AB

ACCOUNTING AND BUSINESS INTERNATIONAL 06/2012

INVESTORS LOOK TO THE EARTH SUMMIT

THE ROAD TO RIO

SOUTH AFRICA PROFESSOR BEN MARX EURO 2012 FINANCIAL GOALS TECHNICAL STRATEGY

CORPORATE REPORTING AND SUSTAINABLE CAPITALISM

AL GORES 2020 VISION

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Editors choice

Professor Ben Marx FCCA is on a mission to make students passionate about what auditing has to offer. And he is playing a vital role, too, in bringing corporate governance and integrated reporting to the fore in South Africa. See page 16

ELECTING TO FIND A WAY FORWARD

The elections that took place in Europe last month, in Greece and France, once again set the global markets into freefall. As I write this, parties in Greece were yet to form a government. In France, the victory of Franois Hollande was raising the spectre of renewed discussions over the terms of the financial stability pact with Germany, although positive and conciliatory noises were beginning to emanate from its chancellor, Angela Merkel. What happens in Europe, of course, has an impact on economic recovery in the US, and the main contenders in the US presidential election stakes incumbent President Barack Obama and the most likely Republican nominee, Mitt Romney will be keeping an eye on whats happening across the pond. In the countdown to Novembers election, what the new leader of the worlds (currently) biggest economy plans for business is a big deal; in our feature, on page 12, we look at what the hopefuls proposals mean for the corporate community at home and abroad. In anticipation of the Earth Summit in Rio de Janeiro, which takes place this month, on page 24 we look at the background to this important event. Since the first United Nations Conference on Sustainable Development held in the same Brazilian city 20 years ago, the environmental agenda has moved even further towards the centre stage of politics, society and the corporate world. With commercially minded investors uniting with even louder calls for organisations to address sustainability issues, the summit will be more important than ever to business. As part of this movement, compulsory integrated reporting to help achieve sustainable capitalism by 2020 is looking more attainable. This is, at least, what David Blood and Al Gore a former US vice president himself promote through their firm Generation Investment Management. You can read excerpts from their paper, Sustainable Capitalism, on page 28. The sporting world is not without its significant goals this month; we anticipate the kickoff of Euro 2012, hosted by Poland and Ukraine. You can read all about it on page 20. Lesley Bolton, lesley.bolton@accaglobal.com

WAITING GAME After 12 long years of deliberation and debate, is the US Securities and Exchange Commission any closer to adopting IFRS? Page 31

THE PERSUADERS The best managing partners understand how to make themselves and their firms stand out from the crowd. Page 46

EXPERT INSIGHTS
Join ACCA, IBM and the IIRC for a free, onehour webinar as we explore how integrated reporting can enhance and consolidate your existing reporting practices. www.accaglobal.com/virtual

BIG AMBITIONS?
For your next move, check out www.accacareers. com/international

AB INTERNATIONAL EDITION CONTENTS JUNE 2012

VOLUME 15 ISSUE 6
International editor Lesley Bolton lesley.bolton@accaglobal.com +44 (0)20 7059 5965 Editor-in-chief Chris Quick chris.quick@accaglobal.com +44 (0)20 7059 5966 Asia editor Colette Steckel colette.steckel@accaglobal.com +44 (0)20 7059 5896 Sub-editors Dean Gurden, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar jackie.dollar@accaglobal.com +44 (0)20 7059 5620 Designers Robert Mills, Jane C Reid Production manager Anthony Kay anthony.kay@accaglobal.com Advertising Richard McEvoy rmcevoy@educate-direct.com +44 (0)20 7902 1221 Head of publishing Adam Williams adam.williams@accaglobal.com +44 (0)20 7059 5601 Printing Wyndeham Group Pictures Corbis ACCA President Dean Westcott FCCA Deputy president Barry Cooper FCCA Vice president Martin Turner FCCA Chief executive Helen Brand OBE ACCA Connect Tel +44 (0)141 582 2000 Fax +44 (0)141 582 2222 members@accaglobal.com students@accaglobal.com info@accaglobal.com
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 2012 Accounting and Business. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA.

Features
12 Rally call As the presidential hopefuls square up for the US November election, we look at what their proposals mean for the corporate community 16 Closer scrutiny A passion for audit has gone beyond the lecture theatre for Professor Ben Marx FCCA 20 The beautiful gameplan Never mind the teams, how will the hosts of this summers Euro 2012 get on? 24 Beating the drum The Earth Summit in Rio highlights the growing importance of sustainability 28 2020 vision Former US vice president Al Gore and David Blood on sustainable capitalism 31 Lightbulb moment Has the US Securities and Exchange Commission moved any further ahead in its thinking around adopting IFRS?

