports across energy and fi nancial services industries are getting larger – and in some cases are the length of a blockbuster novel,’ complained Bruce Collins, assurance partner in PwC’s Aberdeen Oil and Gas centre of excellence. Despite this, companies often fail to show how strategy connects to their business model, how risk can affect their business and how the business is managed through key performance indicators.
Ulster opens fintech labUlster University has opened a fi nancial innovation laboratory to provide students with access to software that imitates the experience of being a trader at an investment bank. The project is a joint venture between the university, Invest Northern Ireland and the CME Group Foundation, which is providing US$175,000 towards the cost. Irish enterprise minister Jonathan Bell said: ‘Focusing on real-world fi nancial technology, the laboratory will provide students with exposure to state-of-the-art fi nancial software and access to the expertise of leading industry, which will help to produce
graduates with high-level analytical skills.’
HMRC unleashes tsunamiHMRC has obtained a ‘tsunami’ of new tax-collecting powers, according to a tax offi cial speaking anonymously to the Financial Times. The offi cial explained that the new government has turned its back on the negotiated approach to settling large but disputed tax bills. New measures include ‘strict liability’, eliminating the excuse that evasion had been accidental except in rare cases, and making the aiding of tax evasion – including by accountants – a criminal offence. The Budget provided HMRC with an
additional £800m to tackle tax evasion.
PwC reports revenuePwC’s UK revenues grew by 10% to top £3bn in the year ending June. Profi ts rose by 6% to £818m. Consulting revenues rose by 16% to £571m; assurance by 9% to £1.1bn; deals by 8% to £628m; and tax by 7% to £763m. Ian Powell, chairman and senior partner of PwC UK, said the profi ts refl ected its planning and investment strategy. ‘Over the past seven years we have invested close to £1bn in developing our people, technology, infrastructure and new services to meet the future needs of our business,’ he explained. »
When Steve Brown left school, he wanted to be a rock star and started a band. But when the records didn’t sell, he set his sights on a career in fi nance, attaining his ACCA Qualifi cation while working at the NHS. After building his
career in healthcare fi nance he grabbed an opportunity to enter the sports world, becoming CFO of England’s Rugby Football Union in 2011, and this year stepping up to run one of the world’s largest sports tournaments.
Take oneAs the Rugby World Cup gets into full swing, the latest in our series of video interviews with high-profi le members features Steve Brown FCCA, managing director of England Rugby 2015
Find out more about Steve Brown’s
inspiring career journey to one of the top jobs in the sports industry at www.accaglobal.com/ab/videos
His leadership role in
planning and running the Rugby World Cup tournament
His journey from aspiring
rock star to fi nance and management in the world of sport
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EY launches health teamEY is to consolidate its health consultancy expertise from various parts of the business to form a new global healthcare team. The practice is to work with clients to improve effi ciency, support new digital health technologies and help the evolution of approaches to prevent ill health. The practice is to be led by Jacques Mulder, who joined EY at the end of last year from Deloitte, where he was chief strategy offi cer for healthcare and life sciences.
KPMG opens W1 officesKPMG is to open plush new offi ces in Mayfair, described by the Financial Times as a ‘members’ club’ for KPMG clients. ‘The fi ve-storey converted townhouse at 20 Grosvenor Street will provide a club-like atmosphere for well-heeled clients who feel more at home in London
W1 than the glass-and-steel environs of its corporate headquarters in Canary Wharf in faraway Docklands,’ gushed the FT. A spokesman for KPMG described it more prosaically as ‘space for clients and meetings’. It will contain a restaurant, bar, presentation suite, business lounge and meeting rooms.
eBay’s Wong joins EYEY has appointed Jeff Wong as head of its new global innovation team. Wong joins from eBay, where he led its business incubation group. ‘Jeff will take his experience and insights to challenge everything from the way we do business internally to the way we innovate with our clients,’ said Mark Weinberger, EY’s global CEO and chairman.
Deloitte revenues riseDeloitte UK increased its revenues in the year ending May by 6.4%, to £2.71bn,
with profi ts rising by 7% to £593m. Revenues increased across all business lines, with consulting growing by 10.5%, fi nancial advisory by 9%, tax services by 5% and audit by 0.3%. As part of its results, Deloitte also published its gender pay gap, which is 17.8%. However, senior partner David Sproul said the gap at each grade is much lower, at 1.5%. ‘This illustrates that for Deloitte, the issue is far less about how we pay our people and more about the number of women employed at senior grades.’
Deloitte expands KaisenDeloitte has launched a new leadership consulting practice, which will recruit 700 people by 2020, of which 140 will be in the UK. The new practice will expand on Deloitte’s acquisition of Kaisen Consulting, described as ‘a boutique leadership consultancy of business psychologists’. Kaisen is based in Bristol and employs more than 60 people, including 30 occupational psychologists.
DFK expands in UKTwo London fi rms have joined the DFK International network, boosting its representation in the UK and Ireland to 18 fi rms. Carter Backer Winter – known as CBW – and Wilson Wright are both based in Central London, becoming the city’s representatives of DFK. Earlier this year DFK announced expansions in both China and Russia, recruiting new member fi rms. It is a top 10 global accountancy association, with more than 400 offi ces in over 90 countries.
Almond rejoins GTSue Almond has been appointed by Grant Thornton as its head of assurance. She was previously in charge of ACCA’s external affairs programme. Almond had
been with Grant Thornton for more than 20 years, from 1988 to 2009. As head of assurance, she will work closely with the fi rm’s leadership, focusing on quality and excellence and will be based in the fi rm’s London offi ce. Almond takes over from Mark Cardiff, who becomes head of practice development, a new role.
PwC retains easyJetEasyJet has retained PwC as its auditor, following a tendering exercise. PwC was also successful in winning the audit for Aberdeen Asset Management, which had previously been held by KPMG. Deloitte has won the contract for Admiral Group Insurance, which had also been audited by KPMG. There was better news for KPMG when it won the audit tender for Premier Foods, where it replaced PwC.
Big Four activity on upThe Big Four have continued to implement strategies to increase revenues and enter new areas of activity. EY has acquired Seren, a digital consultancy based in London’s ‘Silicon Roundabout’ area, with 60 staff. EY says the purchase – the fi rst of its kind by an accountancy or advisory practice – is part of a plan to grow its global strategy consulting service to over 2,500 people by 2020. PwC has entered into a strategic partnership with Tanium, a cybersecurity service provider. Deloitte has agreed to work closely with Sage through a strategic partnership, to provide SMEs with cloud-based business management services. KPMG has announced a strategic alliance with MarketInvoice, to provide SMEs with a wider range of fi nance and advice services. ■
Compiled by Paul Gosling, journalist
Students welcome
PwC has received a record number of student applications this year, with 41,000 seeking places on student programmes. It received 23,000 applications to graduate positions, a rise of 15% since it dropped the use of UCAS scores as entry criteria. The other Big Four fi rms have also adopted less rigid recruitment criteria to attract a more socially diverse intake. Rob Fryer, head of student recruitment at Deloitte, explained: ‘We are actively seeking applications from a wider breadth of backgrounds and we look for individuals who have gained both work and life experience alongside their academic achievements.’
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Protect yourselfOne in six small businesses says it’s lost money in the past year as a result of poor professional advice. The impact on their business adviser can be equally shattering.
Every small business owner dreads the day when they make a mistake. When you’re in the business of giving professional advice, the impact on the client – and on your own business – is potentially crippling.
According to new research from Direct Line for Business, the small business insurer, one in six small and micro businesses in the UK – some 320,000 companies in total – say they’ve lost money as a result of receiving poor professional advice in the past year. The average loss in each case was £20,842, but 19% said that poor advice had lost them between £50,000 and £100,000.
The majority of cases (44%) involved advice from IT consultants, but 34% of the affected businesses said the culprit was poor advice on management issues and 9% blamed advice from their accountant.
The other side of the storyIn most cases the impact on the adviser is equally shattering. Even innocent mistakes can do a huge amount of damage. The cost and stress of a legal battle is often the most visible loss but the most significant risk by far is to a business’s biggest asset – its reputation.
The corporate reputation and branding consultancy Reputation
Dividend calculated in 2012 that between a quarter and a third of a company’s value is directly attributable to its reputation. And anything that damages it will inevitably hit revenues hard; a survey by Deloitte in 2014 of companies that had suffered reputation-damaging events found that 41% had seen the biggest impact in loss of revenue and brand value.
Professional Indemnity coverIt’s this recognition that’s behind the decision of Direct Line for Business to add Professional Indemnity Insurance to its range of products for small businesses. This new product, which is underwritten by U K Insurance Limited, covers your costs if you’ve provided inadequate advice, services or designs that cause your client to lose money. Anyone who buys Professional Indemnity Insurance will be covered against breach of professional services, confidentiality, libel or slander, unintentional infringement of intellectual property and loss of data or damage to documents.
‘Our research shows clearly how small businesses can be affected by poor professional advice,’ said Nick Breton,
Head of Direct Line for Business. ‘But it doesn’t stop there – the impact on the adviser can be just as catastrophic. If you provide advice, you could find yourself facing a compensation claim at some stage in your career. Our Professional Indemnity Insurance is an umbrella for that eventuality.’
For more information: Search for ‘Direct Line for Business Professional Indemnity Insurance’, or call 0345 878 555
19% of businesses who believe they
have lost money as a result of poor advice said it had cost them
between £50,000 and £100,000
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14 Focus | Interview
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CV
Sweet smell of successLush has been producing ethically sourced cosmetics since 1995. FD Kim Coles FCCA talks about the journey that has led to soaring profits and global expansion
with our ethical tax policy, we don’t want them to be involved in any dodgy tax schemes or messing about with their VAT,’ says Coles. ‘We want them to pay their taxes and make the proper deductions where they can, and pay the correct and fair amount of tax.’
This natural, environmental and sustainable business environment is very different from Coles’s previous work at Grindlays Bank in the City and at Sotheby’s auction house in London. ‘When I moved to Poole from London I really didn’t imagine finding another business as exciting and full of passionate people as Sotheby’s had been. I loved my 15 years there and sort of accepted that while life outside London would have cleaner air, it would be somehow less dynamic with nice quiet nine-to-five accounting jobs.’
‘Then I joined Lush and was fortunately proved very wrong. The people are just as passionate, dynamic and fun to work with and I’ve really got caught up in the buzz of working with fresh products and caring for the environment. And we get to live by the seaside! Working in central London, it’s easy to forget about the environment.’
Initially, Coles joined Lush as a financial controller for the UK retail business in 2004. Her team was required to process faxed sales results coming through each week.
Then, as the number of shops and the business grew, Coles and her team began creating more automated, efficient processing systems. This included giving the shops better tools and till systems to help managers run their businesses better – with fewer faxes, less manual input, proper bank reconciliations, better stock checking and less admin – streamlining and tightening everything up. »
Cosmetics giant Lush has every reason to celebrate its 20th anniversary in style. All its line graphs show an upward curve, from staff and shop numbers to
profits, sales and charity donations. No wonder finance director Kim Coles is smiling broadly from her bright and breezy position at ‘Lush Towers’ in Poole, Dorset, the company’s birthplace and main home.
The growth and expansion of Lush Fresh Handmade Cosmetics, to give the company its full title, is nothing short of miraculous. From its humble beginnings in 1995 when Mark Constantine and his five fellow Dorset-based founders first experimented with all fresh, handmade cosmetic products in Constantine’s garage, and opened their first store, the company has taken off. By 2000, Lush had 68 stores worldwide. In 2010, that number had reached 671, and now in 2015 it has 934 worldwide in 49 countries.
This last published accounts (2014) showed brand sales increase to over £450m and pre-tax profits to £23m (up from £11m in 2005), charitable donations were £4.6m and staff numbers have hit 11,000 around the world.
But while these numbers are impressive, Lush, and in turn Coles, are keener to promote the company’s ethical and sustainable success.
‘We place great emphasis on fresh ingredients such as organic fruits and vegetables with all our products,’ says Coles. ‘We operate a strict policy against animal testing. We also lead the industry in combating over-packaging by running public awareness campaigns and developing products that are sold “naked” to the consumer.’
Bath bombs and shower jelliesSome of these standout beauty products include the fizzing bath bombs, shower jellies, solid shampoo bars and solid toothpaste – all of which are handmade at the Lush factories and none are despatched at more than three weeks old.
The ingredients are ethically sourced by the creative buying team who meet the growers and producers, and ensure care for the environment and fair conditions for workers. ‘We have set up a SLush Fund, which to an accountant might sound a bit dodgy, but it is used to start or support sustainable farming and regenerative community projects around the world,’ explains Coles.
This ethical approach also extends to the company’s tax policy, which aims to ensure that the business pays the right amount and is open and transparent in its tax dealings. ‘We make it clear to all our finance directors around the world that,
2004Joined Lush as financial controller before becoming finance director
1988Joined Sotheby’s as assistant financial controller, working up to chief accountant and then senior director of business planning
1983Joined Grindlays Bank as trainee on the bank’s recognised accountant’s training scheme, completing her ACCA Qualification there in 1987
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Tips
‘As an accountant remember you can choose the type of business you work in. Think about what passions and interests you have so you can make them part of your daily working life.’
‘It’s important for FDs to have clear, straightforward accounting so that you can see what your true costs and drivers are. Also, particularly for a multinational company, accept the responsibility of paying taxes and don’t add complications, especially where you’ve got non-financial creativity going on in the business. The smoke and mirrors of tax avoidance are very unhealthy. Once you understand it, it’s easier to make it clean.’
‘For finance professionals looking to step up to FD, my advice is to get involved with the people in the business. You can’t just deal with the financial staff; you’ve got to get to know everyone and understand what they need.’
High level of empowermentThe company now invests in a raft of management training initiatives in the UK retail business, allowing the managers at each shop to be more self-sufficient, running them as businesses with their own P&Ls, business drivers and so on. This high level of empowerment, raising standards, training, development, new systems and best practice, was then extended across the whole of Europe, including France, Germany and Spain.
‘That was when I came out of just UK retail and became part of the group team, working on projects for Mark [Constantine, one of the founders],’ says Coles. ‘He’s a very dynamic boss. He’ll wake up in the morning and want to investigate something and ask me to look into it. So my day-to-day responsibilities vary considerably.’
Coles’s work now tends to focus more on the commercial and operational side of the business, which is her forte. ‘My partner in crime, Mike Bishop – who heads up the group finance team – is responsible for the treasury, accounts, audits and statutory side of the business; he’s chartered and I’m certified. I’ve always been more interested in the dynamic side of businesses, which is why my ACCA Qualification has proved so invaluable,’ she says. ‘It has opened doors to commercial positions at a variety of businesses, including ethical organisations such as this one.’
‘Clear and transparent’One of the big projects Coles has worked on is creating a transparent global transfer pricing policy for the business. Working with consultants, they assessed where the value in the
business was created and benchmarked themselves against other retail, manufacturing and inventing businesses to ensure the intercompany pricing was demonstrably arm’s length and was clearly articulated and documented. ‘Mark and I both believe that by having straightforward accounting, you actually improve the standards of business,’ says Coles. ‘You don’t get lost in a mire of money moving across different parts of the world »
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Basics
have to work out how to clearly explain the costs of production for each of the products they invent to make sure we can still make a profit once we set a price for selling to our customers. This doesn’t always stop them.
‘For example, we’ve got impressive-looking shower sheets that we sell in our Oxford Street store that are
stunning but don’t make much of a margin.’Another key central issue that Coles and her team are trying
to tackle and improve is pay and bonuses for staff. This is a particular problem in the UK where business and premises costs attached to retail firms are very high. ‘We would love to pay the living wage nationally. At the moment we pay the London living-wage, and 50p above the National Minimum Wage in all other parts of the country. Our challenge is keeping the profitability but being able to push up pay for staff on the shopfloor.’
Meanwhile, on the sustainability front, the business continues to push through investment in initiatives such as the Lush Prize, which awards £250,000 a year to organisations that are working on alternatives to animal testing, and the SLush Fund, which often provides a return on investment.
‘There are many examples of us having invested in local community projects where in the longer term we end up actually saving money. It may feel dangerous investing in a Colombian peace village, but the rewards for doing so, emotionally and financially, are great. The price we’re paying for the cocoa butter from there is probably much less than we’d pay for cocoa butter of such quality if we bought from elsewhere.’
‘Everything we do is about making a difference, whether it’s for our staff, improving the environment or campaigning against animal testing and fox hunting. The fact that people love and appreciate our products is a great bonus.’ ■
Chris Evans, journalist
that people don’t understand. You are very clear and transparent and you can then see why things aren’t working, whereas if companies try to move money all over the place they lose track of what’s going on. So we keep things simple and do things responsibly. We introduced the transfer pricing policy and make sure everyone knows what it is and how it works, and when updated make sure it’s done properly.’
This has naturally correlated with the ethical tax policy. ‘We realised none of us had an appetite for tax structures, so everything in the business was driven by [the principle that] where we made our profits we paid taxes,’ she explains. ‘One year we had a 57% tax rate, while one of our competitors had a 2% tax rate. Now, with the introduction of a clear, ethical tax policy with transparent country-by-country reporting in our statutory accounts, we have been rewarded with the Fair Tax Mark.’
This fair, open and productive approach also extends to the structure of the business, which is flat, rather than hierarchical. Across all the shops, there’s no structure in terms of regional heads, and the managers are empowered to run their own shops while Constantine and his fellow co-founders are still actively involved in the running of the business and in creating new products with fellow inventors and constantly engaging with employees.
‘The inventors of the products sit in labs above the Poole shop,’ Coles explains. ‘They train new people up to work with them on product innovation and often invite people from the shops to have a go at creating fragrances. They seek inspiration from everywhere and try to be as innovative as possible, replacing about 25% of products throughout the year.’
Indeed, Lush launched 200 new products at the unveiling of its largest shop in the world on London’s Oxford Street in April.
Spirit of free willColes and the group finance team also set the general standards of what sort of accounts they require and how to do them. But, again, in the spirit of free will, the various finance teams in each country are empowered to support the managers of their shops and factories within the Lush guidelines.
‘They know they can come to group accounts if they need help with their balance sheets, or what the accounting policy is for depreciation, but our main role is to consolidate all the figures from the countries and then set things like the transfer pricing policy,’ she says.
However, explaining the figures and accounting policies to the creative teams producing the cosmetics requires a little more attention and intervention. ‘The inventors are very passionate about what they’re making and love to experiment with ingredients, textures and designs, which is great. But we
1995Year that Lush was founded
934Number of shops
£454mTotal brand sales in 2014
49Number of stores with a turnover of over £1m
£23m Profit before tax in in 2014
‘Now, with the introduction
of transparent reporting, we
have been rewarded for our
efforts with the Fair Tax Mark’
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‘Everyone has to accept that we are going to be
in a permanently tougher
environment with high fines’
A fine lineAs regulators around the world penalise market abuses with increasingly stiff fines, calls for a single set of global regulatory standards are mounting
in the right direction. The large fines imposed in these areas of enforcement act as a valuable tool for deterrence.’
Kinetic’s report warns that new enforcement actions relating to such high-profile scandals will continue to be felt in future years, but that the industry must be wary of the danger of budgeting for such massive fines, ultimately passing the costs on to shareholders and consumers. If this were to happen, the whole point of severe sanctions would be lost.
This is a point made by Standard & Poor’s, the credit rating agency, which has highlighted how the UK’s four largest banks – Lloyds Banking Group, Barclays, HSBC and Royal Bank of Scotland – have shouldered some £42bn in conduct and litigation charges over the last five years. ‘We think that conduct and litigation charges are now “a way of life” for the UK banking »
Mega-fines dished out by financial services regulators around the world helped drive the total value of
penalties to record highs in 2014. But 2015 looks set to top these values as more fines are handed out in the wake of the foreign exchange and Libor scandals, while other markets such as the gold ‘fix’ remain under investigation.
So far in 2015 we have seen six major banks hit with a record £3.7bn in fines from the US Department of Justice for exchange rate manipulation, following on from last November’s £2.6bn of fines handed out to five banks by the UK’s Financial Conduct Authority (FCA), and the imposition by the US Commodity Futures Trading Commission (CFTC) of a further $1.475bn (£0.95bn) on the same banks. And with the likes of Mark Carney, the Bank of England’s governor, setting out new rules that will widen the pool of individuals who can be tackled over areas such as market abuse and unethical behaviour, the level of fines, and possibly length of prison sentences, could increase yet further.
A report from Kinetic Partners, part of corporate finance advisers Duff & Phelps, reveals a trend towards higher but fewer fines in a bid to target key areas as part of a deterrence strategy. Its analysis shows that the number of enforcement actions grew at the US Securities & Exchange Commission (SEC), while the FCA, CFTC and the US Financial Industry Regulation Authority (FINRA) all saw a decline in the number of cases filed. Yet the value of total fines has skyrocketed. Kinetic’s conclusion is that regulators around the world are concentrating on a small number of cases that are pursued aggressively to encourage the rest of the industry to comply.
As Monique Melis, Kinetic’s global head of regulatory consulting, says: ‘Regulators are focused on cases of market integrity and consumer protection, as they face continued pressure from politicians to demonstrate to the public that the industry is moving
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Global priorities
US1 Cybersecurity and data integrity2 Anti-money laundering and
financial crime3 Client suitability
UK1 Capital liquidity and resolution planning2 Cyber security and data integrity3 Anti-money laundering and
financial crime
HK1 Anti-money laundering and
financial crime2 Investor protection3 Corporate governance
Global priorities
Cybersecurity and data integrity Anti-money laundering and
financial crime Client suitability
Capital liquidity and resolution planning Cyber security and data integrity Anti-money laundering and
financial crime
Anti-money laundering and financial crime
Investor protection Corporate governance
stage where we will see fewer jumbo fi nes? I think it will very much depend on whether the regulators are satisfi ed they have brought about a change in culture in the institutions.’
Given that the banks and other fi nancial institutions have implemented a number of internal programmes aimed at changing behaviour and
identifying market abuse at an early stage, Srivastava believes the industry may have reached a high water mark for the level of fi nes.
‘It is diffi cult to remove the risk of an individual beating the system and doing something stupid, but where the institutions have gone wrong in the past is that they haven’t been able to demonstrate that they had robust procedures in place,’ Srivastava says. But now the institutions have a renewed focus on systems and controls, and the ability to demonstrate that they have been proactive in identifying improper conduct, he adds.
Asian finesThe trend towards increasing fi nes is not just a UK/US phenomenon. According to the Kinetic report, this has extended to Asia as well, with Hong Kong’s Securities Futures Commission increasing its average penalty by 50% between 2013 and 2014. And the Monetary Authority of Singapore, which has launched few enforcement investigations in the past, levied its highest civil penalties in April 2015, fi ning two individuals £5.6m.
industry, and that some form of charge seems probable every year for the larger banks and every other year for the smaller institutions,’ the S&P report, Carrying That Weight, says.
John Liver, fi nancial services head of regulatory reform at EY, says the fi nes are part of a wider scene, with regulators around the world endeavouring to make the fi nancial services market safer for investors and more resilient. ‘Importantly, the regulators want the individual actors to be more responsible,’ he says. ‘This goes through everything – board engagement with the risk agenda, understanding it and challenging it. It is not acceptable from a public policy perspective that the system has needed so much public support and yet has been seen to be not treating customers fairly or to be challenging market integrity. In fairness, I think all the actors in the industry have got that message loud and clear.’
Liver adds that the enforcement regime is designed to change behaviour. For instance, the reasons behind charging fi nes are for the penalties to be meaningful, for them to grab the headlines and for them to have consequences, both at the corporate and individual level.
‘There was always going to be a shift in the level of penalties if they were to provide a credible deterrence,’ agrees Arun Srivastava, head of Baker & McKenzie’s fi nancial services group. ‘The fi nes were too small. This caused the FCA to change its fi ning policy to result in higher fi nes. But have we reached a
Increase in average financial penalty size, 2013–14
2013 2014 % increaseSFC (HKD) 2.7m 4.0m 50%SEC (USD) 5.0m 5.5m 10%FCA (GBP) 9.9m 36.8m 272%CFTC (USD) 20.7m 48.8m 135%FINRA (USD) 0.04m 0.1m 146%
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However, the focus of regulators around the world can differ, even if they are demonstrating similar trends of increasing penalties. According to Kinetic, such differences are unsurprising. Legislation continues to be less harmonised globally than many would hope, with the consultancy pointing to differences between the US Dodd Frank legislation, the European Markets Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Directive (MiFiD). And even within the European Union, the discretion given to countries in implementing European directives means consistency is diffi cult to achieve.
That is not to say there will not be cooperation between regulators around the world. For instance, investigations into the Libor scandal saw close coordination between regulators in the US, UK, Europe and other regions, while hundreds of requests for assistance have also been sent between the SEC, FCA and SFC in recent years.
And it is a trend recognised by the fi nancial services sector itself, with 25% of senior executives in the industry saying that a single set of global regulatory standards was the most important factor in maintaining an effective regulatory system.
Climate of fearBut an emphasis on tough punishment could have a counter-productive effect on fi nancial services. According to a joint PwC/London Business School study, Stand out for the right reasons, a get-tough approach to poor performance in fi nancial services is creating a climate of fear that risks breeding more unethical conduct, not less. And this is, of course, exactly the opposite of what regulators, businesses and the public want. The report goes on to say that threats of fi nes, bonus clawbacks and even prison will not on their own prevent further misselling and market-rigging scandals because anxiety disrupts people’s capacity to make good decisions, which in turn leads to unethical behaviour.
‘We are not suggesting that rules and penalties for bad behaviour should be abandoned, as it’s essential that people know what is acceptable and what isn’t, and criminal behaviour should be punished,’ says Duncan Wardley, PwC’s people and change management director. ‘This is about the sorts of pressures that push ordinary, well-meaning people into behaving
less ethically than they would want to.’
Wardley suggests that regulators and fi nancial services leaders can change behaviour within companies by an increasing emphasis on the positive outcomes of good performance instead of focusing on the negative outcomes of the bad conduct.
Whether such sentiments meet with global approval remains to be seen. Certainly, the former US attorney-general Eric Holder has come round to the view that mega-fi nes work. Holder, who oversaw the biggest post-crisis fi nancial investigations in history, told the Financial Times that prosecutors had been right to level record-setting penalties against institutions rather than trying to make examples of individuals. ‘Given the nature of the penalties that were extracted, given the
interactions that we had with people at the banks, with those attorneys who represented the banks, I think cultures have changed,’ he said.
‘We are never going to go back to pre-crisis days,’ says Srivastava. ‘Everyone has to accept we are going to be in a permanently tougher environment with high fi nes, more aggressive regulators and not so many friendly chats. The question is, where do we recalibrate to? One can hope that there will be less recourse to enforcement or fewer large fi nes, with the level lower than where we are at the moment, but higher than where we were before.’
Liver agrees: ‘Meaningful enforcement will continue to be an important part of the regulators’ armoury. But the big fi nes have been for a relatively small number of issues, and I don’t see them being applied in other areas. They will be used in the most egregious cases, but they won’t go away.’ ■
Philip Smith, journalist
For more information:
Read the PwC/London Business School study, Stand out for the right reasons, at tinyurl.com/phbewgu
Read S&P’s report, Carrying that weight, at tinyurl.com/ns4zj8d
The big numbers
As at May 2015, the CFTC had imposed more than $4.4bn in penalties in 15 actions against banks and brokers to address foreign exchange, Libor and ISDAFIX benchmark abuses.
ForexMay 2015 Barclays $400mNov 2014 Citibank $310m JP Morgan Chase $310m RBS $290m UBS $290m HSBC $275m
LiborApr 2015 Deutsche Bank $800mJul 2014 Lloyds $105mMay 2014 RP Martin $1.2mOct 2013 Rabobank $475mSep 2013 ICAP $65mFeb 2013 RBS $325mDec 2012 UBS $700mJun 2012 Barclays $200m
ISDAFIXMay 2015 Barclays $115m
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Overmatter:
Additional pictures for carousel:
The view fromDaniyal Syed ACCA, manager at Deloitte UK, hardworking self-starter and ACCA member advocate
I grew up in Hyderabad, Pakistan and made the two-hour drive to Karachi to do my exams, as there were no exam centres in Hyderabad. I always knew I wanted to work in the UK, and qualifying with ACCA would support that ambition. The early sacrifices and long study hours have been well worth it. I self-studied for all the exams because there were also no tuition providers in Hyderabad.
I completed my three years post-qualification experience with KPMG in Karachi. Here I started to really build my skills and knowledge, but I always had one eye on opportunities in the UK. With IFRS and UK GAAP and other technical developments, the UK and Europe presented an enticing environment in which to operate.
I was recruited by Deloitte in Guernsey in 2013 as an assistant manager. Since moving to Guernsey I have been promoted to manager. It shows that if you put in the hard work, you will be rewarded.
As an audit manager, you have so much more to think about. When I was an assistant manager, much of my time was spent on field visits to clients. As a manager, there’s the bigger picture in terms of managing the whole relationship.
No two audits are ever the same. One of the attractions of working in audit is the variety of clients we work with. The size of the audit team can vary, and the length of an audit can be anywhere between two weeks and two months. Our offshore location means we work with a wide variety of banks, insurance clients, open and closed-ended funds and real estate businesses.
The best piece of advice I have received is to ‘work hard, know your goals and believe in yourself’. If you follow this advice and are determined, I believe you can achieve anything in your life.
Progressing to senior manager is my next goal. Looking beyond that, I’d like to stay with Deloitte and am focused on becoming a director and then a partner in the next five years.
I wouldn’t be in the position I am now without the ACCA Qualification. The transferable skills I have acquired enable me to work anywhere in the world – a strength when working for a Big 4 firm.
I have recently registered as an ACCA ‘member advocate’
because I see this as an opportunity to build on my own experiences. I want to help others know how valuable ACCA can be. I’ll do this here in the UK and as an ambassador for ACCA in Pakistan. ■
Snapshot: forensic accountingForensic accounting covers a wide variety of work, including financial investigations and expert reports for criminal and civil disputes and court cases.
Fraud and financial crime is a global problem and a growing one. Similarly, expert accountants are increasingly needed to assist in local and cross-border financial, tax and commercial disputes.
Our work typically includes valuing businesses for divorces and shareholder disputes, investigating a suspected employee or officer fraud, preparing a loss calculation in a personal injury claim or preparing an expert report on a negligence claim against an audit firm.
One negative aspect of forensic work is that it can be stressful giving evidence under cross-examination. Work also comes with tight timetables requiring long hours. Unlike audit or tax compliance, the workload can be unpredictable.
Forensic accounting is an area that is set to grow and offers exciting opportunities to those accountants with the right skillset.
As well as strong technical ability, forensic accountants need an objective and independent mindset, investigative skills, excellent written and verbal communication, confidence and robustness.
Forensic accounting is certainly not for all auditors or accountants.
Fiona Hotston Moore, partner and head of forensic accounting, Ensors
Did you know…?
ACCA has 90 technical factsheets to help practitioners understand key technical issues www.accaglobal.com/factsheets.html
22 Practice | The view from
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Additional phots for carousel:
High-street fashionWhen KPMG announced last year that it would be entering the SME market, it placed small firms in the sights of an accountancy giant. But is KPMG’s foray really a threat?
The launch of KPMG Enterprise last October raised eyebrows, given its SME market remit – a radical departure for a Big Four firm previously focused on the stock market giants.
KPMG Enterprise targets the small business arena with the expected range of services, including bookkeeping, payroll, year-end accounts and tax returns. As well as these mainly cloud-based services, it is offering one-to-one specialist guidance via a dedicated accountant.
‘We think of the small business accounting element of Enterprise as being an entrepreneur’s bookkeeper, accountant and financial director, from as little as £150 per month,’ says Iain Moffatt, head of KPMG Enterprise. But while he acknowledges that the cloud-based technology is attractive to SME clients, he says the real selling point is the firm’s ‘deep experience at affordable rates’.
Even though margins on SMEs are a fraction of those on larger clients, the firm sees working with fast-growing businesses at their nascent stage as an investment, with an eye to a more lucrative relationship in the longer term.
Reaction to regulationThe introduction of mandatory rotation for audit firms and restriction of services is shaking up the market – particularly among the Big Four – and may be the impetus behind the Enterprise initiative. Although Moffatt says that the new regulation ‘hasn’t been a factor’ in the creation of Enterprise, the business creates another revenue stream for KPMG in a market where regulatory changes are affecting the service offering.
The key challenge is whether KPMG can successfully compete with many small and medium-sized practices (SMPs) that have built up strong, often personal, relationships with their small business customers. A deep understanding of the local market is also important. ‘Many business owners we speak to are very loyal to their advisers because of the financial intimacy their position brings,’ says Patrick McLoughlin, director
of accountancy marketing specialist, Accounting for Growth. ‘In terms of KPMG’s market penetration over the last 12 months, only a handful of businesses have mentioned they were considering taking up the Enterprise offer.’
The move might look more threatening to SMPs if the rest of the Big Four were to go the same way. So far, Deloitte has ventured into the SME market with its UK Futures scheme, which aims to work with the 1,000 fastest-growing SMEs in the UK.
PwC has been working with start-ups and SMEs for some time, including through its cloud-based outsourced service MyFinancePartner, which it describes as ‘affordable accounting services for businesses of all sizes’.
And EY says it is working with SMEs, including through its Entrepreneur of the Year Awards, which recognise entrepreneurship in over 50 countries, and EY Start-Up Challenge for tech start-ups.
Time will tellSome SMPs see no immediate threat from KPMG Enterprise and believe the firm may soon regret its move. ‘I’m certain they’ve made a big mistake,’ says Shaz Nawaz, managing partner of
Peterborough-based AA Accountants. ‘It’s difficult to work on smaller margins when you’re used to working on bigger margins. It’s unknown territory for them and they’re taking a big risk.’
Others are more wary. ‘Eventually it is bound to affect the smaller accountants when clients are attracted to the Big Four,’ says Peter Mellor, partner at Doncaster-based Glover & Co. SMPs would need to adapt quickly if the SME market gets any more crowded. ‘Small firms with high-street locations and experience in the SME market may well sell out or merge with the larger firms, and be the actual service provider working under the larger firm’s brand,’ he adds.
There is also something that KPMG and other Big Four firms can offer SMEs that SMPs simply cannot: the reputational advantages of having one of the world’s largest firms as their accountant. The value that individual businesses will place on this benefit will vary greatly, but some will be willing to pay a premium for this positive association. So far there is no evidence of any great market shake-down, but it’s still early days. ■
Finbarr Toesland, journalist
24 Practice | SMPs
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Leave no stone unturnedRecent financial disasters show that while some risks are easy to spot, internal pressures often cause the real problems – and tend to remain in the shadows, says Jane Fuller
One of the most important tasks in financial analysis is to ‘spot the dog’ – see the warning signs of corporate failure. A handful of companies working their way through the aftermath of financial shocks have provided rich material to update this toolkit.
In the past few months, a Serious Fraud Office investigation has been launched into business and accounting practices at Quindell, the UK insurance technology company; Toshiba, the Japanese conglomerate, has confessed to overstating its profits by $2bn over seven years; and the UK’s Financial Conduct Authority has censured the Co-operative Bank. An SFO investigation into Tesco’s £263m overstatement of profits was ongoing at the time of writing.
The common factor behind these scandals is pressure on management, such as unrealistic expectations of future growth and fear of the consequences of an external shock. Many companies experience these pressures; it takes a failure of governance for a tiny minority to tip over into breaking the rules.
Quindell is a classic example of ‘up like a rocket, down like a stick’. The Financial Reporting Council’s Conduct Committee faulted the accounting for claims management revenue and an acquisition. Various restatements turned 2013 after-tax profits of £83m into losses of £68m, and year-end net assets of £668m into £446m.
But this understates Quindell’s fall from grace. As the Investors Chronicle reported in the article ‘The Quindell conundrum’ in July 2014, revenue growth had so excited investors that its market value reached £2.8bn in February of that year. The company claimed revenues would top £800m. But delayed 2014 accounts, finally published this August, showed revenue of just £72m as a new board stripped down the formerly acquisitive company.
Toshiba’s rule-breaking was triggered by recession following the financial crisis. The Independent Investigation Committee produced a textbook report in July this year of the accounting failings. The company’s leadership had
responded to the external difficulties by imposing ‘challenges’ to generate even higher profits than had been budgeted for. Contracts were won at levels that would never prove profitable, and the ‘percentage of completion’ method of accounting was bent to overstate sales and understate provisions for losses.
While the initial aim might have been to smooth profits, the investigators note the snowball effect of ‘excessive challenge’ in subsequent periods, forcing managements of subsidiary companies ‘to carry out inappropriate accounting treatment in an even larger amount’.
The Co-operative Bank (2013 loss: £2.5bn) illustrates another classic red flag: change equals risk. Its unaccustomed foray into deal-making by acquiring Britannia Building Society in 2008 was also
terribly timed. But ‘values’ also got in the way of good governance. As Paul (Lord) Myners said in his 2014 review, the group’s ‘social goals agenda’ was not aligned with its ‘strategic and commercial objectives’.
These disparate cases demonstrate that governance and culture are at least as important as challenging circumstances. Weakness of board composition can be spotted, but the internal pressure exerted by proud, fearful or ideological leaders is tougher to judge in advance of disaster. ■
For more information:
Read ‘The Quindell conundrum’ at bit.ly/Quindell
See also the feature on regulatory penalties on page 19
Jane Fuller is a fellow of CFA UK and serves on the Audit
and Assurance Council of the Financial Reporting Council
10/2015 Accounting and Business
Jane Fuller | Comment 25
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Standard bearersAs IFRS celebrate their first decade, Europe’s early adoption was vital to legitimise the standards on a global scale, despite the odd hiccup along the way, says Peter Williams
A decade ago the European Union revolutionised international accounting standards. The European Commission (EC) decided that International Financial Reporting Standards (IFRS) would become mandatory for listed companies in Europe from 2005. That one decision propelled the idea of a global set of accounting standards – not yet achieved, with the US the most notable absentee – but the process is still nudging forward with the G20 continuing to want ‘a single set of improved high quality global accounting standards’.
The EC’s decision meant that 8,000 quoted companies in 25 countries simultaneously switched to IFRS. The fact that this happened with so few problems was a testament to the resilience and the hard work of many in the accountancy
profession. At the time it seemed like a huge issue, with finance directors and auditors, in particular, wondering if they could make it happen. And now? Well, IFRS is an accepted, even unremarkable, part of the landscape.
The EC was determined to resolve the accounting differences between the UK and continental Europe as part of its drive to create an effective European market. As the IASB chairman at the time, Sir David Tweedie, noted, the idea of adopting US standards was a complete non-starter so the International Accounting Standards Board (IASB) was in reality the only game in town. Tweedie calls it a decision of ‘great courage and complete ignorance’.
IOSCO, the International Organization of Securities Commissions, had written off the earlier sets of international standards,
called International Accounting Standards (IAS), as not fit for purpose just before the EC decided to use them. The advantage for the EC in taking the IASB option was that it gave it a key influence – up to a point – over the direction and nature of the standards that rolled off the board’s production line over the next four years in its response to the IOSCO criticism.
The EC was a first mover, the first adopter and a key advocate. Its influence has waned, rightly, as more countries have signed up to IFRS, but the EU/IASB relationship remains pivotal and not always harmonious. The low point came early on with the ructions over the EC decision to ‘carve out’ IAS 39; two French presidents, Jacques Chirac and Nicolas Sarkozy, had a go at the IASB over financial instruments and fair value. Tweedie says in the end only 29 companies in the whole of Europe used the carve-out; he thinks it was one standard the IASB should have just left alone.
The financial crisis also caused strain, with the EC threatening to write into law the ability of banks to revert to cost accounting. Such a move would have led to the accounts obfuscating enormous losses caused by the crash and the markets unable to trust the numbers. In the end that did not happen; a recent review by the EC noted as much, saying that companies were positive about their experience of using IFRS, with benefits outweighing costs, and the process by which IFRS became EU law was working well, especially following reforms to the technical advisory group, the European Financial Reporting Advisory Group. Concerns remain, most notably over the IASB’s private body status (see ‘Taking stock’ page 36), but it’s minor stuff.
Accounting standards exist to help improve business and economic performance. They are there to make accounts more understandable and easier to compare for investors. An academic study suggests that IFRS in Europe has reduced the cost of capital by 47 basis points – a remarkable success story for the EU’s capital and internal markets unimaginable a decade ago. ■
Peter Williams is an accountant and journalist
Comment | Peter Williams
Accounting and Business 10/2015
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Making commitmentsNew ACCA president Alexandra Chin outlines her priorities: inspiring the next generation of accountants, promoting diversity and looking after the interests of SMEs
It is with great excitement and a real sense of pride that I accept the honour of being your president for the year ahead.
I was immensely proud when I qualified with ACCA in 1986 – not least because I was eight months pregnant when I took my final examinations!
I achieved my qualification through self-study. Living in Sabah, a beautiful Malaysian state on the island of Borneo, I relied on the resources and the opportunities that ACCA provided through its commitment to open access, and I was actually inspired to succeed by the knowledge that I was able to study for a globally recognised qualification while then being hundreds of miles from learning providers.
We must never underestimate the importance of that commitment to opportunity, and equally we must never forget how many people have the opportunity to pursue a rewarding career because of ACCA’s pioneering can-do attitude.
With that in mind, I wanted to give something back to ACCA and have served the organisation for more than 24 years in a variety of roles, including on the International Assembly and Council.
My main aim for this my presidential year is to inspire younger people in the way that ACCA has inspired me.
As the first Malaysian and only the fourth female president of ACCA, I also
want to focus on diversity, particularly in relation to open access and providing opportunities for thousands of people around the world.
Having worked in a practice since 1986, and having had my own accountancy firm in Sabah since 2006, I am also very interested in small and medium-sized enterprises (SMEs) and the issues that affect them.
SMEs represent a critical element in healthy business ecosystems since they form the backbone of all the world’s economies, and finance professionals have a huge role to play in supporting and advising them.
Looking back, I never thought that a decision to switch from my chosen career in marketing to pursue the ACCA Qualification would give me such a
fulfilling career and let me play my part in ACCA’s history.
I look forward to meeting as many members and students as possible in my presidential year, and I am committed to representing you and ACCA around the world throughout the coming 12 months. ■
Alexandra Chin runs her own practice in Sabah, Malaysia
We must never forget how many
people can pursue a rewarding
career because of ACCA’s pioneering
can-do attitude
10/2015 Accounting and Business
On film
Watch Alexandra Chin’s video about her inspiring journey to the top of the profession at bit.ly/1MO5ll9
27Alexandra Chin | Comment
UK_INT_COM_pres.indd 27 15/09/2015 11:28
Podcast
Hear Robert Bruce’s podcast on the Cadbury Code at www.accaglobal.com/ab/podcasts
Cadbury is sweeterCorporate reporting has become a robotic exercise, driven by lawyers, that doesn’t reflect a company’s values, and it is disillusioning the profession, says Robert Bruce
In the US you have to shout loud if you want to be heard. And if you want to talk about reform or change, you have to take a megaphone to war with you. This may seem an odd thought when it comes to accounting reform and the success or failure of corporate and financial reporting, but it is so.
Back in June, Bob Laux, Microsoft’s senior director, financial accounting and reporting, found himself on a panel at a conference in Los Angeles. The first question that was discussed was why he had become interested in integrated reporting. He reached for the megaphone. His reply was: ‘Because I am thoroughly disgusted about what I do for a career.’