Accounting and Business is published by Certied Accountant (Publications) Ltd, a subsidiary of the Association of Chartered Certied Accountants. Accounting and Business ISSN: (1460-406X) is published monthly except July/August and November/December by Certied Accountant (Publications) Ltd, and distributed in the USA by DSW, 75 Aberdeen Road, Emigsville, PA 17318. Periodicals postage paid at Emigsville, PA. POSTMASTER: send address changes to Accounting and Business, PO Box 437, Emigsville PA 17318.
29 Lincolns Inn Fields London, WC2A 3EE, UK +44 (0) 20 7059 5000 www.accaglobal.com Audit period July 2009 to June 2010 138,255

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

Worldwide

Regulars
BRIEFING
06 News in pictures A different view of recent headlines 08 News in graphics We show a story as well as tell it using innovative graphs 10 News round-up A digest of all the latest news and developments

TECHNICAL
48 CPD: strategy The third part of our new series encourages you to create and evaluate strategic options 51 Accounting solutions The problem solvers at PwC answer questions on business combinations and the recognition of goodwill 52 Expats and tax liabilities Foreign companies must be aware of the tax implications of sending employees to work in Chinese afliates 54 Update The latest from the standard-setters

VIEWPOINT
34 Ramona Dzinkowski Wonders why the COSOs revised Internal Control-Integrated Framework has been revised 36 Dean Westcott On the benets of the integrated reporting agenda at the Rio+20 summit

Your sector
37 CORPORATE
37 The view from Karuna Luthar of Elara Capital, plus news in brief 38 Capital competition How companies can improve their chances of securing the right funding 40 Keeping the love The business process outsourcing contract is much like a marriage contract 42 Natural transition With her many years working in heavy industry in Scotland, Beverly Stewart was perfectly placed to move to Canada

CAREERS
59 Longdistance relationship Do distance-learning MBAs measure up?

45 PRACTICE
45 The view from Anjum Ehsan of Grant Thornton, plus news in brief 46 Standing out from your peers What managing partners need to do to differentiate themselves

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

CPD

ACCA NEWS
62 Calm before the storm Commentators at a recent ACCA UK event discussed the eurozone crisis 64 CPD: planning Get the low-down on ACCA Compass and the Professional Development Matrix 65 Celebrating membership ACCA Pakistan welcomes new members 66 News Vice president Martin Turner addresses UNCTAD

News in pictures

Supporters hold flags with portraits of Russian president-elect Vladimir Putin during a rally on the eve of his inauguration Samsung Electronics overtook Nokia to become the worlds largest maker of mobile phones, leaving Apple in third place While financial turmoil rocked modern Greece, ancient Greece was the location for the lighting of the Olympic Flame, ahead of its handover to London 2012 organisers

01

02

03

04

The Olympic Stadium in Kiev is the venue for several matches of the upcoming UEFA Euro 2012 football championship, jointly hosted by Ukraine and Poland Franois Hollande, the first socialist president of France since Franois Mitterrand, was elected amid fears that his antiausterity stance may stall Europes recovery Nigerian minister of petroleum resources, Diezani Alison-Madueke, speaks at a session on Women as Africas Way Forward during the 22nd World Economic Forum on Africa, held in Addis Ababa, Ethiopia Space Shuttle Enterprise got a piggyback from a 747 on the way to its new home, the Intrepid Sea, Air and Space Museum in New York City. Nasa is rehoming a number of craft after its shuttle programme came to an end in July 2011

05

06

07

News in graphics
3%
VERY OPTIMISTIC

RICH PICKINGS

Asias super wealthy are more confident of an even richer future than those in any other region, according to the Knight Frank/Citi Private Bank Wealth Report 2012. There are now more centa-millionaires (worth US$100m or more) in South-East Asia (18,000) than in North America (17,000) or Western Europe (14,000).

39%
OPTIMISTIC

3%
VERY PESSIMISTIC

3 YEARS

$2BN

Intra-African investment up from 27 projects IN 2003 to145 IN 2011 (17% of new FDI on the continent in 2011)

75%

339 in 2003 to 857 in 2011

Intra-African investment led by KENYA, NIGERIA AND SOUTH AFRICA

Tax rate on incomes above 1m, promised by new French president Franois Hollande.

respondents say perception of Africa as a business location has improved over past

Trading loss reported by JP Morgan Chase in the US.