And then, accepting that he had said this to attract their attention, he explained
what he meant. Was it a strong statement? ‘Most definitely,’ he said. Was it an accurate statement? ‘Pretty much so,’ he said. And then he expanded on his theme. He had been a member of the accounting profession for over 30 years, mostly in the world of external reporting. ‘While there is probably a number of reasons I became an accountant,’ he said, ‘deep down I think a motivating factor was the profession’s important responsibility in the proper functioning of the capital markets’. And,
being an accountant, he explained what underpinned that. ‘As indicated in the FASB’s Concepts Statement Number 1,’ he said, ‘financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions’.
Failing miserablyAnd that is what he thought the accountancy profession had not been doing for all these years. ‘Unfortunately,’ he said, ‘I believe my profession has failed miserably in achieving that objective, as our day-to-day work seems to have become mostly a compliance exercise rather than a communication exercise. In essence’, he said, ‘I produce reports that I don’t think too many people actually look at, except the regulators.’
Sadly, this is not a commonly expressed view, particularly in the US. But many must share it. The profession is still mired in producing compliance-related stuff for the regulators. Laux, like many, produces reams of information on everything from financial instruments to income tax. ‘If you think of Microsoft as a bank,’ he says, ‘that’s fine, you can have a lot of information; we have a hundred billion dollars in cash and securities’. It is a mass of information for regulators and analysts to bury themselves in. But, as he points out: ‘That’s not what drives Microsoft’s values.’ And that is why he feels the accountancy profession has failed.
In the US, a culture of compliance and a culture of lawyers have stultified the process. It is all about lawyers nitpicking their way through every disclosure and insisting that the minimum possible should be disclosed because it could open you up to litigation instigated by other lawyers. And that is before they get on to the dangers of disclosing anything that might be seen to be putting you at a competitive disadvantage.
It is an extraordinary climate of isolation and fear. The recent death of Sir Adrian Cadbury, the architect of the Cadbury Report – which laid the foundations in
Robert Bruce is an accountancy commentator
and journalist
Comment | Robert Bruce
Accounting and Business 10/2015
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1992 for a system of corporate governance that led the world by being effective, fair and, largely, non-prescriptive – reminds you of how it should be.
Cadbury’s guiding idea was that people would do things properly if they believed it was the right thing to do, not because some regulator had imposed it upon you. That simple idea has since transformed UK corporate governance and much of the rest of the world.
Contrast this with the US. Even a relatively mild and pliable suggestion in August by the main regulator, the Securities and Exchange Commission, that companies disclose a pay ratio between a company’s CEO and the median earned by the rest of the employees is hit by vituperation that would be inexplicable in the business world elsewhere.
Daniel Gallagher, one of the SEC’s five commissioners, admittedly on the
verge of retirement, lambasted it as ‘adopting a nakedly political rule that hijacks the SEC’s disclosure regime to once again effect social change desired by idealogues and special interest groups’. The same man, in another context, compared prudential regulation to ‘Soviet Five-Year Plans’.
So you can understand the context that meant that Laux, at that Los Angeles conference, regretted the fact, as a he put it, that integrated reporting was ‘at best a blip on the radar screen’.
But even a slow-moving, culturally constipated arena like the US business world is showing signs of change. ‘It is difficult,’ says Jonathan Labrey, chief strategy officer with the International Integrated Reporting Council. ‘So much of the conversation in the US never gets beyond first base with the regulators.’ And the isolation of the US is extraordinary.
‘In Asia they ask what is happening in Germany or the UK,’ says Labrey. ‘In the US they don’t.’
Look west But Microsoft and its US west coast ilk are probably the answer. Massive businesses where the majority of their market value has nothing to do with tangible, financial assets, but is all about intellectual capital and human capital, cannot be understood through traditional reporting. Currently, many of the innovative west coast companies are owned through a variety of means, such as private equity. But the growth route inevitably will lead to the capital markets. ‘If they move to the capital markets,’ says Labrey, ‘they will have to come up with a new framework to explain’. And it won’t be the old compliance-driven one.
This is where the change will come, evolving into Cadbury-mode. And for it to work, it has to come through enlightened accountants. As Laux puts it: ‘In my opinion, the accounting profession has really lost its way in external financial reporting, and it needs to up its game and take a leadership role. We as a profession need to change the way we do reporting, and I personally believe integrated reporting is the best vehicle for us to actually meet our objective.’ ■
The failure of the accounting profession
This is how Microsoft’s Bob Laux described the failure of the accounting profession during his generation: ‘I have had the pleasure of speaking at the Baruch College Annual Financial Reporting Conference in New York for the past 10 years. A couple of years ago, my son was in attendance. He was majoring in accounting and, since then, has graduated and joined the accounting profession. I remember mentioning during my presentation that the generation that fought World War II is known as the “Greatest Generation” and I speculated what would be the term for my generation. What I came up with was the “Kick the Can Down the Road Generation” – that is, blame others, make very small incremental changes, but never really actually address the big issues. Deep down, I think it was my way of apologising to him for my part in what we have left for him in his new profession.’
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Hedging foreign currency may appear baffl ingly complex, but it comes back to assessing and offsetting risk, as this second of three articles in association with World First explains
Behind the hedge
When Russia invaded the Crimea, triggering international action against the country, it caused a headache for a UK tour company specialising in
eastern Europe. Before Russia’s military action, the country had proved a popular destination for British tourists. But the beginning of Russian intervention in Ukraine and the international response and subsequent sanctions saw the rouble collapse to its lowest level on record against the pound. Bookings dropped like a stone as tourists stayed away in their droves.
The company had taken a sound commercial decision, buying forward at a time when it looked as though the rouble could strengthen on the back of Russia’s huge oil and gas reserves. The plan was to protect hotel and other costs, and for a while that strategy worked well. But the sudden plunge – and drop in its demand – was a sharp reminder that even sensible business decisions about foreign currency can be derailed by unexpected events.
A fi nance director or corporate treasurer has a wider than ever selection of hedging options for foreign currency. They range from the simplest forward contract – agreeing to buy a foreign currency in advance at an agreed rate – to hedging options that will allow more fl exibility on their currency purchases. For newcomers hedging can be daunting but, essentially, foreign exchange hedging comes back to the business basic of assessing risk and then choosing the best way to lay it off.
That is certainly the view of Robina Akhtar, the fi nance director at Labcraft, an SME that is a specialist in environment-friendly LED lighting products. The big FX issue on Akhtar’s mind is how to handle the mountain of euros the company is building as a result of selling its products in Europe.
Labcraft pays for a lot of the components it uses in its products in US dollars; it sells mostly in pounds and euros. So Akhtar’s solution is to use some of the euro mountain to buy US dollars. She explains: ‘We take orders four or fi ve months in advance, so I generally know what I’m going to have to pay in US dollars.
‘Our business is growing, but currently I’ll be looking to use euros to buy around US$80,000 to US$100,000 in a month.’ She does this on a variety of three to six-month forward contracts, using her judgment on how she thinks the two currencies will move in the months ahead.
Objective in sightThe important point is that Akhtar is very clear what her business objective is with currency hedging. ‘We’re not gambling here – we’re trying to manage the risk. We’re not trying to make money from currency trading. What we’re trying to do is remain competitive in the European market.’
After all, Labcraft is up against continental rivals that buy components and sell fi nished product in euros, so they have no need to build in a margin for currency risk.
Akhtar’s approach would be likely to win a thumbs-up from Sam Agyei-Ampomah, a reader in fi nance at Cranfi eld School of Management, and a specialist in FX. He says a company looking to hedge FX risk should keep it simple and make sure that any product is right for the business goals and desires. ‘A lot of the products on the market are highly complex,’ he says. ‘If you don’t really understand the dynamics of a structured product, you might not reap the benefi t.’
It is easy to be seduced by the complexity of a product, but that is not the main point, says Agyei-Ampomah.
‘If you are managing your risk, you have to look at where that risk is
At the end of the day, the best FX
strategy matches risk appetite to
the needs of the company
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coming from and how far you’re exposed to it. You also have to recognise that hedging products involve some costs. The benefi t of hedging must outweigh the costs of doing it – and that needs to be explored.’
But Greg Smith, head of corporate dealing at World First, points out that it is also easy to overlook FX risk. He cites the case of a £10m-turnover company that has FX exposure in only 5% of its business. It would be tempting to imagine that the company faces little FX risk. But that may not be the case if it operates on low margins and the FX business involves currencies that are volatile. An adverse 10% currency movement on just that 5% of the business subject to FX risk could wipe £50,000 off the bottom line.
Keep it proportionateThere are two key issues to bear in mind, says Smith. One is how volatile the currency is likely to be – the rouble and India’s rupee are two that have swung unpredictably in the past couple of years. The second is how much it will cost to hedge against
currency moves. The cost or benefi t in hedging relates to the forward points – the differential in interest rates between the two currencies being hedged. So, for example, hedging sales of some South American currencies, such as the Brazilian real, is likely to cost more than lower-yielding currencies such as the US dollar or euro. On the fl ipside, hedging purchases of reals will give a better rate than hedging now.
There is, argues Smith, no lower threshold to make FX trading a useful business tool. ‘But
the size of the business determines how much time you spend hedging and what products you select.’
He cites the example of a company buying machinery from Germany. If it knows the machinery is going to be delivered in six months’ time, it can buy euros on a forward contract with fi xed dates. But it could also choose to have fl exibility in this forward deal, so that it can buy the currency at the same rate if the machinery is delivered early. In some cases, a company may need to decide between buying forward or waiting until the foreign currency needs to be paid and then buying at spot. »
▲ Risk of upheavalPeople hold Russian flags in Lenin Square after the Crimean status referendum in Simferopol, Crimea, caused unrest in 2014: unexpected events far from home can spell doom for a foreign currency hedge
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For example, if a company knows it has to pay in Australian dollars in six months’ time, it stands to gain by buying forward now relative to buying at spot, courtesy of the interest rate differentials. On the other hand, a company selling in Australian dollars will have a cost to hedging given the interest rate differential, although that wouldn’t make it an inappropriate hedge – the Australian dollar has lost 14% against the pound in the past year. A 2% cost is cheap in comparison.
At the end of the day, the best FX strategy matches risk appetite to the needs of the company, says Agyei-Ampomah. ‘If the exposure is immaterial to the bottom line, then managing becomes a problem,’ he says.
Back at Labcraft, Akhtar’s euro mountain is growing larger by the month. Now she’s exploring ways of using it to buy pounds, but, with the euro weakening against the pound, that looks problematical. She’s looking at strategies so as to continually protect the business, and taking her time to weigh up what mix of products suits her business’s needs the best.
But she does have a piece of good advice for SMEs getting into FX hedging for the fi rst time. ‘Make sure you fi nd a dealer that asks the right questions about what you want to risk,’ she says. ‘The rates and ease of transaction need to be right – and the dealer needs to be reliable.’ ■
Peter Bartram, journalist
Know the lingo
Currency pairTwo currencies, such as sterling/euro – here, sterling is the ‘base currency’ and euro the ‘counter’ or ‘quoted’ currency.
DerivativeA fi nancial instrument dependent for its value on an underlying security. A forward contract (see below) is a derivative because it relies on the values of its underlying currencies.
Forward contract A contract to buy or sell foreign currency in advance. Involves an adjustment to the spot rate for the forward points, depending on the interest differentials; the forward points generally increase with the length of the contract.
HedgingThe process of fi nding ways to reduce the risk – or exposure – incurred by buying and selling foreign currencies.
OptionA contract giving the right – but not the obligation – to buy or sell a defi ned amount of a foreign currency at a future date and generally at a fi xed price. Some options will provide more fl exibility about dates and prices.
SpotCurrent market price between a currency pair (see above).
◄ Wobbly exercise A woman rides a bicycle past graffiti mocking the Brazilian real: hedging against a volatile currency is likely to cost more than against a stable one
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Chasing equalityA recent survey of female representation at senior levels of business around the world makes clear we are still a long way from gender equality in the workplace
Gender imbalance in the MBA pipeline
As part of their assessment process for admission to master’s programmes, most global business schools rely on the graduate management admission test (GMAT) from GMAC (the Graduate Management Admission Council). GMAC has collated data from a number of sources including the UN and the CIA as well as GMAT uptake fi gures to survey more than 30 countries about how women are represented in business.
More women than men study GMAT in only fi ve countries
Business bosses
Despite a low ranking in GMAC’s gender gap index, Russia had the greatest proportion of female senior managers.
The median fi gure was 24.2%, in Great Britain it
was 22%, in China 25% and in Malaysia 22%.
Literacy’s ladder to power
High literacy rates are associated with positions of power, and female literacy rates are higher than male rates (by no more than 1%) in just four of the 30 countries surveyed. India had the greatest difference in literacy rates by gender – indeed, the survey found it to be the worst place to be a woman among G20 countries (because of child marriage, infanticide and slavery).
Political clout
Sweden had the highest proportion of members of
government who are women. In every country, men were in the
majority.
Sweden 43.6%
South Africa 41.9%
Finland 41.5%
Spain 41.1%
Belgium 39.3%
Countries with biggest differences in literacy rates:
India 20.7%Egypt 16.8%Turkey 6.6%Peru 5.6%Lebanon 4.2%
Those with higher female than male literacy rates:
Philippines 1%Brazil 0.7%Thailand 0.1%Argentina 0.1%
Russia 40%
Philippines 37%
France 33%
Vietnam 33%
Sweden 28%
37,631vs
20,152
863vs
592
1,050vs
766
181vs
157
1,033vs
919
VietnamChina Thailand Finland Russia
For more information:
GMAC’s interactive graphic is at womeninbusiness.mba.com
35
10/2015 Accounting and Business
Graphics | Insight
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Taking stockTen years after IFRS became mandatory across the European Union, the IASB has much to celebrate – but concerns about it persist. We talk to chairman Hans Hoogervorst
standards. If they are private, is the suspicion, do they listen too much to private interests?’
He argues that the need to set up an international standard-setting body relatively quickly meant that there was no other realistic option than its current structure. ‘The alternative was a treaty organisation along the lines of the IMF, but that would have taken years to set up,’ he says. ‘Whether we are a public or private organisation matters little; what is most important is that we make our decisions independent of any commercial interests.’
For a career public servant like Hoogervorst (before becoming IASB chairman in 2011 he held several senior positions in the Dutch government, including minister of finance and minister of health, welfare and sport), it is not difficult to see why any hint of bias must rankle. This year he was the driving force behind a new mission statement for the organisation – ‘to develop IFRS that bring transparency, accountability and efficiency to financial markets around the world’ – which sums up its contribution to the public interest as ‘fostering trust, growth and long-term financial stability in the global economy’.
Persistent mythsBut still persistent myths about the IASB remain: that its long-term agenda is to move to fair value measurement; that it is beholden to the firms and private companies that contribute to its funding; that it is self-regulating; and that it concentrates too much on the information needs of short-term investors, to name
just a few. So, Hoogervorst and Michel Prada, chairman of the IFRS Foundation Trustees, have taken the decision to tackle the issue head-on by publishing a document, Working in the Public Interest, which directly addresses all of these points and more.
‘It’s been at the back of my mind [to write this document] for a long time,’ says Hoogervorst. ‘It irks me that so many people think we are an Anglo-Saxon commercial organisation working for commercial parties. We are about keeping capitalism honest – creating rigour and discipline so people can invest safely.’
He is equally irritated by the assumption that IFRS only
This year marks 10 years since International Financial Reporting Standards (IFRS) became the common accounting language for consolidated accounts
of European Union-listed companies. The European Commission’s announcement that it would mandate the use of IFRS took many by surprise, but few would argue that the International Accounting Standards Board (IASB) hasn’t faced up well to the task.
‘Overall, it’s been an amazing 10 years,’ says IASB chairman Hans Hoogervorst. ‘If you had asked us a decade ago where we would be today, we would definitely have been pleased with this.’ A total of 116 countries have now adopted IFRS for all or most publicly listed companies, and while some stubborn barriers remain (predominantly the US, more of which later), steady and encouraging progress is being made in most of the remaining large non-IFRS markets, such as Japan.
It has not always been a smooth ride, but the IASB has a solid history of adapting and evolving to the needs of its many and varied constituents. The IASB and IFRS Foundation, the legal entity under which it operates, have evolved since their formation in 2001, each time in response to stakeholders’ views. The trustees of the foundation hold five-yearly public consultations on its structure and effectiveness, as required by its constitution, the latest of which was launched in July. Previous constitutional reviews have resulted in the introduction of specific geographical quotas for the board’s membership and the appointment of a Monitoring Board.
Hoogervorst argues strongly that the IASB is one of the most open and transparent bodies in the world, but throughout its life it has had to contend with persistent suggestions that it lacks independence. The root of the issue is the fact that the IFRS Foundation is a private sector, not-for-profit organisation – an unusual structure and one that many people have trouble getting their heads around.
‘I wouldn’t say that we are misunderstood by everyone,’ says Hoogervorst, ‘but some do question why a private organisation is responsible for a public issue like accounting
IFRS adoption
116 jurisdictions require IFRS for all or most domestic listed companies and financial institutions
12 jurisdictions, including India, Switzerland and Japan, permit rather than require IFRS
2 jurisdictions (Saudi Arabia and Uzbekistan) require IFRS for financial institutions, but not for listed companies
8 jurisdictions, including China and the US, use national or regional standards
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exist for a small group of professional investors and creditors. ‘Most investors are not hedge-fund billionaires, but very normal people – the members of mutual funds and pension plans,’ he says. ‘Many people are hugely dependent on working capital markets.’ The document itself goes further, arguing that because economic growth and long-term financial stability are of immense importance to the public at large, even those who do not invest in capital markets are stakeholders in the IASB’s work.
The paper methodically addresses each of the misconceptions that have developed around the IASB. On the widespread belief that the IASB has a strong preference for market-based fair value accounting, it says: ‘The fact is that for most companies, especially in the non-financial sectors, historical cost accounting is still dominant. IFRS prescribes fair value accounting judiciously, usually for activities that take place in active markets and for instruments, such as derivatives, that are highly sensitive to market conditions. For these instruments, historical cost does not provide meaningful information.’
It is thought that the belief that the IASB has a fair value agenda has its origins in a discussion paper issued by the board in pre-crisis 2008, Reducing Complexity in Reporting Financial Instruments. This argued that a ‘long-term solution’ to address measurement-related problems around financial instruments was to measure them all in the same way, adding that ‘fair value seems to be the only measure that is appropriate for all types
of financial instruments’. But the Financial Crisis Advisory Group – which was set up in 2009 at the request of the IASB and the US Financial Accounting Standards Board to discuss financial reporting issues arising from the crisis and which was co-chaired by Hoogervorst – recommended a mixed measurement model. ‘People have long memories,’ he says. ‘One or two board members still think full fair value measurement should happen, but the majority are happy with a mixed model.’
Short-term concernOn the criticism that the IASB is too honed to the needs of short-term investors, the paper says: ‘We share the concern that many actors in the financial markets are driven by short-term incentives. That is the very reason why the IASB aims to set standards that make it difficult to manipulate earnings and that bring hidden liabilities to light. We believe, however, that in practice it is difficult to distinguish between long-term and short-term investors, and we also believe that their information needs may not be very different.’
‘I don’t know of any long-term investor who doesn’t want to know of short-term events,’ says Hoogervorst. ‘You never know if a short-term event is actually the beginning of a long-term trend – and low interest rates in the UK are just such an example. The argument of long-term investors is used by people who don’t want to show the effect of short-term market information.’ »
On board
See more from Hans Hoogervorst on IASB progress at bit.ly/1i19XuS
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The quality of IFRS is not under debate. The European Commission’s recent evaluation of IFRS regulation concluded that the standards have ‘increased the transparency of financial statements through improved accounting quality and disclosure and greater value-relevance of reporting’. It also found ‘evidence of improved capital market outcomes, higher liquidity, lower cost of capital, increased cross-border transactions, improved investor protection and maintenance of investor confidence’. Criticisms were generally confined to the complexity of the standards and challenges related to ensuring that all jurisdictions contribute on an appropriate basis to the long-term financing of the IFRS Foundation.
Sustainable fundingThe current foundation budget is set by its trustees at between £26m and £27m a year. Over half of its 2014 income came from publicly sponsored contributions, a quarter from other sources including the large auditing firms. The contribution from firms remains controversial – Hoogervorst and Prada argue in their paper that their contributions ‘seem intrinsically reasonable and do not create material conflicts of interest to the IASB’, but acknowledge that the foundation needs to do a better job explaining the safeguards that are in place.
Funding discussions will most likely rumble on for some time to come. The trustees have said that the spread of IFRS suggests that its budget would need to increase to around £45m over time, although they concede that that is not achievable in the near future. The current effectiveness review asks for comments on the functioning of the foundation’s funding model – the European Commission’s report argued for compulsory contributions, proportionate to GDP, from countries that were members of the governing and monitoring bodies of the foundation and the IASB.
The US remains a sticking point on IFRS adoption, but also on funding. ‘The biggest challenge [on adoption] is the US, which is at a standstill,’ says Hoogervorst. ‘Nevertheless, IFRS is very important for the US. We will just have to be patient.’ He smiles. ‘Very patient.’
In the meantime, the board’s work continues and its future agenda has just been released for consultation. ‘We have unfinished business, such as the Conceptual Framework and insurance,’ says Hoogervorst. The board is also tackling disclosures, but is constantly aware that its work means more work for constituents. ’We feel a general responsibility not to overdo change; not to overburden preparers with a continuous stream of work,’ he says. ‘But many of the standards are old and in need of improvement, and they are all necessary improvements.’ ■
Liz Fisher, journalist
Which brings us to the pressure that the board comes under whenever it discusses accounting that is deemed sensitive by particular sectors. While it has a rigorous consultation process – and puts considerable effort into its outreach activities – there is a careful balance to be found between listening to constituents and disregarding self-serving views. ‘We have to remain independent,’ Hoogevorst says. ‘We know that for a lot of preparers the priority is to avoid volatility in their accounts, even when that volatility is a true reflection of the economics of the situation. We are under pressure from interested constituents and sectors on many standards, and it can get quite intense. You can’t be deaf to what they say, and we know that we can’t hit on an ideal standard in one go. The measure is always: are we making tangible progress?
‘We know our standards are particularly important to investors, but we also have to listen to preparers, regulators and many others as well. I feel the standards have huge value for the preparer community. That can be seen in Japan; no one is forcing Japanese companies to adopt IFRS and yet they still do.’
With such a lot at stake, transparency is the key. Hoogervorst says that the board’s ‘outstanding’ due process is the most transparent of any private organisation. All board papers are public, and every meeting is broadcast and archived. Ultimately, says Hoogervorst, the IASB knows that if it falls short on consultation, the risk increases that its standards will not be endorsed in some jurisdictions. The fact that IFRS in almost every jurisdiction have been endorsed without modification is partly due to the responsiveness of the IASB to its constituents. ‘People know they are being listened to.’
For more information:
Find IASB’s Working in the Public Interest on the board’s website www.ifrs.org
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Steering a safe passageWith problems over culture, strategy, data and technology, is it any wonder that CFOs are cynical about how organisations tackle the planning, budgeting and forecasting process?
that every organisation – whether in the public or private sector – has objectives. ‘PBF is about turning those objectives into a strategic plan which, in turn, forms the basis of targets,’ he says. ‘These can be used to create in-year budgets so that operationally you deliver the strategy that fulfils the objectives.’
O’Mahony says no one would get in a car in London and want to get to Edinburgh but have no idea how to get there. ‘If organisations just meander it is ineffective and inefficient.’ This meandering is often caused by that lack of partnership between finance and the rest of the business.
‘Forecasting in most organisations tends to be weak because it is done by finance on its own without suitable input from operations,’ says O’Mahony. If it is finance-owned and not properly
integrated into the wider planning cycle of the business, it is going to fail. The quest is for an integrated model that takes operation’s predictions and monetises them as part of informing a financial forecast. But first of all organisations have got to take the process seriously. ‘A lot of organisations see budgeting as an exercise that must be done’, says O’Mahony. ‘So the approach is “What can I get away with?” These problems are cultural, organisational and technical.’
Short-term targetsThe ‘what-can-I-get-away-with?’ attitude has wide consequences, especially for the corporate culture surrounding target-setting. The study found that planning and budgeting was often focused around short-term targets and not linked to achieving the strategy over a three- to five-year period. Linking employee incentives to the short rather than the long term, says Lyon, creates the problem of lowballing. ‘Perversely, managers in »
Planning, budgeting and forecasting (PBF) is an underutilised and
ineffective process in many organisations. Although the finance department should shoulder some of the blame, the cultural attitude of the wider organisation needs to change, as does organisations’ use of technology and data.
Markets move more quickly than ever before and are more complex; there is also greater competition. These pressures make the need to forecast all the more acute. ‘Companies need a much better steer on how external factors are impacting their business and how the decisions companies take are impacting performance’, says Jamie Lyon, ACCA’s head of corporate sector. If companies could obtain that better steer and translate it into an effective PBF process, they could gain a distinct competitive advantage.
But few organisations seem to recognise this. Although CFOs may accept that PBF is an increasing priority, an ACCA/KPMG study reports a high degree of cynicism around PBF procedures. Almost one in two (46%) of those surveyed said their annual budgets were politically agreed numbers, generated from the top of the business and not linked to operational reality. Over 62% said budgets simply reflected a point in time and quickly ceased to be relevant as the financial year went on.
But that is not how it should be. ‘Within the enterprise, PBF is central,’ stresses Lyon. ‘The starting point is having the right enterprise culture. Tone at the top and visible support is critical in integrating and effectively delivering these activities into the business. It has to be a real partnership approach between finance and the wider organisation in ensuring that strategic alignment.’
It is that word ‘strategic’ that is crucial. John O’Mahony, head of KPMG’s Enterprise Performance Management team, notes
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But if a company spends well and on the right technology, it could expect to reap benefits such as real-time reporting and continuous improvement. Lyon says that CFOs should be asking themselves how quickly they can produce their forecasts and how quickly can they change their plans.
Preston thinks that there may be a workable solution to quieten the doubters: ‘Cloud-based planning and budgeting technology allows finance to provide consistent finance and business data throughout the business in a much more timely and collaborative manner,’ he says. ‘The web is a force for good in better joining up globally remote business units.’
The good news A chink of light amidst the general gloom that hangs around PBF can be found, according to O’Mahony, in a couple of places. He says that the FMCG (fast-moving consumer goods) sector, led by multinationals such as Procter & Gamble and Nestlé, have successfully embraced a PBF strategy. ‘This has given them insights to make better decisions based on facts, which in turn have led them to be dominant on a global basis,’ he says.
O’Mahony also commends e-commerce corporates such as Amazon. ‘While they did not have to wrestle with legacy baggage, they took advantage of the clean sheet of paper and adopted leading-edge PBF models from the start. It is part of their DNA and it has equipped them to perform more efficiently and run their operations in a way that optimises the business model.’
To other CFOs who may not be in that happy place, O’Mahony makes the following suggestion: ‘CFOs should step back to see where their organisation is in terms of their ability to forecast quickly, gain insight and look forward to see how the business is likely to perform,’ he says. ‘If not, they will be failing to exploit opportunities.’ Companies are all about driving shareholder value, and a robust strategic planning process helps – year by year – to maximise the efficiency and effectiveness of the organisation. ‘By performing a strategic planning process, companies are attempting to reward the shareholders so that they are willing to continue their investment.’ ■
Peter Williams, accountant and journalist
business divisions may be able to get away with setting short-term targets that are easily achievable. Do they understand the build-up of revenue and costs and what is possible for the business to achieve?’ This leads to a further question of whether finance has the skills and the capability it needs to challenge during the PBF process. A poor process enterprise-wide leads to sub-optimal decision-making and a strategy that is not aligned to the reality of the delivery.
The study found that organisations are struggling to use data analytics effectively. Over 30% of the financial professionals surveyed said that the quality of the data was the biggest impediment to using data analytics in their planning processes; 17% said that management ignored the data and simply pursued the same decision regardless. Quantity of data is also cited as an issue.
‘Companies need the right data and it needs to be visible,’ says Lyon. ‘Unless you have the propensity to take in all the different data flows – internal and external – you struggle to understand where your business is heading. Data has to be robust, accurate, timely and visible.’
Ian Preston, vice president sales, UK & Ireland, at software-as-a-service business analytics provider Adaptive Insights, understands the shortcomings. ‘A universal data source of consistent data for strategic plans, budgets, forecasts, scenarios and actuals is a goal that few companies achieve,’ he says. ‘The common mistake is a big-data approach, drowning in detail. A more focused view of what is necessary to support decisions works best.’
When all else fails, corporates tend to turn to technology to provide a solution, but O’Mahony warns against trying that approach to sort out PBF issues. He says: ‘Technology is an enabler but it is not a silver bullet. There is no system out there that you implement and it immediately gives you the answer.’ Instead, says O’Mahony, companies need to define the strategic planning model, which will in turn define the budget model. Processes, structures and reward mechanisms need to be in place. Then, when a company has the building blocks, it can start creating a technology specification to make a system investment.
Erosion of trust Inaccurate data and technology are intrinsically linked, eroding C-suite trust and, the survey suggests, encouraging them to base operational decisions on instinct rather than insight. And the distrust is leading to underinvestment in finance technology. Of those surveyed, 41% said that they haven’t invested in a planning tool other than Excel; and, of those who had, 28% said it hadn’t delivered the benefits expected, setting them back yet further.
‘Organisations need a company-wide holistic technology solution,’ says Lyon. ‘If it is not joined up, inevitably there are lots of reconciliations between systems and that is an ongoing challenge for finance.’
For more information:
Download Planning, Budgeting and Forecasting: An Eye on the Future at www.accaglobal.com/ab/245]
See ‘How to create a business budget’ at bit.ly/bus-budget
See www.accaglobal.com/ab/webinars for future webinars on budgeting
40 Insight | Budgeting
Accounting and Business 10/2015
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All or nothingACCA’s Chas Roy-Chowdhury believes that countries should not be allowed to cherry-pick from the 15 action points in the OECD’s BEPS project
US Treasury deputy assistant secretary Robert Stack has said his government was ‘extremely disappointed’ in the OECD’s work, while adding that the diverted profits taxes in place or being planned in the UK and Australia were ‘a disturbing development for the OECD’. However, the article also suggested that other Treasury officials were saying that country-by-country reporting, as set out in the BEPS Action 13 on transfer pricing, could be introduced earlier than required, a move that would not be aligned with a government intent on scuppering the whole BEPS process.
At the same time, we have seen the European Commission release its own action plan to reform corporate taxation, setting out a series of initiatives to tackle tax avoidance and secure sustainable revenues under its common consolidated corporate tax base (CCCTB) proposals. But at ACCA, we believe that to be credible, such a comprehensive approach to corporate taxation, as proposed by the commission, must be fully compatible with the BEPS project. In fact, it has to make sense that work on CCCTB should only begin in earnest after the BEPS project outcomes have been finalised, in order to make sure that the CCCTB and other European Union measures are fully aligned with the OECD conclusions. Having at least two sets of rules just would not make sense.
Interestingly, the OECD welcomed the EC’s plans, saying the move was ‘another major step towards international cooperation in the fight against tax evasion and avoidance’, and adding »
Are we entering the final straight of the BEPS project or is there a danger we could end up in a cul-de-sac? I ask the question because so far the speed
at which the Organisation for Economic Cooperation and Development (OECD) has moved with its Base Erosion and Profit Shifting (BEPS) work has been impressive. But the hardest part is still to come.
By the end of the year we will see the full fruits of the OECD’s labours, as this is the deadline by which the organisation’s Committee on Fiscal Affairs will have reported on all 15 of the action points agreed by the G8 back in June 2013, and endorsed by G20 world leaders in September of that year. The committee delivered on seven of the action points last year, with the remaining eight up for debate during 2015.
But arguably some of the most difficult and fundamental issues are to be addressed in this second batch of action plans, and it is vital that we get these right, with full agreement and support, when they are delivered as a coherent package to the G20 finance ministers meeting this October. And in the meantime, one has to hope that any moves towards unilateral action by a single jurisdiction, such as the UK government’s diverted profits tax legislation, do not throw up any conflicts with the OECD’s work.
Indeed, as reported by Forbes magazine recently, the US has been critical both of the OECD’s work and the legislative proposals coming from the UK and Australia. According to the publication,
Embacing the OECD’s BEPS project in its entirety
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companies choose where best to make their investments. A desire for tax sovereignty alone should not be used as an excuse.
There will need to be proper structures in place to deal with those jurisdictions that effectively block multinationals from going to arbitration. There will be disputes, but jurisdictions need to have in place proper arbitration procedures. Local tax authorities might claim that a multinational would get a worse settlement if it were to go to arbitration, with the threat of successive and more in-depth tax audits in the future. Will BEPS be able to change this attitude?
Any vagueness and opportunity to avoid mandatory arbitration will need to be removed from Action 14 if it is to succeed, and I hope to see a future proposal that takes a firm view in this area. An easy compromise, that would be acceptable to some governments, will not achieve this. It is the most fundamental action point underpinning the whole BEPS project; it should establish a sea change in thinking.
that the political impetus and support for establishing a fairer international tax system was ‘overwhelming’.
Overwhelming? Probably. Universal? Possibly not. For if the whole project is to be successful, and successfully implemented, then there is a clear and pressing need to ensure that all jurisdictions are on board and more than willing to implement the action points, with an absolute commitment to the whole package, without dispute.
Yes, without dispute. But the issue of dispute could provide us with one of the key sticking points in the project. Action 14 aims to make dispute resolution mechanisms more effective. According to the OECD, the G7, along with a number of other jurisdictions, has agreed to mandatory binding arbitration, but there are other major players that have yet to accept this principle. My fear is that there will be a certain amount of cherry-picking from all the action points, leaving large gaps in the global tax landscape. Action 14 will be high on this list. Those that do not allow themselves to be subject to such a system will suffer in the long term as multinational
My fear is there will be a certain
amount of cherry-picking from all
the action points, leaving large gaps
in the global tax landscape
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We are not alone in thinking this. At the beginning of the year, the OECD published the initial reactions to its Action 14 draft discussion paper. It was 413 pages long. The Association for Financial Markets in Europe (AFME) and the British Bankers’ Association (BBA) teamed up to say that ‘the absence of a binding and effective proposal to improve dispute resolution mechanisms is a significant concern for our members’, adding that the proposals would almost
Timescale of the BEPS project
2014 deliverables (released in September 2014)
* Action 1: address the tax challenges of the digital economy.
* Action 2: neutralise the effects of hybrid mismatch arrangements.
* Action 5: counter harmful tax practices more effectively, taking into account transparency and substance.
* Action 6: prevent treaty abuse.
* Action 8: assure that transfer pricing outcomes are in line with value creation/intangibles.
* Action 13: re-examine transfer pricing documentation.
* Action 15: develop a multilateral instrument.
2015 deliverables
* Action 3: strengthen controlled foreign companies rules.
* Action 4: limit base erosion via interest deductions and other financial payments.
* Action 7: prevent the artificial avoidance of PE status.
* Action 9: assure that transfer pricing outcomes are in line with value creation/risks and capital.
* Action 10: assure that transfer pricing outcomes are in line with value creation/other high-risk transactions.
* Action 11: establish methodologies to collect and analyse data on BEPS and the actions to address it.
* Action 12: require taxpayers to disclose aggressive tax planning arrangements.
* Action 14: make dispute resolution mechanisms more effective.
ImplementationIn February 2015, the OECD and G20 countries agreed three key elements:
* a mandate to launch negotiations on a multilateral instrument to streamline implementation of tax treaty-related BEPS measures (Action 15)
* an implementation package for country-by-country reporting in 2016 and a related government-to-government exchange mechanism to start in 2017 (Action 13)
* criteria to assess whether preferential treatment regimes for intellectual property (patent boxes) are harmful or not (Action 5).
certainly lead to a greater number of disputes arising as both tax administrations and taxpayers adapt to any new policy changes. The two associations said: ‘Unless there is an effective dispute resolution mechanism in place to mediate these disputes, it is likely that there will be a substantive increase in the risk of double taxation without the necessary recourse for business to mitigate this risk.’
At its most recent briefing held in June, the OECD’s BEPS team set out its latest thinking on dispute resolution. On making dispute resolution mechanisms effective, it called for a minimum standard in relation to the resolution of treaty-related disputes so that treaty obligations are fully implemented in good faith and cases resolved in a timely manner. It also called for administrative processes that allowed taxpayers to access mandatory arbitration where eligible.
It added that arbitration for willing countries would be included in the multilateral instrument (part of Action 15), and reminded us that the G7 has called for better and more effective dispute resolution mechanisms between tax administrations to ensure that the risk of double taxation does not act as a barrier to trade and investment.
A step in the right direction, but I question whether, even now, the team has fully assessed the impact of this. Jurisdictions that do not want to be part of mandatory arbitration should not be let off the hook. Mandatory arbitration will be the glue that binds the whole project together. Without it, there is a risk that it will fall apart.
This will also have a knock-on effect for Action 15, the development of a multilateral instrument for implementation. Such an instrument will lack credibility if jurisdictions have been allowed to cherry-pick. As one respondent to the Action 14 discussion paper sums it up: ‘First, countries must be willing to truly support the project. Second, business must be willing to fully accept its outcomes.’ Adopting a binding and universal arbitration framework should be an integral and inseparable part of the BEPS deliverables.
I look forward to seeing a revised draft where every ‘could’ has been replaced with ‘should’, or even ‘must’.
Arbitration is, of course, only one area of dispute. We continue to see discussion drafts issued by the BEPS team, alongside public consultations, and they are to be commended for their speed of delivery. And all the interested parties are to be commended for their swift responses, some critical, others much more supportive.
Such speed and swiftness is driving the initiative forward, and it is certainly driving it on to the corporate agenda. According to a recent survey from Deloitte, some 90% of the firm’s multinational company clients are anticipating that their corporate tax compliance burden will substantially increase as a result of additional reporting requirements of the BEPS recommendations. Country-by-country and transfer pricing reporting were just two areas that figured in their calculations.
Interestingly, more than half (55%) also believed that there would be significant unilateral legislative changes that would not be coordinated with other jurisdictions, leading 75% to anticipate cases of double taxation as a result of BEPS.
Which is why those at the steering wheel need to ensure all parties stick to the one roadmap and not take any detours as they approach their final destination. ■
Chas Roy-Chowdhury FCCA is head of taxation at ACCA
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Career boostDr Rob Yeung reveals the secrets of employability. Plus, perceptions of performance management, the pros and cons of being tech savvy and the perfect CV
Dr Rob Yeung is an organisational
psychologist and coach at consultancy Talentspace
Talent doctor: employability
What makes you a desirable employee for any organisation? I recently worked with an organisation to restructure its human resources and fi nance teams. The executives were concerned that too many employees were traditionalists more keen on preserving the status quo than adapting to market pressures and new ways of working.
To cull weaker performers and hire more proactive business partners, they ran a series of assessment centres, comprising interviews, written tests and other exercises. New roles were based on three criteria, dubbed ‘the three Es’. Let’s consider these as it’s a good way to refl ect on what makes us employable.
ExpertiseMost jobs require some degree of technical knowledge. Human resources specialists have to know employment legislation. Finance professionals must know acceptable and unacceptable accounting practices. Sales people have to know their products thoroughly.
The thing is, just about everybody in the human resources and fi nance departments had the requisite levels of expertise; their technical acumen wasn’t really in doubt.
Emotional intelligenceThis is best defi ned as the ability to understand and alter emotions in both oneself and others. However, many people see emotional intelligence as
synonymous with interpersonal skills – building relationships with new colleagues and customers, working effectively within teams, criticising others constructively and handling confl ict appropriately.
Emotional intelligence was perhaps the biggest factor in deciding whether people were hired in the new organisation. What mattered more than their technical expertise was their capacity for understanding others and cooperating with them.
EthicThe third ‘E’ concerned work ethic, which in this organisation comprised a range of related skills: a readiness to demonstrate initiative; a willingness to work hard and be persistent; and the ability to motivate oneself in the face of adversity.
You may think that the three Es sound obvious but I think there are valuable lessons here. First of all, it’s worth noting that technical expertise was not the stumbling block for most people. There are many people with the right specialist knowledge who, unfortunately, are not very employable.
No, it was more usually a defi cit in emotional intelligence or a lack of work ethic that led to people not being offered jobs. Clearly, these are the more prized career assets.
The three Es help us to think about the ways in which we add value to our organisations, identifying the strengths we have as well as the weaknesses we may need to develop. And hopefully they should prompt us about the actions we need to take in order to remain eminently employable. ■
For more information:
www.talentspace.co.uk
@robyeung
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For more information:
www.accacareers.com
The perfect: CV
Self-promotion doesn’t come naturally to everyone, but the CV is a not-to-be-overlooked part of one’s career plan. Whether yours is a Word document that you submit by email, a letter delivered by snail mail or a LinkedIn version, simplicity and brevity should be your bywords. Plus, you need to really sell how clever you are.
Start with a personal statement. This should explain that you are a person who has put some thought into their career moves so far and has accumulated some lessons and working standards along the way. It should help put some personality into the proceedings, too.Polish up your descriptive skills. You’ll be sending your CV to people who read them by the tens, if not hundreds. So, after your personal statement, set out some of your previous roles
in a way that shows why they turned out to be such marked learning opportunities. Describe
(briefly) that last transaction in a way that conveys how hard-won it was and how
discerning your own contribution turned out to be.
Include some sort of ice-breaker: your PADI
qualification, the Ceroc dance sessions you still devotedly organise even though
everyone else has long deserted you for Zumba,
your lifelong commitment to mud-wrestling. You don’t
want to come across as an automaton, after all. And don’t go over one sheet of
paper. Achieve all that, and everyone will fall over themselves to continue the conversation.Good luck.
Positive performanceWhile many companies have invested considerable time into performance management metrics and review processes, detailed research conducted by consultancy GP Strategies in the US provides some interesting statistics and opinion for this area.
One key finding demonstrates that the higher up an organisation you go, the more positive the perception of performance management, with only 41% of managers not believing that it improves performance versus 68% of individuals surveyed stating that it either has no impact or that it it negatively impacts their engagement levels with the firm.
The research also found that regular coaching and feedback resulted in a more positive attitude towards the performance review in terms of fairness, but that the activity remains the exception rather than the rule in most organisations.
In addition, the research found that traditional performance review approaches still place little value on career conversations despite this being a key to employee engagement.
Boost for Nigeria ACCA and a number of other organisations and professionals have been organising training sessions on accounting as a profession for university undergraduates in a number of states across Nigeria.
‘We believe that accountants bring value to economies in all stages of development,’ said Akinyemi Adeyemi, ACCA Nigeria’s business development manager.
‘We aim to develop capacity in the profession and
encourage the adoption of global standards’.
This initiative follows Nigeria’s adoption of International Public Sector Accounting Standards (IPSAS) in 2011, which have since posed considerable challenges for financial reporting in public sector entities, caused by a vacuum on how best to fast-track the teaching of the new guidance among students, civil servants and those embarking on their professional examinations.
Working closely with the Nigerian government, global accountancy bodies are helping ensure that accounting practice in Nigeria is developed and trained effectively, and a concerted effort is made to make
accountancy more relevant among students.
Double-edged swordA recent survey by CV Library, the UK’s largest independent job noticeboard, confirmed that accounting professionals value technology in the workplace more than any other sector, with 95% believing that being tech-savvy makes them more employable, compared with a national average of 86.2%.
However, accountants are also among the most concerned about technology advancements threatening their jobs, with 35% of those working in accounting seeing
advances in technology as a threat compared with the nationwide average of 25%.