CITY LIVEABILITY

Singapore is the most liveable city in the world for Asia expats, ranking well ahead of regional rival Hong Kong where the air quality is now among the worst in the world, according to HR consultancy ECA International. The survey ranks cities overall liveability according to factors including climate, health services, utilities, sociability, personal safety and air quality.

SINGAPORE 1
RANK

SYDNEY
RANK 2

FDI projects into Africa have more than doubled from

Australian unemployment falls to its lowest level in a year.

Africa GDP forecast to grow 4%-5% in the next 10 YEARS

4.9%

$4BN

FDI to reach US$150BN by 2015

Facebook employees estimated tax liability following the companys initial public offering, according to CNN.

ADELAIDE & BRISBANE

RANK =3

RANK 5

KOBE

PERTH
RANK 6

60% of

Month in gures

CANBERRA
RANK 7

Growing optimism among international and African investors has led to significant inward investment into Africa over the last decade, according to EYs second African Attractiveness Survey. It combines an annual analysis of investment into Africa since 2003, with a survey of 505 global executives on their views about how and where investment will take place in the next decade. It predicts that Africa is poised to enter the premier league of investment destinations.

AFRICA INTO PREMIER LEAGUE

DUBLIN
RANK 8

RANK 1
CHILE

RANK 2
TUNISIA

RANK 3
TAIWAN

RANK 4
JORDAN

KAZAKHSTAN

RANK 5

MOROCCO

RANK 6

MALAYSIA

RANK 7

URUGUAY

RANK 8

ALL CHANGE New research by KPMG and the Overseas Development Institute the 2012 Change Readiness Index
has identified which developing and emerging countries are best prepared to respond to change. The impact of recent food, fuel and financial crises on countries around the world highlights the importance of adaptability.

1
R EAL M

2
FC BARC

3
MANCHESTER UTD

4
BAYERN MUNIC H

5
ARSENAL

480MRID AD

451M

367M

ELONA

321M

251M

6
CHELSEA

7
AC MILAN

8
INTERNAZIONALE

9
LIVERPOOL

10
SCHALKE 04

250M

235M

211M

203M

202M

As the Euro 2012 football tournament kicks off this month in Ukraine and Poland, Deloitte has identified whos winning in the money stakes in Fan Power: Football Money League. The latest edition found that the top 20 clubs had combined revenues of over 4.4bn in 201011. Loyal supporters, strong broadcast audiences and corporate attractiveness have helped the top clubs to stay relatively resistant during tough economic times.

FOOTBALL CRAZY

STACKING UP

Singapore, Beijing, Hong Kong and Tokyo are among the top 20 cities where international retailers have the largest presence. This is according to property consultant CBREs latest How Global is the Business of Retail? report. Almost half (47%) of the retailers in the survey are now present in the Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific. US retailers are by far the most global, with 73% being present in all three regions.

RANK 2

UAE

RANK 1

UK

RANK 3

US

CHINA
RANK 5

SPAIN
RANK 4

10

News round-up

TAX CRACKDOWN HAS FAILED

Measures to tackle tax evasion agreed at the London G20 conference in 2009 have been unsuccessful and tax havens are thriving, according to a report by the Task Force on Financial Integrity and Economic Development. Information exchange agreements the main policy tool that G20 countries use to curb tax evasion have proven to be largely ineffective, concludes the report, noting that tax havens tend to provide information on request only. However, requests have to be based on wellfounded suspicions almost impossible to formulate without the information held by tax havens. Funds held in tax havens have actually increased since 2009, says the report.

Solutions, an arm of the leading investment management company. Other demands are for an end to core elements of the austerity programme, including cuts to pensions and salaries, the striking out of measures to end collective labour agreements and new legislation allowing politicians to be prosecuted for past failures.

MCCARTHY TAKES IFRS ROLE

TAX IS A RISKY BUSINESS

GREEKS WANT AUDIT OF BLAME

Greeces Coalition of the Radical Left (Syriza), which finished second in the countrys general election, has called for the creation of an international auditing committee to investigate the causes of the national fiscal deficit. It is seeking a second investigation into an audit of the Greek banking sector that was performed by BlackRock

Governments need to collect higher revenues has created a high-risk tax environment, argues Ernst & Young. Becky Lai, tax policy and controversy leader of EY China, said: Governments worldwide have been enacting an everincreasing number of complex changes to their tax laws, regulations and tax administration processes. The pace of these changes continues to accelerate, creating the riskiest environment for tax risk and controversy the world has experienced for many years and adding to the sense of uncertainty felt by tax executives everywhere. The adoption of stable tax and fiscal policies has enabled most Asia-Pacific nations to become preferred destinations for capital investment, she added.