Other findings showed that three-quarters of accounting professionals felt that access to the latest technology would make them feel more valued by their employers; but of those surveyed, 40% also felt that increased connectivity and technology has had a detrimental effect on work-life balance. ■
Compiled by Adam Akbar, MD, Bronzegate – finance leadership search [email protected]
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Tell us a storyThe oil and gas sector is a great example to others of where storytelling can be applied to strategic advantage. The hard part is doing it well, says Tony Grundy
the joker in the pack: shale gas obtained through fracking.
* Get inside the heads of the key players such as OPEC, the cartel of oil producing countries. These players can be split between the ‘hawks’ and the ‘doves’. The former (such as Iran) want higher prices through restricting production; the latter (such as Saudi Arabia) prefer to keep production up and prices low.
* Look at ‘transitional events’ that could bring volatility – such as wars, major terrorist attacks,
changes in leadership and governments, and disasters such as BP’s Deepwater Horizon oil spill in the Gulf of Florida in 2010 or the nuclear accident in Fukushima, Japan, in 2011.
* Role-play how the different players might behave to develop a series of scenarios.
Role-playing as game theoryScenario storytelling can be a lot of fun. I once used this technique to model the deregulated gas market in the UK. We successfully predicted that many peripheral companies would shy away, British Gas would be slow to exploit the market, the government would put up petroleum revenue tax and there would be good profits to be had. Here, role-playing was essentially game theory based on identifying perceived pay-offs
When I qualified as an accountant in the early 1980s there were two secure places to start one’s career: banking and the oil industry. So I went to work in
group internal audit at BP. The two years and many foreign trips during very profitable times for the company left me with fond memories.
While the oil and gas sector is very different from many other industries, it highlights the importance of certain techniques in strategic and financial decision-making for senior accountants in any sector: economic analysis, game theory and storytelling.
Once, when I went for a job at a business school, I was asked as a trick question what the oil price would be in 10 years’ time. It was a silly question, as there is generally – apart from an underlying long-term upward trend – just as much a likelihood of it going up or down. I answered that you need to model the systems that impact on the price. The process that you would use would be ‘scenario storytelling’ – that is:
* Understand the key variables, such as the world demand for energy, world GDP growth, urbanisation, energy conservation, the need for travel, social and demographic trends. You also need to understand the availability, convenience and relative price of substitutes, and the rate of depletion of existing reserves of oil and gas. Finally, you need to understand
46 Insight | Management and strategy
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For more information:
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For more on oil and gas and the finance function, visit www.accaglobal.com/uk/oilgas
Watch this video of Simon Constant-Glemas, vice president of finance at Shell Global Functions, on key priorities for
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‘How to’ video
See the latest in our series of management and strategy videos by Tony Grundy – on the importance of strategic vision – at www.accaglobal.com/ab/videos
inherent in the agendas of multiple stakeholders.The intention with scenarios is not to forecast very specific
results, as that would intrude in the creative part of the process. It is no accident that the practice of envisaging scenarios was invented by the oil industry (by Shell). Some of the biggest uncertainties in this sector can be addressed by relatively soft management techniques – not by purely quantitative modelling. However, scenarios can be challenging, as most managers – even those who are strategic planners – find storytelling difficult. As the head of strategy for one of the world’s largest banks once suggested, the difficulty arises ‘because we are so used to thinking in bullet points’.
One of the latest big issues in the oil and gas sector to hit the news and that would lend itself well to scenario storytelling is fracking – extracting oil from shale. The controversial techniques it uses, involving water, sand and chemicals being put through oil-bearing rocks under compression, has raised concerns – real or imaginary – over health, pollution and even seismic stability. Fracking is now happening on a significant scale and may
cause – if it hasn’t already – the ‘tail to wag the dog’ in the oil price market. It is now plausible that the US could become oil-independent at some point. I expect that the large oil companies are scenario storytelling this hot potato, as they assess the likelihood of high, medium, low or ‘rollercoaster’ oil prices. ■
Tony Grundy is an independent consultant and trainer and lectures at Henley Business School
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Scrum down!In the second in a series on agile methods, David Parmenter explains why finance teams should consider adopting the scrum communication technique
even have a rule that you can only talk as long as you can hold a dumbbell in your extended arm. The team leader or ‘scrum master’ notes all the roadblocks and immediately sets about removing them with an appropriate phonecall or walkabout visit. At the end of the session, the group touch fists (embarrassment levels permitting) – an homage to the source of this technique.
Team members now get to know what has been done, and what is going to be done and by whom. They also know that they will be having a scrum tomorrow, alleviating the need to email. Everyone is accountable, with no place for ‘cruising’.
Every month-end should be scrummed. Start around day minus two (the day before the last day) and ensure everybody who works on month-ends attends the scrum. By the time you get to day plus two, many members do not need to attend, as their month-end activities will by now be finished. Continue to scrum until the month-end is in the CEO hands.
Every year-end should also be scrummed. This time it starts with the month-minus-12 scrum and continues. Have the senior auditor attend once they are on site. Every annual plan should also be scrummed; start with the team planning the next annual plan and expand as you go into the collecting numbers phase. Finally, every finance project should be scrummed, such as implementing a planning tool. ■
David Parmenter is a writer and presenter on measuring, monitoring and managing performance
Do your meetings go nowhere slowly? Is there a stagnation of ideas? Is the finance team stuck in ‘groundhog day’? If so, you need to completely
change the way you communicate with each other.Agile planning and scrum communication is a technique that
was developed to radically reduce the time it took to write new software applications. It recognised that teams in very intense work periods do not always function properly. Common features of large projects are that they are:
* typically late with lots of pressure, no fun and have long dysfunctional meetings, going nowhere quickly
* slowed even further when more resources are applied to help speed them up, as the new staff are tripping over each other with unnecessary duplication
* often over-planned only to find that the game has changed
* constantly hitting road blocks, with members not having the skills or internal authority to fix the problem by themselves.
A 1986 Harvard Business Review paper, The New New Product Development Game by Hirotaka Takeuchi and Ikujiro Nonaka, noted that the best teams looked like sports teams: all linked together, working intensively to overcome obstacles and with frequent, short, targeted communication.
Jeff Sutherland, a consultant, discovered that software companies benefited greatly from starting each day with a stand-up meeting. He, along with others, started to promote this method, which is now known as a daily stand-up scrum.
Clear visionInstead of over-planning, you need a clear vision of what you are trying to achieve. You then take a chunk of work – between one and two weeks of effort – which is a standalone part of the project and is signed off at the end by the customer. This chunk is called a sprint. For the finance team, the month-end should be treated as a sprint.
Each day the finance team members delivering the sprint (month-end) meet in a stand-up scrum meeting. They are asked to talk for one to two minutes about what they did yesterday, what they are doing today and any current roadblocks. Each debrief is to take no more than a minute or so; some teams
Next steps
1 Visit Jeff Sutherland’s YouTube presentation on scrums2 Visit tinyurl.com/qc4hrfc to find out more3 Email me ([email protected]) and I will send
you a useful paper on agile planning.
For more information:
www.davidparmenter.com
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‘The process allows
organisations a degree of
transparency about the risks
and opportunities they face’
Green standardGraham Holt outlines the developments in sustainability reporting requirements and practices that are currently under way
Entities are investing more time and resources on the issues surrounding sustainability. A key part of the global advance towards sustainability involves the need to account and report on the implementation and application of the entities’ sustainability practices.
Sustainable development goals have historically been identifi ed as economic development, social development and environmental protection. Sustainable development consists of balancing local and global efforts to meet basic human needs without destroying or degrading the natural environment.
Despite the increased popularity of the use of the term, the possibility that societies will achieve environmental sustainability has been, and continues to be, questioned. The purpose of the article is to outline developments in sustainability reporting requirements and practices.
Information from the sustainability reporting process is being used by diverse groups of stakeholders who are fi nding increased value from sustainability reporting information. Decisions are made by businesses and governments,
which are seldom based purely
on fi nancial information
alone. Rather, they are based on
an assessment of risk and opportunity using information on a wide variety of immediate and
future issues.
Increased transparencyThe process behind sustainability reporting
ensures that organisations consider their impact on sustainability issues, and allows a degree of transparency about the risks and opportunities they face. Increased transparency can lead to better decision-making. There is now a greater
demand for sustainability
information, as demonstrated by the emergence of new reporting initiatives.
An example of these is the United Nations Global Compact (UNGC). This is a voluntary initiative based on CEO commitments to implement universal sustainability principles and to take steps to support UN goals. At the time of writing there were more than 8,000 companies and a total of more than 13,000 entities signed up to the initiative. BP, as an example, reports against the principles of UNGC on human rights, labour, environment and anti-corruption. These principles centre on operating responsibly in alignment with universal principles and taking actions that support the society around them.
UNGC wishes sustainability to be pushed deep into the corporate
DNA, with companies showing commitment at the highest level, reporting annually on their efforts and engaging locally where they have a presence.
The Global Reporting Initiative (GRI) is an international not-for-profi t organisation, which produces Sustainability Reporting Guidelines, currently in their fourth generation. The GRI’s Sustainability Reporting Framework provides guidance for organisations to voluntarily report on their environmental, social and governance (ESG) performance. »
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CPDGet verifiable CPD units by answering questions on this article at www.accaglobal.com/cpd
GL_T_HoltCPD.indd 49 11/09/2015 10:19
In support of those preparing corporate sustainability reports, the GRI offers reporting principles, standard disclosures and an implementation manual. Its guidelines are developed through a dialogue with stakeholders from around the world, including representatives from business, civil society, fi nancial markets, labour and government.
GRI has championed sustainability reporting for many years and provides the world’s most widely used standards on sustainability reporting and disclosure. Of the world’s largest 250 corporations, 93% now report on their sustainability performance and 82% of these use GRI’s standards in their reporting. GRI is built upon a multi-stakeholder principle, which ensures the participation and expertise of diverse stakeholders in the development of its standards.
Twenty-seven countries use GRI in their sustainability policies and in addition it has longstanding collaborations with over 20 international organisations such as the UNGC, Organisation for Economic Cooperation and Development and the UN Working Group on Business and Human Rights.
Its focus has always been on the reporting process and the value of the information that comes from it. GRI has published a fi rst-analysis paper resulting from its Reporting 2025 Project that is designed to promote an international discussion about the purpose of sustainability reporting and disclosures looking ahead to 2025. As part of the project, leaders in various fi elds were interviewed on subjects ranging from data technology to society and business development scenarios. The insights gained, which are not too unexpected, include the fact that companies will be
held accountable more than ever before, that business decision-makers will take sustainability issues more and more into account, and that ethical values, reputation and risk management will guide decision-makers.
Setting standardsThere are developments worldwide in terms of sustainability reporting. The US Sustainability Accounting Standards Board (SASB) has issued provisional standards for various industries. The series of eight industry-related standards focus on material sustainability matters that corporations are already required to disclose in their form 10-K or 20-F fi lings with the US Securities and Exchange Commission.
The Singapore Stock Exchange is making fi nal plans to make sustainability reporting mandatory. It is currently undergoing a one-year study to determine what guidelines should be adopted for these reports, which disclose a company’s economic, environmental and social impacts. The Taiwan Stock Exchange recently
announced that specifi ed listed companies would have to comply with mandatory CSR reporting according to GRI G4 guidelines. In 2014, Japan’s Financial Services Agency published the fi rst draft of a stewardship code, called the Principles for Responsible Institutional Investors. The code exists on a voluntary ‘comply-or-explain’ basis and aims to encourage long-term sustainable returns based on seven principles to guide investors on their stewardship responsibilities.
Also in 2014, the European Parliament passed a vote to require mandatory disclosure of non-fi nancial and diversity information by certain large companies and groups on
a comply-or-explain basis. Companies must disclose information on policies, risks and outcomes as regards environmental matters, social and employee aspects, respect for human rights, anticorruption and bribery issues, and diversity in their board of directors.
Finally, in the UK, the Public Services (Social Value) Act 2012 places a duty on public bodies to consider social, economic and environmental wellbeing of stakeholders ahead of a procurement. This was followed, in August 2013, with new regulations for the strategic report and directors’ report. The regulations resulted in an amendment to existing company law requirements and became effective on 1 October 2013.
The main change was the introduction of a requirement for certain entities to prepare a strategic report as part of their annual report. The strategic report is intended to replace the existing ‘business review’ section of annual reports and requires companies to provide a complete picture of their business activity, including social effects, calling into question what is material in business reporting.
Quoted companies in the UK also need to include specifi c information on the company’s strategy, business model, human rights and
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gender diversity in the strategic report, as well as information on greenhouse gas emissions in their directors’ report.
Integrated approachAnother consideration is the International Integrated Reporting Council (IIRC) framework. This is a principles-based framework aimed at encouraging businesses to explain and disclose better how they create value. The framework focuses on six sets of resources and relationships (capitals): fi nancial; manufactured; intellectual; human; social and relationship; and natural. The framework defi nes an integrated report as a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.
The framework provides a conceptual basis for thinking about how a business creates value and identifi es the risks it faces, not only in the short but medium and long term, and about how it articulates its strategy and business model for long-term sustainable value creation.
However, despite the benefi ts and investor appetite, many companies are adopting a ‘wait-and-see’ approach to integrated reporting.
The Climate Disclosure Standards Board (CDSB) is an international consortium of business and environmental NGOs. It is attempting to advance and align the global corporate reporting model to equate natural capital with fi nancial capital, and has developed a framework for reporting environmental information.
The CDSB and the IIRC have signed a joint statement of collaboration. Both organisations believe
that climate change and the protection of natural capital are core issues for business and that relevant disclosures about both can provide valuable insight into corporate performance as part of an organisation’s mainstream reporting.
Further, the IIRC has created the Corporate Reporting Dialogue (CRD), which brings together organisations that have signifi cant international infl uence on the corporate reporting landscape. It has published a landscape map that provides a snapshot of a comparison of their frameworks, standards and related requirements. Participants are the CDSB,
the US Financial Accounting Standards Board, the GRI, the International Accounting Standards Board, the IIRC, the International Public Sector Accounting Standards Board, the International Organization for Standardization and the SASB.
The participants aim to work together to respond to market calls for better alignment and reduced burden in corporate reporting by promoting proactive engagement between the key organisations.
Finally, the International Auditing and Assurance Standards Board has released revised International Standards on Auditing to better deal with disclosures in fi nancial statement audits, together with a publication on assurance on integrated reporting to deal with such issues as the nature of assurance and how different mechanisms contribute to credibility and trust.
There are no worldwide agreed standards on sustainability reporting. There are many initiatives and entities can comply with a range of ‘standards’. It seems reminiscent of where International Accounting Standards found themselves many years ago. ■
Graham Holt is director of professional studies at the accounting, fi nance and economics department at Manchester Metropolitan Business School
For more information:
United Nations Global Compact: www.unglobalcompact.org
Global Reporting Initiative: www.globalreporting.org
US Sustainability Accounting Standards Board: www.sasb.org
International Integrated Reporting Council: www.integratedreporting.org
Climate Disclosure Standards Board: www.cdsb.net
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Glenn Collins, ACCA UK’s head of technical advisory, provides a monthly roundup of the latest developments in fi nancial reporting, audit, tax and law
Technical update
Audit
Non-financial informationThe International Auditing and Assurance Standards Board (IAASB) has published information on its work on the issue of assurance on integrated reporting and other emerging developments in external reporting. The publication Exploring Assurance on Integrated Reporting and Other Emerging Developments in External Reporting highlights that ISA 720 has been strengthened with regard to the auditor’s role in the reading and consideration of non-fi nancial information. It is also highlighted that the IAASB will need to consider other assurance issues relating to these developments. More at bit.ly/iaasb-ir.
Summary financial statementsED ISA 810 (revised), Engagements to Report on Summary Financial Statements, is open for comment until 2 November and would apply to engagements to report on summary fi nancial statements for periods ending on or after 15 December 2016. The International Auditing and Assurance Standards
Board draws attention to paragraph 17 and asks for views on how it has covered references to the additional information contained within audit reports. More at bit.ly/iaasb-comment.
Reporting
Revenue recognitionThe International Accounting Standards Board has issued Clarifi cations to IFRS 15, in which it seeks to clarify:
* how to identify the performance obligations in a contract
* how to determine whether a party involved in a transaction is the principal (responsible for providing the goods or services) or the agent (responsible for arranging for the goods or services to be provided to the customer)
* how to determine whether a licence provides the customer with a right to access or a right to use the entity’s intellectual property.
Comments need to be received by 28 October. You can fi nd further explanation at bit.ly/iasb-rev.
SRAThe SRA accountants’ report changes highlighted last month would be part of Version 15 of the SRA Handbook that goes live on 1 November. Revised accountants’ report forms will be available for use after 1 November and will apply to all fi rms whose accounting period ends on or after that date. More at www.accaglobal.com/advisory.
Public sector accountingThe International Public Sector Accounting Standards Board (IPSASB) has issued consultations for comment:
* Recognition and Measurement of Social Benefi ts
* Exposure Draft (ED) 56, The Applicability of IPSASs.
Recognition and Measurement of Social Benefi ts is open for comment until 31 January 2016. In the consultation IPSASB identifi es, explains and asks for comment on the merits and weaknesses of three broad options for the recognition and measurement of social benefi ts. They are the:
* obligating event approach
* social contract approach
* insurance approach.More at bit.ly/ipsasb-ben.
Exposure Draft (ED) 56, The Applicability of IPSASs is open for comment until 30 November. It aims to clarify the entities that should use IPSASs and aims to remove the uncertainty for entities that fell outside of the previous defi nition. Comments are required as to whether it has achieved its objective. More at bit.ly/ipsasb-applic.
Academies Transition to FRS 102 and Charities SORP 2015: For academy trusts incorporated before 1 January 2015, from the Education Funding Agency, highlights the transition issues that will be faced by academies and highlights how they have been considered as part of the Accounts Directive. It highlights that ‘as a minimum established academy trusts should consider:
* revisiting and revising their accounting policies as appropriate
* the need for restating comparatives for the year ended 31 August 2015, together with the opening balance sheet fi gures at 1 September 2014, within their fi nancial statement for the period ended 31 August 2016
* revising the format of the statutory accounts, ensuring that the trustees are aware of, and understand, the changes. The Accounts Direction for the period ending 31 August 2016 will provide model fi nancial statements (the “Coketown model”) based on SORP 2015, covering most situations
* whether the trust’s accounting systems will be able to accommodate the changes
* the impact on timetables for preparing, auditing and approving the fi nancial statements. The trust’s management team should plan and discuss this with the trustees, professional advisers and auditors as appropriate
* whether specialist assistance is needed to identify transitional issues
* whether fi nance staff need training on the changes to the SORP’.
The guidance also contains a table of the main changes. It is available at bit.ly/efa-acad.
Charities SORP 2015The 2015 Charity (Account and Reports) Regulations, authorising use of the SORP 2015, have not
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CAA/ATOL reporting
The Civil Aviation Authority (CAA) highlighted in September that it will establish a contact email for training for the ATOL Reporting Accountants scheme, which it plans to bring into effect on 1 October.
The email is [email protected] and may be used by accountants to contact the CAA in order to apply to undertake their training. The CAA has said that it will require the following information from each accountant:
* name
* professional accountancy body
* member registration number
* email address.You can find updates during the coming months at www.accaglobal.com/advisory.
been issued. The current regulations are those issued in 2008, which stipulate that accounts must be prepared in accordance with the SORP 2005.
The Charity Commission’s recommended solution to this problem can be found within its guide CC15c. In section 8 it highlights why the new SORP can be used despite the regulations not having yet been issued.
It is important to note that if the regulations are not issued then, reports will need to be amended or reporting delayed until the regulations are available. More at bit.ly/cc-ess.
Tax
Consultations and discussion documentsA number of consultations and discussion documents have been issued, which close in October and November. They include:
* Tips, gratuities, cover and service charges: employer practice
The discussion has been in the news for a while and the Department for Business, Innovation and Skills has issued a call for evidence. It is aimed at employers and is gathering information on common practice. It closes for comment on 10 November.
* Replacing Wear and Tear Allowance with Tax Relief for Replacing Furnishings in Let Residential Dwelling-Houses
This consultation closes on 9 October and seeks views on replacing the wear and tear allowance with a new relief that allows a deduction for the actual costs of replacing furnishings in let residential properties. It is highlighted that the relief will apply to landlords of unfurnished, part-furnished and furnished properties. The relief will not apply to ‘furnished holiday letting’ businesses (FHLs) and the letting of commercial properties because these
businesses receive relief through the Capital Allowances regime.
* Simplifying the Gift Aid Donor Benefit Rules: a call for evidence
Comments are invited by 9 October on this discussion paper, which recognises that many charities have difficulty understanding the current Donor Benefit Rules and which looks for simple options. It contains a useful summary of the current position.
More at www.accaglobal.com/advisory.
Penalties – what HMRC is saying‘HMRC does not want to charge penalties – we want people to report, file or pay on time.
HMRC wants to help people who are trying to do the right thing rather than penalise them, and focus our penalties on those who persistently break the rules.
Whether it’s customers filing their Self Assessment return late or employers missing PAYE filing deadlines, HMRC will accept most appeals at face-value if they are received on time and contain a reasonable excuse in line with our published guidance.
HMRC will select some appeals for more in-depth review where they do not appear in line with our guidance or are from those who persistently miss deadlines.
This risk-based approach to penalties is in line with the likely direction outlined in the HMRC penalties: a discussion document, issued earlier this year.’
You can see the document at bit.ly/hmrc-pen.’
SDLTSpotlight 25: Stamp Duty Land Tax avoidance – no human rights breach in Stamp Duty avoidance challenge highlights »
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HMRC’s position and states that the Court of Appeal unanimously refused an application for a judicial review against SDLT retrospective legislation.
You can read more about this and other tax avoidance schemes currently in the spotlight at bit.ly/hmrc-avoid.
Carer’s creditNearly 200,000 people with caring responsibilities could receive a boost to their state pension by claiming Carer’s Credit. Signing up means a carer could receive over £200 extra per year in state pension when they retire. But currently only an estimated 5% – or 11,000 – of those eligible have signed up.
The credit contributes to a carer’s National Insurance record, yet around 200,000 are thought to be eligible. It is designed for those who are caring for others for at least 20 hours per week and who aren’t getting Carer’s Allowance.
For information on eligibility and how to apply, people should visit bit.ly/hmrc-carer.
HMRC guidanceYou can find the list of HMRC webinars at bit.ly/hmrc-web.
Student loansFrom 6 April 2016 a new student loan threshold of £21,000 will be introduced and will be known as a Plan 2 loan. Employees repaying student loans under the existing threshold will be unaffected by the change and their loans will be described as Plan 1 loans. The threshold for Plan 1 loans is £17,335. More information about the existing threshold can be found at bit.ly/hmrc-loan.
Tax avoidancePromoters of Tax Avoidance Schemes: Guidance explains new rules that apply to promoters of tax avoidance
schemes, and that aim to deter the development and use of avoidance schemes, by influencing the behaviour of promoters, their intermediaries and clients. It highlights HMRC’s assessment process and the actions it will take against promoters of tax avoidance schemes. You can view the guidance at bit.ly/hmrc-prom.
VAT: reduced rate exemptionRevenue and Customs Brief 13 (2015): reduced rate of VAT for the installation of energy saving materials explains the government’s plans in respect of the decision of the European Court that the UK had implemented the reduced
rate for the installation of energy saving materials in a way that was not in accordance with European Union law. It is highlighted that ‘if there are to be any legislative changes, they won’t be implemented before Finance Act 2016. Until then, supplies of the installation of energy savings materials will continue to be reduced-rated and any changes will only apply to future supplies and not to supplies already made.’
Access to finance
Grants for businesses in WalesThe Welsh Government highlights grant initiatives to support businesses in
Wales and summarises these at bit.ly/wales-gr.
Law
Auto-enrolment: choosing a pension scheme The Pensions Regulator recommends that employers should have a scheme in place six months before their staging date and should start planning for automatic enrolment, including identifying a scheme, 12 months ahead.
The regulator has updated the information and tools on its website to make it as straightforward as possible for smaller employers, who may not have experience of pensions, to identify a suitable
HMRC software
HMRC has been asked to reconsider its policy on restricting all agents from using the new HMRC company tax return and company accounts filing service called Company Accounts and Tax Online (CATO). HMRC has stated that the ‘new service will make it quicker and easier for companies to file their own annual accounts to Companies House and company tax returns to HMRC– at the same time or separately.’ But it continues to say that ‘with the introduction of CATO agents will not be able to use this service on behalf of their clients’, and has stated that agents should use commercial software.
The current free HMRC software will continue to be available for accounting periods ending on or before 31 December, and will remain available until 31 December 2016.
We will highlight any change of view by HMRC at www.accaglobal.com/advisory.
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scheme for their staff. This includes a quick guide to choosing a scheme. More at bit.ly/tpr-auto.
To help employers choose a scheme, the regulator has also published a list of master trust schemes that are suitable for automatic enrolment at bit.ly/tpr-find. Employers do not have to use a scheme from this list and can choose any scheme suitable for automatic enrolment, which meets their needs and those of their staff. The regulator also publishes information about the scheme set up by the government (NEST) and schemes listed by industry bodies.
To be used for automatic enrolment, the scheme must meet certain criteria. This includes not requiring staff to do anything to become active members or make investment choices. It will need to be an occupational or personal pension scheme and be tax registered. There are also minimum requirements regarding the level of contributions that must be paid into the scheme.
If an employer has an existing scheme for their staff, they will need to check whether it is suitable for automatic enrolment. The Pensions Regulator’s website has a tool to help employers with an existing scheme decide whether or not it is suitable: bit.ly/tpr-qual. Employers who find that their scheme is not suitable will need to identify a new scheme.
When choosing a pension scheme, employers should check whether it will be compatible with their payroll software. It may also be advisable to check if the scheme provider will generate letters to staff to tell them about automatic enrolment. In addition, employers should decide what level of service they want – for example, some schemes will assess workers and manage opt-ins – and
should weigh up costs and charges against the level of service offered. The regulator highlights that employers will also need to consider whether the scheme offers investment options that suit their particular staff needs, such as ethical funds or funds that are compliant with sharia law.
For more guidance on auto-enrolment, turn to page 61.
Consent to act Companies House will replace the current ‘consent-to-act’ process for directors and company secretaries. It states that for ‘newly appointed directors and secretaries, a statement will be added by Companies House to the relevant appointment and incorporation forms (paper and electronic) that the person has consented to act in their relevant capacity.
Companies will be required to agree to this statement. This will replace the current consent-to-act procedure of providing a signature on paper forms and personal authentication on electronic filings.’
The revised process will result in Companies House writing to all newly appointed directors to make them aware that their appointment has been filed on the public register and explain their statutory general duties. More at bit.ly/ch-consent.
Letting agents – Scotland Consultation on a draft statutory code of practice and training requirements for letting agents in Scotland is open for comment until 15 November and proposes a number of changes that are likely to impact letting agent businesses. In addition to the focus on qualifications and training, it contains a section on client money, where it states conditions that include:
Business risk and opportunity
FCO Political and Economic Updates provide information for UK businesses on how to identify opportunities and guard against political and economic risks when trading overseas: bit.ly/fco-updates.
UKTI guides – exporting country guides – aim to assist businesses that are interested in developing their overseas trade. They contain sections that consider start-up, legal, and tax and customs issues.
Recent updated guides include those for Australia, New Zealand, Iran, Luxembourg, Lithuania, Netherlands, Iceland, Hungary, Denmark, Belgium, Azerbaijan, Sri Lanka, Kazakhstan and Canada. The guidance can be seen at bit.ly/fco-guides.
The guide for Canada highlights that, from 15 March 2016, British citizens will need to obtain an Electronic Travel Authorization (eTA) before travelling to Canada. This process has already been made available. It also highlights federal and provincial laws and the permits and licensing requirements for business activities.
You can find details of regimes and designated persons subject to sanctions at bit.ly/fco-sanct.
* You must have robust and transparent written procedures for handling clients’ (landlords’ and tenants’) money.
* If you hold money on a client’s behalf, you must record it appropriately in your accounts, however it is held.
* You must ensure you
hold client money in one or more separate and dedicated client bank accounts with a bank or building society authorised by the Financial Conduct Authority, which are separate from your main business or private accounts.
More at http://bit.ly/ sco-let. ■
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Take 10 reportsIt is now 10 years since IFRS were mandated for EU-listed entities. Recent research by Robert Hussey and Audra Ong reveals how annual reports and accounts have changed
The introduction of new International Financial Reporting Standards (IFRS) and additional financial statements has had a significant impact on the annual report and accounts of IFRS reporters.
We looked at 10 UK plcs’ annual reports and accounts for 2005 and 2014 and found that length had increased by an average of over 50 pages, with all sections increasing in absolute terms (see Table 1). Growth in the lengths of the audit report and financial statements is driven by regulation. Interestingly, the notes to the accounts showed an increase of eight pages on average but, as a percentage of the total document, they declined from 34% to 29%.
We also looked at the lowest and highest number of pages. Table 2 does not show the weightings of the various sections, as the sections are taken from different reports. For example, our longest annual report of 172 pages in 2005 did not have the longest section on other disclosures. However, the 2005 data emphasises the wide range in the various sections. The results for the audit report and financial statements are as expected, but the difference in the length of the notes to the accounts is a surprise.
The 2014 data illustrates the significant increase in the length of the audit report. It also confirms the substantial increases in the notes and other disclosures, both at the lowest and highest levels.
The growth in the ‘other disclosures’ is due mainly to corporate governance. Under
the heading of ‘strategic review’, in 2014 the average was 36 pages; the 2005 data is not under a single heading, but we would estimate the average at around 12.
What’s to come?The last decade has seen significant change, strongly influenced by the now aborted convergence project with the Financial Accounting Standards Board. The next decade may bring more changes:
* Regulatory changes will not slow
The International Accounting Standards Board (IASB) has a mandate to set accounting standards. We anticipate a slowing down of IFRS amendments as the dust of the first decade settles. But
organisational theory suggests that, if the major activity of an organisation decreases, it will search for other related activities to replace it. A concentration on disclosures and improved notes to the accounts is a logical extension.
* Integrated reporting (IR) is attracting increasing attention
A small but increasing number of companies are experimenting with IR. In 2013, the IASB and the International Integrated Reporting Council (IIRC) agreed that the two bodies would develop an integrated reporting framework, with a IIRC’s Breakthrough Phase from 2004-16. The aim is development and early adoption.
* Contextual disclosures will increase
The internet was used sparingly for corporate communications in 2005. There is now a vast range of information made available to investors and other stakeholders. Although the annual report and accounts will remain a foundation stone, we expect to see further increases in contextual disclosures. ■
Roger Hussey FCCA is emeritus professor at the University of the West of England and the University of Windsor, Canada. Audra Ong is associate professor at the University of Windsor, Canada
Table 1: average number of pages in annual reports
Table 2: lowest/highest number of pages in annual reports
2005 2014
Number
143972
116
% of total
133462
100
Number
4548111168
% of total
232966
100
Audit reportFinancial statementsNotes to the accountsOther disclosuresTotal
2005 2014
Lowest
132234
Highest
1567115
Lowest
343989
Highest
6570153
Audit reportFinancial statementsNotes to the accountsOther disclosures
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Standard switching Financial reporting standards 101 and 102 take effect on 1 January 2015, but there’s a lot that businesses need to do to be ready. Stuart MacDougall looks at how to prepare
As autumn approaches, thoughts are swiftly turning to December year-ends and, with that, a surge of activity in GAAP conversions following the UK’s adoption of FRSs 101 and 102. These standards are effective from 1 January 2015 for December year-end reporters and are undoubtedly the single biggest accounting change since IFRS in 2005.
We are seeing many companies using this closing window of opportunity – between fi nalising their December 2014 year-end and any pre-year-end visits – to drive forward their conversion projects. But there is quite a gap as to where businesses are in the process. Some are yet to decide on the most appropriate framework, others are nearly complete, but the majority sit somewhere in the middle.
So unless you happen to fall into the nearly complete category or have early adopted, you will soon need to identify a complete list of GAAP differences and quantify them. This is the fi rst key challenge companies are facing, as the transition can be complex and »
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time-consuming – especially for groups with many subsidiaries, where it can not only be volume-intensive but require an extensive knowledge of arrangements, contracts and policies. But it is crucial that businesses do recognise their key GAAP differences, as they are likely to have a significant effect.
For example, GAAP differences could impact treasury, tax and distributable reserves, to name a few. Businesses should also be mindful that third parties such as banks, which have realised that covenants could be impacted, will be wanting to discuss the implications with their borrowers.
A further challenge is to ensure that the conversion exercise captures all GAAP differences, both when preparing an opening balance sheet (at 1 January 2014 for December year-ends) and for the purposes of the 2014 comparative balance sheet.
We have been working with clients on their impact assessment, taking their existing UK GAAP financial statements and identifying where there are GAAP differences, where there are options and where the standard requires something new. Essentially these assessments look at each page of the financial statements and signpost where the new standard will have an effect,
what the issue is and what needs to be considered, alongside a reference pointing to the new standard. On a typical 30-page set of financial statements, you could expect in the region of 100 comments.
Some of the changes will be relatively straightforward to deal with; others are more of a challenge and could have a significant financial impact. Take primary financial statements, where there are purely disclosure changes. While the detailed company law formats still apply, unless a company uses the IFRS-based formats, new terminologies will apply and so the presentation will look different in some areas, such as cashflow. As for recognition and measurement, there are a host of changes across the board.
High impactTreasury is one of the areas impacted the most. Accounting under the ‘old’ UK GAAP was simpler, with derivatives typically being held off balance sheet until they matured; hedge accounting requirements were pretty relaxed; and accounting for intra-group foreign currency exposure was straightforward. All this will change.
* All derivatives and more non-derivative instruments will be carried at fair value, leading to income statement volatility.
* Hedge accounting can be applied to manage income statement volatility, as long as hedge accounting requirements, broadly aligned with the concepts and language of IFRS 9, Financial Instruments, are met – for example, the requirement to have an ‘economic relationship’ between the hedged item
For more information:
www.pwc.co.uk/impact
Areas likely to be impacted
* Treasury
* Accounting
* iXBRL
* Tax
* Distributable reserves
* Third parties
* Controls
* People and processes
and hedging instrument. However, the hedge accounting requirements of FRS 102 are shorter than IFRS 9 and contain no detailed application guidance.
* SSAP 20, Accounting for Investments in Subsidiaries – largely popular with holding entities in their standalone accounts – will be not allowed any more. SSAP 20 allows the matching of retranslation on investments in subsidiaries with the debt used to finance them. Treasurers will need to implement new ways to manage the exposure – and the income statement volatility – arising from intra-group foreign-denominated financing. Remember, it’s the standalone accounts that drive the tax charge. This is only one such example, but there are various others.
* Deferred tax is a further area of complexity, particularly now that we have a ‘timing differences-plus’ approach. It will result in transitions to new UK GAAP, creating volatility from deferred tax gains/losses on revalued fixed assets.
* There is a lot of change as regards investment properties. Of particular significance is gains and losses going through the profit or loss rather than through reserves. Additionally, groups will likely need to prepare or obtain market valuations, in advance of their coming year-end, for any properties held by companies within the group that rent these out intra-group.
* As there are more identifiable assets in
business combinations, this could lead to lower goodwill and give rise to alternative amortisation and tax treatment under new UK GAAP. With goodwill, there is no longer a rebuttable presumption for useful life, with the revised standard saying: ‘If, in exceptional cases, an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed 10 years.’
While many have viewed new UK GAAP as a compliance issue and not a top priority, even in straightforward businesses there are bound to be unforeseen issues.
Transition nowHowever, these pitfalls can be avoided by channelling the right resources, time and effort to a transition project now, and this will ultimately reduce the scope for additional costs, risk and stress in 2016, while also providing a greater opportunity for the business to consider all the various options and implications. As my gran would say: ‘Prevention is always better than the cure.’ ■
Stuart Macdougall, PwC London audit lead, new UK GAAP
It is crucial that businesses do
recognise their key GAAP differences,
as they are likely to have a
significant effect
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‘How to’ video
Navigate the choppy seas of auto-enrolment with the expert guidance in our video at bit.ly/1RUqoZz.
The milk testIn this second instalment of our series on pensions auto-enrolment, Kate Upcraft focuses on what your practice strategy might look like for delivering auto-enrolment for clients
Key to your auto-enrolment (AE) project is the support and resources you need to put into it. It’s quite likely that neither your clients nor your payroll team have much expertise in selecting or administering pensions.
Even if you have had a few directors paying into a pension, it was almost certainly they who selected the SIPP (self-invested personal pension) and told your payroll team what to deduct on a net basis each pay period, which the client then paid over to the provider. That is about as far from AE as Real-Time Information (RTI).
The other important distinction to make from RTI is that RTI requires two standard fi les to be sent to one destination each week or month, whereas AE requires a number of totally different fi les, all formatted differently, submitted to a myriad of different providers at no set time in the tax month. You may now be starting to realise that IT skills are as key to this as pensions knowledge.
So over the next two years your payroll team are going to become pension administrators as well as payroll administrators. That’s not an additional service you can offer for free, particularly as payroll is a low-margin service in the fi rst place. The solution to the fee/service conundrum is to ask yourself:
* What service will I offer to clients?
* Do I have the resources to do that?
* How much can I, or must I, charge to make this cost effective?
The propositionIf you’ve already supported some large clients through staging, this decision may well have been made for you by the client(s) without your involvement, but that does mean one size fi ts all. I categorise the agent auto-enrolment offer as the ‘milk test’: your service can be skimmed, semi-skimmed or full fat, or you can offer all three with a different fee structure for each.
The skimmed route is likely to be what your larger clients have already chosen; you simply receive the results of payroll data that has been assessed elsewhere by other third-party software, which you then input into your payroll software, provide the results back to the client in the form of deductions shown on payslips, and perhaps a report that can be used by them to upload both maintenance data and contribution data to their chosen provider. Using this model, you can avoid purchasing bolt-on AE modules from your payroll software provider if these are charged as additional licences.
The semi-skimmed group will want you to carry out assessments within your payroll software, but may want to produce their own ‘letters’
and upload the requisite fi les to their chosen provider. For them you will need assessment functionality within your payroll software, but have the ability to ‘turn off’ letters if these are not required.
The full-fat group is likely to be the majority of your micro and mini-micro clients, as the regulator refers to them. Your very smallest clients (apart from the exemptions we spoke about last month) will expect you to do the whole AE piece.
So they will want you to set up a scheme for them, run assessments, provide letters and upload fi les to the pension provider, with their only involvement being to give out letters and pay the contributions over. Each of these service propositions needs costing in terms of time, human resources and software costs.
Resources requiredYour trained payroll team are not pension managers. Sitting down early with them to assess the skills gaps, and where your pension service will begin and end, is vital.
It’s unlikely you’ll be able to work with every client to source an appropriate pension, set up their scheme and match the scheme rules to your payroll software and their payroll data within the resources you currently have. And this is not just a peak that is over once all your clients have staged; AE is as much a part of every payroll run as tax and NI. I’ve seen client payrolls for around 30 salaried staff that used to take about half an hour suddenly take up to an hour and a half, once the company has staged and fi les need to be agreed with the client and then have to be uploaded to a pension provider. Will a »
‘How to’ video
Navigate the choppy seas of auto-enrolment with the expert guidance in our video at bit.ly/1RUqoZz.
61
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Clarity in your letters of
engagement is important
to determine where your agent
responsibilities begin and end
client accept that it now takes three times as long to run their payroll and pay a fee commensurate with that?
You may need a dedicated team to work with your client base on implementation decisions. These will include:
* What are qualifying earnings?
* Is pensionable pay based on qualifying earnings or is the scheme a certified scheme using, for example, just basic pay but with higher contributions?
* What tax relief is to be delivered – net pay or relief at source?
* Does the client want to use salary sacrifice or contractual enrolment?
* Is postponement important for them and, if so, when will it be used?
When the dedicated team needs to be in place will be
driven by your staging profi le. You can’t plan unless you know how many clients are due to stage each month over the next two years. You must make it clear that clients can’t agree with the regulator to bring staging forward unless they have also discussed whether you can cope as their agent.
Going forward, you need to consider the impact that AE will have on your monthly schedule and your client base. Can you afford to take on weekly payrolls anymore, given the need to offer a pension service every week?
As well as payroll software and people doing assessments and letter production, you may well need additional software or people to manipulate the numerous fi les that need uploading after the payroll is fi nalised. You may have IT skills within the payroll team that you can call upon here, but equally this may necessitate a new role where payroll skills are not vital, but knowledge of multiple pension provider formats and fi le sets-ups is. Alternatively, you may choose to purchase middleware from a third party – not to carry out assessment, but to marshal, format and bulk upload client fi les.
Who does what?Clarity in your letters of engagement is important to determine where your agent responsibilities begin and end. You may have taken the decision not to be involved in
scheme selection or set-up; in which case, you will be talking to clients once the scheme selection is done and they have carried out the due diligence. It is a very important decision to offer a workplace pension. Not only is there a huge cost impact for the client; this is about choosing a scheme that will provide employees with fi nancial security in retirement. This really is ‘buyer beware’ territory, and agents should also be mindful that choosing only to offer one auto-enrolment pension vehicle through a provider tie-up may be risky.
Your payroll team’s activities will look materially different this time next year. Below is a matrix of what might need to happen with each client, accepting that some of these steps will not apply to the smallest clients. ■
Kate Upcraft, payroll consultant
For more information:
See also David Harrowven’s tax /fi nance act articles at tinyurl.com/accacpd
Agent
Agree payroll parameters and implementation rules for client
Agree where and how assessment will be carried out and letter provision if required
Amend payroll input forms to show pension scheme choice
Agree who and how opt-outs, cessations and opt-ins will be handled and the ensuing refunds
Set up interface fi les for chosen provider
Action
Agree qualifying earnings, pensionable pay, tax relief and postponement rules
Purchase payroll module or third-party software
Aim for standardisation wherever possible
Create a control dashboard for all these activities
Client
Tell the pensions regulator (TPR) who the nominated contact is
Create a project plan, appoint a project lead and implementer
Amend legacy pension scheme and/or fi nd a new scheme
Brief staff on choice of scheme
Complete declaration of compliance
Action
Click here to nominate
May not be the daily payroll contact, as business owner needs to take key decisions
Tell bureau as a new interface from payroll may need developing if this is a provider they haven’t worked with before
Can bureau assist with alliances with IFAs?
Online to TPR within fi ve months of staging
Agent
Agree payroll parameters and implementation rules for client
Agree where and how assessment will be carried out and letter provision if required
Amend payroll input forms to show pension scheme choice
Agree who and how opt-outs, cessations and opt-ins will be handled and the ensuing refunds
Set up interface fi les for chosen provider
Action
Agree qualifying earnings, pensionable pay, tax relief and postponement rules
Purchase payroll module or third-party software
Aim for standardisation wherever possible
Create a control dashboard for all these activities
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The view fromKaren Shaw FCCA, finance director at Waterfall Catering Group and keen traveller
Today I work for a really progressive catering company with ambitions to double turnover in three years. The parent company – Waterfall Catering Group – is private equity-owned and was formed by the acquisition of a 100% shareholding of Waterfall Services, Taylor Shaw and CaterPlus Services. Growth has been immense and I have recruited 25 people to the fi nance function.
We provide healthy meals to schools and care homes from Aberdeen to Devon. We are both proud and quick to say we were here before Jamie Oliver! Our staff are passionate about providing nutritious meals to our customers at schools, colleges and in the care sector. Cashfl ow management is key, and we hold monthly profi t and loss reviews for each of our 750 business units.