Former UK Financial Services Authority chairman Sir Callum McCarthy has been appointed as an IFRS Foundation trustee. He chaired the FSA from 2003 to 2008 and is currently a nonexecutive director of HM Treasury, the Industrial and Commercial Bank of China and IntercontinentalExchange. McCarthy was an official at the Department of Trade and Industry for 13 years. He was CEO of Barclays Japan from 1993 to 1996 and of Barclays USA from 1996 to 1998.

RUSSIA-UK INITIATIVE LAUNCHED

SINOTECH CHARGED

China-based oil field services company SinoTech Energy has been charged by the US Securities and Exchange Commission (SEC) with intentionally misleading investors about the value of its assets. Two senior company officers, CEO Guoqiang Xin and former CFO Boxun Zhang, have also been charged. The chairman, Qinzeng Liu, is in addition charged with the theft of US$40m. The company is also charged with misleading investors about the purpose of a US$120m initial public offering. The charges are set out in documents filed at a US district court in Louisiana where the SEC has commenced the proceedings against SinoTech. SinoTechs brief life as a public company in the US markets has been rife with falsehoods, said David Woodcock, director of the SECs Fort Worth Regional Office.

Ernst & Young has launched the Russia-UK Business Initiative, aimed at promoting trade between the two countries. The initiative is led by Stuart Lawson, chairman of the Investment and Finance Committee of the Association of European Businesses. A UK Business Centre will be established in Russia, which will support British companies seeking to trade in the country, as well as Russian companies researching trade opportunities in the UK. The initiative hopes to influence government officials, including trade representatives, to improve the business environment in both countries. Similar initiatives have been established in Germany, France and Japan.

STANDARDS SCHEDULE

The International Accounting Standards Board (IASB) is proposing amendments to 11 International Financial Reporting Standards, (IFRSs), under its annual improvements project. The proposals are in line with issues discussed by the IASB in its project cycle that began in 2010. Standards being amended include IFRS 2, Share-based Payment; IFRS 13, Fair Value Measurement; and IAS 36, Impairment of Assets (see Technical Update, page 54).

GOVERNANCE IS TOP CONCERN

Corporate governance and improved transparency have become core priorities for fund managers, according to a survey conducted by EDHECRisk. Some 91% of respondents said that regulators must ensure

Analysis
THE ROAD TO RIO
Twenty years since the first UN Conference on Sustainability took place in Rio de Janeiro, the eyes of the world are again firmly focused on the Brazilian city as it hosts Earth Summit 2012, with investors playing a key role

11
P24
TALENT CRISIS STOPPING GROWTH
More than half of South African CEOs complain that talent shortages are restricting corporate growth, according to a survey conducted by PwC. Gerald Seegers, director for human resources services at PwC Southern Africa, said that CEOs are facing a talent crunch. An inability to find and keep the right people is biting, with CEOs saying the lack of talent is stifling expansion and

information is genuinely fair, clear and not misleading. Other major high-risk factors are the growing sophistication of operations, the reduced capacity of some intermediaries to guarantee deposits, poor quality of regulation and management companies failure to provide restitution.

VODAFONE DISPUTE CONTINUES

Vodafone has escalated its dispute with the Indian government regarding the tax liability for the mobile phone carriers acquisition of Hutchisons Indian subsidiary. Vodafones Dutch subsidiary has served the Indian government with a Notice of Dispute, challenging proposals in the Indian Finance Bill 2012 which Vodafone claims violate the international legal protections granted to international investors in India. The notice may lead to international arbitration under the Bilateral Investment Treaty between India and the Netherlands. Vodafone argues that the proposed retrospective tax legislation would have serious consequences for Indian and international businesses.

years through pro bono consulting, workplace giving campaigns and direct engagement in community initiatives. Barrys leadership will be a tremendous asset to our communities, said Brian Gallagher, president and CEO of United Way Worldwide. United Way supports nearly 1,800 communitybased organisations in 41 countries, promoting opportunities through improved education, income and health.