I’m very proud to have the letters FCCA after my name. The ACCA Qualifi cation has proved invaluable. In my current role it helps me understand hedging and shares.
I always wanted to be an accountant. Early in my career I took a bookkeeping diploma, passing with a 100% distinction. I joined Swinton Insurance as an accounts clerk and – working in the property department – my career took off when I was promoted after three months and was responsible for a team managing 1,000 commercial property leases. I was then headhunted by a company that provided concrete driveways, which I helped build into a £10m-turnover business.
I studied in quite intense periods over weekends with Kaplan. It was very challenging to work full time and spend a further eight hours on a Saturday and Sunday studying. But the benefi ts are numerous, and today I am encouraging our three part-qualifi ed ACCA students to complete their studies.
You never know what life will throw at you. In my case, it was two redundancies in two years. Having joined Adecco with responsibility for a £120m function as fi nancial controller, my part of the business was transferred to Bulgaria. A switch to Thomas Cook Airlines was followed by the news a few weeks later that the function was moving to Peterborough. I’ve had experience of working with US and UK GAAP. While some people might be wary of wrestling with different standards, I would not say one method is harder than another. At the end of the day, it is all about debits and credits.
Becoming fi nance director means so much to me. I feel like this is the culmination of many career goals. I am excited to plan the next phase of activity as we seek to increase our turnover through a mixture of acquisition and organic growth.
I simply can’t sit still and have visited 27 countries in total. Outside of work I love to travel, and this year alone I’ll be visiting Florida, Jamaica, the Cayman Islands, Mexico and Turkey. ■
Did you know...?
You can gain 21 verifi able hours of CPD at ACCA’s fl agship training event for members in the corporate sector www.accaglobal.com/ukcourses.html
Snapshot: media and entertainmentThis covers a wide variety of industries such as marketing services, fi lm and TV production, interactive media, music, games, theatre and many more. All these different industries are subject to different pressures.
Marketing services businesses tend to follow the fortunes of the general economic cycle, whereas fi lm, TV and music remain comparatively recession-proof.
While not heavily regulated, the sector has interesting tax nuances, such as the new VAT rules within the EU for the supply of digital services that came in this year.
Marketing, digital and media services agencies were hard hit by the downturn and struggle to attract and retain the right talent. Fees have not recovered to pre-recession heights, and they have to innovate to stay relevant to clients.
Marketing services businesses generally have a lifecycle of around seven years before the founders seek out a sale. They look for accountants who can take them through that journey and address any global aspirations. They also look for commercial knowledge and tax planning skills pre or post sale.
In this dynamic sector, while the technical skills required may not be overly demanding, the person-to-person input and commercial awareness need to be fi rst-rate.
Esther Carder is head of media and marketing services at Kingston Smith
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Croeso i GymruInvestment in Wales is at its highest level for 25 years, boosted by a surge in shared services – but it has been a long time coming
If there is a recurring theme running through the economic history of Wales, it is the fight to find a new source of revenue and employment to replace the sudden decline of heavy industry. The country’s dependence on natural resources over the past 200 years created an economic rollercoaster.
The proximity of coal and copper ore mines made Swansea an international centre for copper smelting in the 18th century before it succumbed to foreign competition. A little later, Merthyr Tydfil was the world’s centre for iron production until that was eclipsed by steel. And later again, coal mining in the South Wales valleys declined sharply between the end of World War II and the 1980s.
This and the country’s geography – mountainous terrain and a population concentrated along the M4 corridor in the south – means that Wales’ economic performance lags behind the rest of the UK. Gross value added (GVA) per head is £15,401, according to the Office of National Statistics, compared with £21,937 in England, and it has the lowest level of gross disposable household income in the UK (£14,623, compared with the UK average of £16,791).
Ups and downsAs coal mining declined, Wales had to reinvent itself. This time its recovery was built around the service sector. By the turn of this century, services contributed two-thirds to the country’s GVA, with manufacturing contributing 32%. Once again, though, it has been a rocky road.
The drive to attract foreign investment into Wales stepped up in pace in the 1980s through the Welsh Development Agency, and by the mid 1990s Wales had become a major player in the European regional development arena, attracting 15% of all foreign investment coming into the UK. Today, that figure has fallen to 5%.
Research into inward investment in South-East Wales by Cardiff Business shows that there was a continuous fall in inward investment between 2003 and 2010, at a time when the performances of other regions, particularly Scotland, were improving. In fact, in terms of overall inward investment projects won, Wales fell from the number two region in the UK in 2003 to 11th (out of 12) in 2010. In 2011/12, Wales attracted just 23 inward investment projects.
Part of the reason was cost. The report points out that Wales was successful in »
‘Overall, employers think
the skills pool here in Wales is good
and well served by higher education and bodies such
as ACCA’
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Tata – showing its mettle
▼ Blazing a trailThe Tata Group has transformed Port Talbot into a major financial shared services hub
◄ Road to successSecond Severn Crossing and M4 motorway
When Tata Group acquired Corus in 2007 to form one of the world’s largest steelmakers, there was already an established shared service centre at its steelworks in Port Talbot, south Wales. ‘The shared service centre had been established by Corus in 2005,’ explains NK Misra, executive director finance at Europe Tata Steel, ‘but it was mainly a transactional centre, dealing with things like paying invoices, cash collection, travel expenses and payroll’.
Within months of the acquisition, work began to transform the existing centre in Port Talbot into a major financial shared services hub, beginning with Tata Steel’s UK operations and eventually encompassing more and more of the European operations. Tata Steel was an early adopter of SAP, and its implementation of SAP across its UK operations was the trigger for transformation of its shared services.
‘Our game plan when we acquired Corus was always to have the majority of transaction and accounting services here, in Port Talbot,’ says Misra, pointing out that at the time of Tata Steel’s acquisition of Corus, financial shared service centres were not such a common concept.
‘We had the land and buildings we needed in Wales, so Port Talbot was the most cost-effective option,’ says Misra. Building on the transactions shared service already operating, the finance activities across Tata’s sites in Wales (which include Trostre and Llanwern in south Wales and Shotton, near Flint in north Wales) were consolidated at Port Talbot and soon its activities were extended to include all other UK sites in the Midlands and the north of England.
The financial shared service centre, now known as the Accounting and Transaction Centre of Excellence, is still expanding. ‘We are adding more and more facilities to the centre all the time,’ says Misra. ‘We recently transitioned finance services from some of our operations in France and Germany.’ Consolidating as many of Europe’s finance
operations as possible in Port Talbot brings Tata Steel significant benefits, he adds. ‘It means we can standardise and have common templates and ways of working. And when it comes to investing in IT, things become a lot easier.’ The ultimate aim is to have a single platform for Tata Steel Europe.
The expansion of Tata Steel’s shared service centre was done without any support or intervention from the Welsh government, but Misra says it was a relatively easy ride and finding the skills they need has never been difficult:
‘Initially, we had no problem at all finding the people we needed. We are 30 miles west of Cardiff, a distance that might deter people based there, but Swansea is within reach, has good universities and is developing well as a city. A few years ago, when we were considering insourcing work from Germany and France, we were told that we would be able to find finance professionals here who could speak French or German, and we did.’
The Port Talbot site holds around 300 finance professionals, including 200 accountants (ACCA members and others) in the centre of excellence, and between 50 and 60 working in other functions, such as finance business partnering, corporate finance and insurance. Bringing Tata Steel’s finance staff together under one roof has, he adds, helped to show its finance professionals the many opportunities that are open to them within the group. ‘Professionally, satisfaction levels among our finance staff are much better than when the finance function was fragmented, with some accounting carried out in Newport and other parts of the UK, transaction accounting in Port Talbot and more finance staff at our head office in London.’
The only problem now, he says, is fighting off the competition. ‘More recently, so many other companies have been setting up financial shared service operations in Wales, we have become the happy hunting ground for recruits.’
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attracting inward investment in the early 1990s because it had a low cost base and an English-speaking workforce, but firms began to leave for cheaper locations, first to Eastern Europe and then to China and India. There is an ongoing debate, too, about the effect of the abolition of the Welsh Development Agency, which was credited with bringing major multinationals to Wales in the 1990s, including Ford, Sony, Bosch and General Electric. The quango’s responsibilities for promoting Wales were absorbed into the Welsh Assembly Government (as it was then known, later becoming two entities – the Welsh Government and the National Assembly) in 2006.
‘Inward investment is much more challenging today than it was in the
1990s,’ says Ben Cottam, head of ACCA Wales. ‘But we have seen an upturn in the past two years.’ The official figures support that view. The government’s latest UK inward investment report shows that Wales received 101 foreign direct investment projects during 2014/15, 22 more than the previous year and double that of Northern Ireland.
Welsh first minister Carwyn Jones said the projects had created more than 5,000 new jobs, arguing that the Welsh government’s strategy of sending ministers abroad to ‘sell Wales’ was paying dividends. He added that this time the investments were built on a more solid footing. The days when companies invested ‘because Wales was a cheap place’, he told the BBC, have gone: ‘We
now attract investment into Wales on the basis of the fact we’ve got the skills, not because wage rates are lower.’
In the 1990s and 2000s there was a strong focus on call centres. Virgin, Barclays, HSBC and British Gas have all set up contact centres in Wales and the sector still contributes around £400m to the Welsh economy every year. But while the centres successfully created work for the region, they also left it vulnerable because the jobs were typically not highly skilled.
Instead, the focus more recently has been on attracting companies that want to set up financial shared services centres, with considerable success. Companies establishing shared service functions in Wales include the BBC, Legal & General, L’Oreal and Tata Steel (see boxout).
Wales is now competing on the basis of skills and amenities, and its work is beginning to pay off. While the Welsh Government does offer tax breaks and grants to companies investing in Wales, the stronger pull, it believes, is a skilled and willing workforce, a good standard of living and strong infrastructure – and some nice scenery. ‘In order for any investment to come to Wales, it needs to be seen as an attractive place to be,’ argues the Cardiff Business School report.
Open inviteCottam says there is no doubt that Wales is attractive to financial services professionals. ‘The Welsh Government is articulating better the case for relocation in Wales,’ he says. ‘The workforce costs
are not as high as elsewhere and the cost of living is lower. The transport system is also improving, although it’s far from perfect. Overall, employers think the skills pool is good and well served by higher education and bodies such as ACCA.’
And as more shared services centres are established, the knock-on effect begins. ‘Shared services feed positively off each other and they feed off the talent pool,’ adds Cottam. ‘There is a genuine desire among businesses to connect with each other and to learn from best practice. It creates a noise that others follow.’
In fact, such is the demand for finance professionals that one of the biggest headaches for people like Cottam lies in explaining the benefits of a career in shared services, particularly for qualified
accountants. ‘The truth is that shared services allow you to develop a wide range of skills. We need to have a localised conversation about that.’
There are problems to be overcome, not least the imbalance between investment in South-East Wales and the rest of the country. But with businesses like the Royal Mint now established in Wales (see AB May 2015, page 62) and high-profile investments such as the world’s first tidal lagoon earmarked for Swansea next year, the country feels regenerated. ‘There’s a reason why big names are relocating to Wales,’ agrees Cottam. ‘There is no single factor behind it, but clearly we are getting the blend right.’ ■
Liz Fisher, journalist
▼ Talking it upThe government’s strategy of sending ministers abroad to ‘sell Wales’ is paying dividends, says Welsh first minister Carwyn Jones
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None but the brave?Taking control of the fi nance function at an SME is an exciting opportunity for corporate fi nance leaders, but one that comes with pressure to do more with a great deal less
For fi nance leaders in corporates and professional services fi rms considering a move to a small business, the challenges and opportunities can be as interesting and diverse as the businesses themselves. Many corporate fi nance directors take the well-trodden path to the CFO role in smaller and mid-sized organisations, with a key driver being the ability to take full ownership of a company’s fi nancial management.
In the UK there are around fi ve million small and medium-sized enterprises (SMEs), which employ 24 million people and have a combined turnover of £3.3bn. The employers’ body the Confederation of British Industry (CBI) lauds SMEs as the ‘future champions’ of British industry, with the capacity to inject a possible £20bn into the economy by 2020.
So what does it take to become a CFO in an SME, and what are the challenges involved?
The SME CFO is a holistic finance professional with a strong technical
foundation and a keen
commercial and analytical mind
68 Corporate | SME CFOs
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Most CFOs who move to an SME will agree on one thing: it is a riskier position to occupy than a role in a larger, listed organisation. But is it a role only for the brave? Certainly, seasoned SME CFOs will undertake a careful analysis of the business fundamentals, strategy and products before joining; but with limitations on access to real data, particularly in private companies, the risk is apparent. In addition to analysing the business, many experienced SME CFOs have developed a heightened awareness of the type of chief executive they fi nd they work best alongside.
Chemistry and moreWithin an SME environment, where the CEO/CFO working relationship is particularly close, it is vital for the chemistry to be there from the start. And while the SME CFO needs to be in harmony with the CEO, success in the role is still determined by the ability to challenge and advise credibly. That makes it even more important to assess the business and its culture in a methodical way before applying for a role.
Once in post, the fun begins. An IBM survey of SME CFOs, Inside the Midmarket, highlighted a global trend towards increased corporate infl uence. However, 45% of respondents felt their fi nance functions were not up to speed in delivering the resulting increase in demands. Certainly, a major contemporary feature of the SME world is the elevation of fi nance leaders from professionals responsible for core accounting and reporting functions to genuine business partners to the CEO, driving strategic planning and growth.
While there are many small companies that still view fi nance as no more than a back-offi ce function, the CFO business partner has become the norm among SMEs. The trend can be explained in part by economic volatility and an increased focus on cashfl ow and capital, which have given CFOs a greater forum in the boardroom. As promising a development as this trend is, it leaves CFOs with the unenviable task of delivering far more with the available resources.
Ensuring effi cient fi nancial management and making it a priority are essential tasks before value can be added through other activities. The SME CFO is consequently a holistic fi nance
For more information:
See Inside the Midmarket at bit.ly/mid-ibm
www.bronzegate.co.uk
professional with a strong technical foundation augmented by a keen commercial and analytical mind. Both an accountant and a business leader, this fi nance executive has the ability to interchange between the two functions as the company demands.
Private equity challengeIn the UK, we have a broad range of ownership structures across the SME sector – from independent private companies and British corporate holding companies to those with foreign ownership or private equity backing. There has been a notable rise in private equity activity across the sector. That’s the natural result of greater market liquidity, a factor that has also benefi ted AIM-listed companies as they seek to expand their operations. While CFOs in smaller listed entities will contend with public company investor relations and exposure to equity market volatility, fi nance leaders within private equity-backed companies work in an environment where the principles of sound fi nancial management remain the same but the agenda is more defi ned.
A common trend within SMEs that move into private equity ownership is the subsequent replacement of the incumbent CFO by the private equity fi rm, usually by a fi nance director who has had previous private equity experience. This trend is largely due to the increased demands on a CFO under this kind of ownership structure. Private equity stakeholders have a far greater requirement for regular, consistent and in-depth fi nancial information and analysis.
The new structure will also typically involve a leveraged balance sheet and debt structure that requires careful management. CFOs who have worked in such environments, especially where they have seen their tenure through to a successful exit, are in high demand.
Private equity ownership also places a high degree of emphasis on the CFO’s ability to deliver effi ciency measures to improve business performance, whether through cost-base transformation, improving controls or fostering a decision support culture within the business. For those SMEs with aspirational owners who seek to expand business operations into new
markets, CFOs will have to adapt to the differing cultural, regulatory and economic environments within foreign markets, while maintaining strong governance and controls, and managing any currency exchange risks.
Extra strainAgainst the backdrop of limited resources and an uncertain economy, CFOs face the additional challenge of driving cost reductions, placing additional strain on often inadequately staffed functions. The quest to deliver more for less is perennial for the SME CFO. Yet while the obstacles are clear, SMEs and their management teams generally demonstrate strong balance sheet controls with cashfl ow transparency and an ability to anticipate and respond effectively to external infl uencing factors. If this capability can be counterbalanced with more impactful business analysis through the harnessing of both technology and data, then the fi nance leader’s role naturally elevates to a more strategic plateau.
The balancing act of responsibilities is further strained through shouldering the responsibility for risk management, any investor relations or stakeholder management (including private equity), and supervision of external funding and bank relationships. With such breadth to the role, it is little wonder that an increasing number of SME CFOs are looking to appoint a strong second-in-command, both to share the workload and as a potential successor.
As ever, that is where a new discussion with the CEO on resource allocation begins. ■
Adam Akbar is managing director of Bronzegate, a specialist executive search fi rm dedicated to fi nancial leadership. For more information, email [email protected]
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The view fromEdith Yembra FCCA, director of finance and IT at YMCA North London and chair of ACCA’s Women’s South East panel
My average day begins at 7.30am, replying to emails, dealing with priority items and meeting my staff. I then tackle my key tasks, including interpreting fi nancial information, monitoring and managing cashfl ows, and predicting future trends.
I provide strategic management of the organisation’s fi nancial resources. This includes reporting to the board on the organisation’s fi nancial position, cashfl ow, setting and checking targets, assisting the CEO in drafting board papers and – in response to requests from trustees – monitoring departmental performance.
My roles include coming up with strategic business plans and analysing business changes. I then advise the CEO
accordingly. As company secretary I am responsible for overseeing all tax and regulatory/compliance issues.
Financial sustainability is one of the biggest problems facing us, as with most SMEs. The most important current challenge is modelling different fi nancial scenarios for governance and fi nancial viability standards following the impending cuts on housing benefi ts for 18 to 25-year-olds.
What I truly like most about my role is the pivotal position of director of fi nance and IT, while contributing to strategic decision-making. I provide analysis and leadership and act as an ambassador for the organisation.
My advice to others pursuing a similar career path would be that they should consider how to streamline fi nancial management and leadership. There is a need to incorporate more core business strategies within the FD role, because as well as managing the creation of strategy, FDs also follow up to ensure fi nancial activities align with the organisation’s big picture objectives.
My biggest professional achievement to date has been to develop and implement robust fi nancial management systems and processes. These resulted in our audit fee reducing from £65,000 to £13,000.
Outside of work I am currently chair of ACCA’s Women’s South East panel. I am also a member of ACCA’s Strategy Implementation Committee, which works behind the scenes to help facilitate the Annual Engagement Conference, and I am engaged with ‘buddying’ two ACCA Leaders of Tomorrow.
I have recently been nominated onto ACCA’s International Assembly, which is great. And to keep me even busier I am a trustee of the Keeping Children Safe charity. ■
My advice to others pursuing a similar career
path is to consider how to streamline
financial management and
leadership
Snapshot: defence expenditureChancellor of the exchequer George Osborne pledged in the Budget that the UK is now meeting its NATO commitment of spending 2% of national income on defence. But the Royal United Services Institute (RUSI) claims that some of the supposed spending increase has been achieved through a change in accounting practices.
RUSI says that expenditure on the secret intelligence agencies has been reclassifi ed in order to nominally raise defence spending. This copies the practice of some other NATO member states. In addition, war pensions, UN peacekeeping and pensions for retired civilian personnel have all been reallocated to defence expenditure for the purpose of NATO fi nancial returns.
But the government’s commitment to protect defence expenditure has been welcomed by RUSI.
According to a RUSI briefi ng paper: ‘On the basis of the rules previously used for its NATO returns, the UK would have been on course to spend £36,820m on defence in 2015, equivalent to 1.97% of GDP. In the return actually made to NATO, by contrast, the UK is projected to spend £39,019m, equivalent to 2.08% of GDP. In total, therefore, the UK has added around £2.2bn to its NATO count.’
Source: Osborne’s Summer Surprise for Defence, RUSI
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Cost versus benefitMeasurement of government spending on IT has been patchy over the years and there has been little accountability as a result, recent research finds
Five years ago the coalition government vowed to create ‘armchair auditors’ and instructed departments, agencies and councils to release reams of spending data. The public, however, proved pretty indifferent to the treasure trove of figures opened up to them. Maybe this is because performance data for public bodies is pockmarked by great gaps, despite the British government comparing favourably with other advanced countries in terms of scrutiny and audit.
Take a simple question, which is whether government spending on IT delivers. It turns out to be nearly impossible to answer. Individual health trusts, councils and Whitehall departments can usually say how much they have budgeted and spent this year or last, but most struggle to link their IT spend to measures of organisational success.
As for comparisons across the years, IT is not necessarily accounted for on a consistent basis. Also, different organisations even within the same sector may have their own conventions about what IT covers – people, agency staff, hardware, software licences, telecoms or some mixture? In many (private as well as public sector), the border between capital and revenue spending is permeable.
If you try to aggregate IT spend across, say, all of UK central government, the total you end up with is highly dubious. Referencing costs over time brings in another complication: at various times Whitehall departments and the Treasury simply stopped counting. A new study reaches the dismaying conclusion that we will never know whether the billions spent by government in recent decades on computers, networks and the rest has given value for money; on neither the input nor the output side does reliable enough data exist. Ministers, civil servants, contractors and – it seems – auditors have either not collected consistent performance information or else started measuring it one way, then changed their minds and measured it another, thwarting multi-year comparisons.
An Oxford University team led by Chris Hood, the Gladstone professor of government emeritus, looked in depth at
IT spending by HM Revenue & Customs as part of a review of the management reform in Whitehall since the 1980s, when Margaret Thatcher decreed government had to become more efficient and effective by introducing business techniques, outsourcing and performance-related pay. Remember all the promises of ‘transformation’ from Tory and Labour ministers around the introduction into the UK of ‘new
public management’? A revolution, it wasn’t. ‘Did government really end up working better and costing less as all those reformers so confidently expected,’ asks Hood. ‘Government makeovers made little difference to cost and performance.’ Including outsourcing, it seems.
Back in the days before the Inland Revenue and HM Customs & Excise merged, the former let a £1.8bn contract go to suppliers EDS. The researchers’ trawl through the data shows no detectable effect on the tax authorities’ efficiency. Over 30 years, the running costs of central government rose. Civil service pay increased in real terms from about £15bn in the early 1980s to £16bn in 2012, despite a 200,000 reduction in numbers.
Reasons, the study suggests, include the huge expansion in consultancy and, paradoxically, more contracting out. The ‘new public management’ has actually cost more, yet government isn’t measurably more efficient and effective – since its introduction, measures of public mistrust and complaints have also been on the march. ■
David Walker, journalist and former communications director at the Audit Commission
Measuring goverment IT spend against performance
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CV
High bidderAs finance director of Christie’s Decorative Arts division, Chris Forrest FCCA works hard to get the very best result for the sellers, and for the auction house
Here’s a challenge for you. Imagine you work in a business that has a high proportion of fixed costs. Your sales capacity is almost entirely determined by your ability to source and sell works of art. And you have to price them appropriately; get it wrong and you might not sell at all.
Welcome to the world of the auction business and of Chris Forrest, finance director for the Decorative Arts group of the legendary auction house Christie’s.
Forrest reels off the portfolio of products that fall within his very diverse group: furniture and decorative objects, porcelain, sculpture, rugs and carpets, clocks, portrait miniatures, silver and gold boxes, even suits of armour and musical instruments. Sculpture is his personal favourite.
Typical selling prices aren’t in the headline-grabbing range – they average perhaps around £10,000 per lot – but every now and then there’s a real treat. ‘The highest price we have achieved to date in Decorative Arts was in 2004,’
Forrest recalls. ‘It was £19m for the magnificent Badminton Cabinet. Most recently, in December last year, we achieved the world auction record for any early European sculpture when we sold a mythological bronze figure supporting a globe, by the Dutch artist Adriaen de Vries, for £17.8m.’
That figure includes the buyer’s premium of around 12%, but it’s not the sort of thing you can plan for in a budget. ‘Things like the Badminton Cabinet are very few and far between. You might get a piece like that only once in a generation, providing the market with a once-in-a-lifetime opportunity,’ he says.
Revenue sourceThe buyer’s premium is the main source of revenue for the division, although the less valuable objects that flow through to one of the many themed auctions that Decorative Arts holds every year in London, Paris and New York more typically incur a buyer’s premium of 25%. In London, for lots worth between £50,000 and £1m, the
rate is 20%, and above that it’s 12%.
Sometimes, Christie’s can also negotiate a commission from the seller, although much will depend on whether rival auction houses are equally keen to get their hands on the ‘property’, as the items for auction are often called.
One of Forrest’s roles, therefore, is to work with the team ‘to make the right sort of commercial decisions in order to extract the maximum value for the seller’, he says.
Setting estimatesThe extensive specialist expertise in setting the right estimate is key, and Forrest works closely with the specialists. ‘The aim is always to do well for the seller, but a lot won’t sell at all if the bidding doesn’t reach a reserve price that’s ‘too punchy’, Forrest says. ‘That’s the worst possible outcome, particularly with a fixed-cost base.’ As he puts it, ‘There’s a high degree of operating leverage with Christie’s, so once we cover our fixed costs, any revenue we generate thereafter just falls straight to the bottom line. So if a sale goes well, it can make a big difference.’
Making sure that this happens involves a lot of analysis, looking back at the ‘sell-through’ rates (the number of lots sold versus those offered), understanding which price points fared well, selling prices versus pre-sale estimates and so on.
Within Decorative Arts alone, there are around 100 auctions a year, each with its own P&L. While that’s a lot of volume when compared with the 450 auctions or so across the whole Christie’s group, the price points are considerably lower than for, say, Impressionist and Modern art or Post-war and Contemporary art, so Forrest’s group handles sales worth some £180m a year, whereas the company overall handles sales worth more than £5bn.
Tech savvyTo extract more value, therefore, Forrest is playing a significant role in evaluating how 21st-century technology can be utilised in his business group. Online-only auctions are already being used by many other departments. They’re typically open for two weeks, increasing the timeframe in which interested collectors can potentially participate.
Also being looked at is extending the idea currently deployed by Christie’s online handbag and watch ‘shops’, where prices are fixed but the product is potentially
2013 Promoted to finance director, Decorative Arts, Christie’s
2005Joins Christie’s as a financial analyst
2002Joins start-up weightwatchers.co.uk as a financial analyst
1996Joins Avis Rent a Car, rising to financial analyst
‘There’s a high degree of operating
leverage, so once we cover our fixed costs, any revenue we generate then
falls straight to the bottom line’
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online for sale for longer and there is also the option to buy something immediately.
Such e-commerce offerings are top of Forrest’s agenda: ‘It’s [about] how we define our client proposition to make it more appealing to buyers and how we use 21st-
century techniques so we remain relevant in the market, meeting and anticipating the needs of our buyers,’ he says. ‘It can be a more efficient business model as well. The costs associated with bringing something to auction can be higher, perhaps, than
having an online offering. It’s all part of the broader strategic considerations for my business group.’
That may sound like a major cultural change for an auction house that celebrates its 250th anniversary in 2016 – but the culture of Christie’s has already changed ‘beyond recognition’ in the 10 years since Forrest joined. ‘There’s a lot more accountability for profit targets now than there ever has been,’ he says.
Vital role‘When I first joined it was a lot more focused on the “sold” total and market share and things like that.’ So the finance partner role that
Forrest plays is vital. ‘It gives you an opportunity to embed yourself within the business and try to make a difference with commercially reasoned analysis and provide guidance on the way forward.’
Being part of the management team is, he says, the best part of the job, but he adds: ‘Sometimes I love just attending an auction and seeing what it’s all about down there. It’s very exciting to be in the auction room on one of the major evening sales when it’s a packed room – and the hammer drops on a remarkable work of art for a seven-digit number.’ ■
Andy Sawers, journalist
Tips
* ‘Adapt your own personal communication style to your audience. You can present exactly the same financial information, but do it in a very different way.’
* ‘Financial information can be a bit dry so sometimes presenting with a smile on your face can make so much difference. Drop in the odd joke.’
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Back to basicsIn the latest in our ‘all you ever wanted to know but were too afraid to ask’ series, we look at apps – mini-programs made to run on smartphones and tablet computers
A growing number of people spend much of their day using apps to do everything from checking train times to exchanging important documents with clients.
Given the popularity and effectiveness of apps, it is worth considering whether they could help you run your business or do your work more effectively.
What are apps?Apps (short for ‘applications’) are small, self-contained programs that run on smartphones or tablets rather than desktop computers, and allow tasks to be performed in a user-friendly way.
Because modern smartphones come with powerful web browsers, they can do pretty much anything a desktop computer can. But fi ddling about typing URLs into a web browser and visiting endless websites can be a cumbersome experience on a phone; standalone apps are designed to give users better control over what they are doing and to make the whole
experience quicker and easier.Apple started the apps trend with its
iPhones; others soon followed, and now there are thousands of apps available for Apple, Android, Windows, Blackberry and Nokia phones. Tablet computers can run apps too but offer the advantage of bigger screens.
Many apps are simply cut-down versions of computer programs such as word processors, spreadsheets, presentation makers, music production suites, video and image editors, GPS and travel information providers, as well as email and other communication tools.
The business angleA whopping 73% of businesses already make use of apps every day, according to job site PeoplePerHour. Some take a blanket approach and integrate apps as part of all their work processes; in others some staff use them to organise tasks and check emails while they are on the go.
As with most business tools, your
decision on whether or not to use apps will depend on what you need them for and if using them is cost-effective. You need to research the different apps, assess the security, speak to people in the know and test them out.
‘Often by simply talking to staff, senior fi gures in the organisation can get a better sense of where apps could improve task effi ciency, but also employees tend to have useful opinions about good apps, including ones they have been using themselves already,’ says William Higham, CEO of consultancy The Next Big Thing.
There are some very popular free apps for general business use. Dropbox allows staff to compose and share documents, pictures and videos in the cloud. And Evernote lets you instantly store and share notes, clips, images and recordings.
Other apps can help perform everyday tasks and objectives. An app such as Bookkeeping can handle sales, receipts and purchases, while an app such as AnyMeeting can let you hold meetings and share presentations with others.
Even the sacred ground of internal communication within organisations, which has been dominated by email for so many years, is seeing a notable shift towards social collaboration and task sharing apps such as Asana, Jira and Huddle. They allow users to log in and see what tasks they’ve set themselves, what others have set them, or what they’ve set others, and what stage they’re at – things you can’t do with the traditional backwards and forwards communication of emails.
There are also apps specifi cally for accountants, whether in practice or working in business. ‘Basic accounting can be performed on apps such as QuickBooks, where you can see your »
Watch the video on what app technology offers >
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Expert view
Watch the video on the challenges and opportunities that new technology offers the profession at bit.ly/1JMaSPE
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client’s fi nancial information and how up to date reconciliations are,’ explains Jon Dawson, a partner at Kingston Smith. ‘While others like Receipt Bank can be integrated with the company or fi rm’s accounting software, so you can take a picture of an invoice or receipt on your phone and it uploads it into the accounting system.’
Know the limitsHowever, phone-based apps have less functionality than a PC-based program. If you wanted to upload a lot of transactions and reconcile them, say, then you would have to click into each one to reconcile with an app, whereas on a desktop you can do bulk reconciliations. What’s more, journals and full sets of accounts still cannot be put into the app versions of accounting software.
‘The screen size of a phone does come with its limitations, including trying to get through multiple pages of a document,’ says Dawson. ‘But there are still plenty of everyday tasks that accountants can perform in the palm of their hands. And we’ve got hybrids now, with the iPhone 6 Plus offering a noticeably larger screen.’
Tablet computers also allow apps to be used for the more complex tasks while staff are on the go.
‘Mobile devices and the apps within them will create a paperless offi ce ultimately,’ says Higham. ‘There’s no longer a need to print off data or write information on a scrap of paper – just pick up your phone or tablet.’
Some organisations adopt a specifi c app such as Huddle or Asana as their standard collaboration and task allocation tool for all staff. Given the number of people involved, the specifi c tasks required and potential security issues, they often contact the provider directly and set up a subscription. For Huddle, it is about £30 per person a month, while for Asana it is £10 per person.
Dawson says: ‘If you’ve got a lot of staff, costs can be a sensitive issue. But you’ve got to look at the effi ciencies that you will generate. If it reduces your email traffi c, for instance, and makes it easier for people to see what stage work is at, and you use it as an alternative to collaborate and communicate with clients, it can have signifi cant advantages.’
Businesses and fi rms could even have an app tailor-made to their specifi c requirements. ‘If an owner or manager is willing to put in the effort to establish if it
will be time and cost-effective, they could have an app built in just a few weeks to handle anything within the business,’ says Christer Holloman, a new media expert.
But Holloman warns that using an app for too many tasks and ventures runs the risk of just re-creating a website or intranet within the app. ‘The reason people like apps is they have a specifi c purpose, otherwise they forget what’s in them,’ he points out. ‘They also need to be simple to use by just swiping across the screen, so complicated spreadsheets might not work on a small screen app.’
It is also vital for senior managers to know and communicate to staff exactly who has access to the apps and how to use them properly and securely. A decent password and ID system is vital in case an employee’s phone or tablet containing valuable data is lost or stolen.
Dawson says: ‘There should be passwords for accessing things like email apps or Asana, and the communications themselves should have encrypted technology. A lot of companies still rely on the basic email accounts where you log your details into the iPhone mail app, and you can access information there generally without a password.’
Overall, apps are the perfect tool for lifting out a piece of functionality within the business and facilitating that service. Some companies and accountancy fi rms might already have a desktop-based customer management system or intranet to perform business tasks, but the beauty of an app is that it gets into an employee’s headspace as soon as they pick up their phone or tablet. ■
Chris Evans, journalist
For and againstPros
* Apps give users direct access to important information.
* They allow for quick communication and collaboration with colleagues and clients.
* They manage tasks efficiently.
* They are often free to use.
Cons
* It’s easy to get bogged down with too many apps, some of which may have overlapping functionality.
* They clog up a lot of space on a smartphone.
* By allowing information and communication to be accessed anywhere, any time, they make it hard for users to switch off and relax.
* It’s hard to digest lengthy documents and spreadsheets via an app.
Key facts
73%Proportion of businesses where staff use apps for daily tasks
$8.3bnWorldwide revenue generated by the various app stores
268,692mProjected number of mobile app downloads worldwide by 2017
1.6mNumber of Android apps available (Apple’s App Store has 1.5 million)
FavesCompanies House, Adobe, Documents Free and Indeed Job Search are the most popular business apps.
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The finance function can play a key role in fast-growing small businesses, one that goes far beyond traditional perceptions, by acting as a strategic business partner that drives growth as well as enabling it, according to an ACCA report.
The study looked at a range of small and medium-sized enterprises (SMEs) worldwide that had experienced over 70% growth for three consecutive years.
Rosana Mirkovic, head of SME policy at ACCA and author of the report, said: ‘Growth of this rapidity is almost always driven by one
of three factors: strategic internal decisions to enter new markets, the acquisition of technical expertise that enables the development of new products, or in response to external stimuli such as consumer demand.
‘Taking advantage of the opportunities for expansion brought about by these factors almost always entails risks for an SME. For example, rapid growth can lead to issues such as insufficient staff capacity, increased business “traffic” such as simultaneous deals, or entering new and very competitive or politically unstable markets.’
Mirkovic said that the finance function must become integrated across key business development departments to prepare carefully for, and plan, new growth.
She said: ‘SMEs that are experiencing fast growth require a CFO willing and able to take a key role in monitoring and controlling high growth as well as in forecasting future trends and possible new directions for the business.’
These responsibilities take finance well beyond traditional accounting and processing.
‘CFOs are an essential element in the strategic decision-making of any high-growth business,’ Mirkovic said. ‘For SMEs however, their importance to not only exploiting periods of accelerated growth but also protecting the business from the stresses and strains associated with that growth, cannot be overstated.’ ■
Finance function fosters SME growth
ACCA: Strategic finance
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Back-office accelerantThe finance function not only helps small businesses manage high rates of growth safely and efficiently but can also act as a driver of that growth, according to a recent report
For more information:
Read the report, Ready for growth? A checklist for CFOs of high-potential businesses, at www.accaglobal.com/ab/246
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Celebrating 50 years of CAWS
News: ACCA
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Celebrating 50 yearsThis year is the 50th anniversary of the Certified Accountants Women’s Society, set up by female ACCA members to support each other and encourage women into the profession
The Certified Accountants Women’s Society (CAWS) was established 50 years ago this year, at a meeting in Bedford Square, London.
At that time the proportion of women members was just 3% out of a total UK and overseas membership of 11,000.
Among those early members were Anona Gibbs, Muriel Temkin, Winifred Rowlands, Joyce Gold, Joan Denly and Ruth Mainland. But the driving force behind CAWS was Vera di Palma, who later became the first female ACCA council member and then president. She was also awarded an OBE. Di Palma died earlier this year, aged 83 (see her obituary in AB July 2015, page 12).
Commenting on the society in a past interview, she said: ‘Back then, there still weren’t many women in the profession, and girls weren’t encouraged to consider it at school, so it was helpful to have a group through which female ACCA members could support each other and encourage the next generation of female accountants.’
One of the society’s objectives was to provide
for successful careers in the accountancy profession for many women. Moyra Kedslie and I have followed since, and Alexandra Chin takes office this month – all of us elected without any of the prejudices of those early days. The gender mix of the profession is now far more balanced and we have CAWS, the ambition of Vera di Palma and ACCA to thank most heartily for that.’
ACCA’s new president Alexandra Chin also praised the groundwork laid down by CAWS: ‘I think Vera and her colleagues were well ahead of their time in establishing this network. Vera understood the need for role models and mentors to encourage women to become accountants. She was also ahead of her time in the belief that the profession needs to visit schools and talk about accountancy as a career. I see this advocacy as being just as important now as it was 50 years ago.’ ■
opportunities for women members to meet for professional and social purposes and a medium for them to express their views.
‘How far-sighted was that group back in 1965 in creating CAWS?’, said former ACCA president Gill Ball. ‘Without a doubt it was the genesis
◄ Powerful forceFrom left to right: Joan Denly, Alan Nelson, Vera di Palma, Muriel Simpson, Winifred Rowland, Joyce Gold, Jessica Jacob and Audrey Peers
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One-day coursesThese one-day courses update fi nance professionals on signifi cant developments within the accountancy profession and cost just £199: General tax update 15 October, Leeds16 October, Birmingham29 October, Bristol20 November, Norwich27 November, Newcastle15 December, London
ACCA UK runs an exciting programme of talks, lectures and workshops organised for members across the country. Here are highlights of upcoming events
Upcoming events
October
ACCA UK’s 3rd Local Government Summit – Taming transformation15 October, LondonBe inspired by colleagues who have implemented radical change solutions and revolutionised their processes and ways of thinking. Take away practical tips on how you can deal with change in your organisation, and vote on potential future trends and ideas.
Employment law update17 October, LondonThis Women’s South East Network event is open to both men and women, and a morning presentation will be followed by a lunch.
Celebrating membership 201521 October, Cardiff29 October, EdinburghAchieving ACCA membership deserves to be celebrated with family, friends and colleagues. Join other new members, ACCA offi cers and staff at one of our ‘celebrating membership’ dinners for those who achieved this in
2014/15 for a very special evening. (See the list of newly qualifi ed members in the app version of this edition at www.accaglobal.com/ab.)
Autumn update for accountants22-24 October, BirminghamUpdate your skills and benefi t from the experience of your peers and our expert speakers. Delegates can attend 11 out of 29 sessions – mix and match between business and fi nance, taxation and law, and professional development – to help fulfi l your annual CPD requirements.
November
Managing mavericks12 November, BrightonMavericks are often regarded with suspicion, hostility or even ridicule. Hosted by former MP Lembit Opik, this session will provide a practical way to get the most from people who, by defi nition, think outside the mainstream. Business turnaround17 November, ConwyAt this joint half-day event with Bangor Business School
and Chamber of Commerce you will learn all the nitty-gritty details about how accountancy fi rms and businesses use habits and KPIs to improve their results, so you can grow
your fi rm and be more confi dent about helping your clients to do the same.
For more information: www.accaglobal.com/uk/events ■
Accounting standards13 October, Norwich14 October, Newcastle25 November, Nottingham26 November, Leeds8 December, Bristol
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For more information:
Read the full report at www.accaglobal.com/ab/244
Confidence dropsThe global economy is facing volatility and major readjustments, according to the latest global survey of finance professionals
The second quarter of 2015 saw an abortive rise in oil prices, several expected and unexpected rate cuts by central banks, a rebound in Western consumer sentiment and a stock market crash in China. These events led to business confidence levelling off in the second quarter of 2015 following six months of improvement, according to the latest Global Economic Conditions Survey by ACCA and IMA (Institute of Management Accountants).
The slowing in confidence can be traced to the world’s largest economies; many businesses in the US were affected by severe winter storms, port disruptions and a strong dollar, while those in China faced a cooling economy in the first quarter and over-heating stock markets in the second.
Of these factors, China’s economic slowdown and accompanying shift from investment to consumption-driven growth will have the greatest long-term impact on global trade patterns, hitting the world’s major commodity exporters particularly hard.
Nearly half of those surveyed expected to see government spending increase over the next five years; 35% expected a decrease. The survey also shows that firms remain quick to cut staff when faced with uncertainty. In the past quarter, 41% of businesses have cut staff or ceased recruitment – nearly twice the number that have increased levels over the same period.
Inside ACCA
80 Diary
79 CAWSFifty years of female advocacy
77 Back-office driverEncouraging small businesses to grow
27 PresidentAlexandra Chin outlines priorities in her new role
The major global concern was a rise in costs, with 46% of respondents worried about the impact, while foreign exchange movements were cited as a problem by around a third of larger businesses that have crossborder supply chains.
But there was significant regional variation in the relationship between confidence in the economic outlook and willingness to take on new staff. In North America, the number of firms creating new jobs was actually greater than those expressing more confidence in the economy. But in South Asia and Africa, by contrast, relatively high confidence had yet to translate into new investments
in people. This may reflect a degree of uncertainty about the sustainability of business growth in regions that still face numerous internal challenges and external vulnerabilities.
Faye Chua, ACCA’s head of business insights, said: ‘Since the global financial crisis of 2008, China has been viewed as the engine of the world’s economy. Yet with more sturdy fundamentals re-emerging in the US and Western Europe, the role of Western consumers in driving demand is coming back to the fore.’ ■
◄ China crisisChina’s economic slowdown will have a major long-term impact on global trading conditions
ACCA member benefitsEmployabilityMembership improves earning power and job prospects on a global scale.
Influence and representationMembers play key roles in representing and developing the profession, backed by cutting-edge research.
Knowledge and connectionsKeep up to date with our publications and social media feeds. Our events let you network with a large peer group.
Personal developmentCPD, training and career progression support.
ACCA CareersOur careers portal gives guidance and lists job vacancies worldwide.
Customer careFast and efficient support around the clock, by phone, email and webchat.
Go to www.accaglobal.com/memberbenefits
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CPDGet verifiable CPD units by reading technical articles
The magazine for fi nance professionalsABUK Accounting and Business
Think AheadThink Ahead
Natural winner Lush CFO Kim Coles on the success of ethical sourcing
Green shoots in the valleysWales is attracting big-ticket investment
Regulatory penalties Call for a single set of standardsBEPS project Why all the action points need to be embraced
CPD technical Sustainability reporting requirementsBack to basics How apps can make your life better
UK 10/2015
Taking stockHans Hoogervorst, IASB chairman, refl ects on the board’s progress
Port in a stormEffective budgeting is vital for gaining competitive advantage
UK
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Bu
siness 10/2015
UK_Cover.indd 1 16/09/2015 12:43