APPLE SAVED BILLIONS IN TAXES

TAXES CLOUD CHALLENGE

Most tax authorities have not yet developed detailed rules relevant to cloud-based computing, according to a KPMG study. According to our research approximately 45% of the respondents are neither evaluating the tax implications of cloud, nor do they know if these factors are being evaluated within their organisation, said Steven Fortier, principal-in-charge of KPMGs US Tax Cloud Initiative. Its survey, Clarity in the Cloud, found that 81% of businesses have fully implemented cloud computing, are experimenting with it or are planning to adopt it. The evaluation of approaches in 18 countries found widely differing tax treatments of cloud computing.

Apple may have legally avoided US$4.8bn in taxes through transfer pricing and careful location of operations, according to former US Treasury economist Martin A Sullivan. He claims that Apple declares only 30% of its profits to be generated from its US base, despite its product design, software and hardware research and development, group management and marketing taking place in the US. The New York Times claimed that Apple declared much of its corporate profits in low-tax-rate jurisdictions, including Ireland, the Netherlands, Luxembourg and the British Virgin Islands. Apple responded that it pays an enormous amount of taxes... In the first half of fiscal year 2012 our US operations generated almost US$5bn in federal and state income taxes making us among the top payers of US income tax.

TAX REFORM IS MAJOR CONCERN

DELOITTE CEOS UNITED WAY

Deloittes global CEO, Barry Salzberg, has been elected for a two-year term as chairman of United Way Worldwide, the worlds largest privately funded non-profit organisation. Deloitte has supported United Way for over 25

Tax reform, and its impact on corporate decisions, is the key concern for US corporate executives, according to an Ernst & Young survey. Two-thirds of executives polled said that presidential candidates are not spending enough time addressing tax issues. Corporate America is still waiting for a focus on critically important aspects of both domestic and international tax treatment, said Kate Barton, Americas vice chair of tax services. Some 72% of respondents expect US tax reform will not be addressed until 2013 or 2014 (see feature, page 12).

innovation within their organisations. He added that corporates are increasingly looking outside their own sectors to attract talent.

PwC PAYS UP ON CENTRO AUDIT

PwC and its audit client Centro have paid A$200m to settle a class action lawsuit from investors in Australia. The deal was announced by the Melbourne Federal Court and is awarded to 6,000 investors in property group Centro, some of whom lost their life savings. The suit alleged that the company deceived investors by failing to disclose short-term liabilities of A$3bn.

12

RALLY CALL
usinesspeople are likely to take an unusually keen interest in the US presidential election this November. For a start, the race will focus on matters dear to their hearts economics, trade, finance and regulation. Perennial distractions like terrorism and abortion are taking a backseat after the withdrawal of Rick Santorum from the Republican race. Second, the US corporate and financial elite has been lukewarm at best over Barack Obamas presidency. By contrast, in Mitt Romney, the multimillionaire private equity chief and former Massachusetts governor, many will see the personification of their own values. His manifesto reads like a wish-list for executives, with lower business taxes, less red tape and more trade deals. Nor has Romney left out foreign businesses. British oil titan BP will surely appreciate Romneys more liberal approach to oil drilling, while Barclays is likely to warm to his more relaxed approach to financial regulation. Still, any corporate enthusiasm for the pro-business Romney should be tempered by two things. The first is that US presidents often struggle to get their Incumbent presidential candidate Barack Obama may have his fans, but he is viewed with little affection by the corporate community

As the presidential hopefuls square up for the US November elections, what do their proposals mean for the corporate community at home and abroad?

way on economic policy, which is controlled by Congress. As outgoing president Harry Truman once said of his successor, former general Dwight Eisenhower: Poor Ike. It wont be a bit like the army. Hell say, Do this! Do that! And nothing will happen. Obama has found this too. Three years into his presidency and he has failed to cajole Congress into raising the top rate of income tax or closing tax loopholes for oil companies both pledges in his 2008 campaign. Romney might be offering a wonderful range of policies for businesspeople, says Bill Frenzel, a fellow at the Brookings Institution and

a Congressman for two decades, but chances are he might only be able to enact a fraction of them as president. And if Romney does get his way, there are risks. Class struggle is an unfamiliar concept in the US. But more than any election in recent history, the upcoming contest is shaping up as a conflict between the 1% and the 99% the elite versus the rest. The US has become ever more polarised. In the last business cycle between 2002 and 2007, the richest 1% of Americans cornered almost two-thirds of all the gains. Meanwhile, the median US household suffered a US$2,000 drop in annual income the first time in the modern era that the bulk of Americans have ended up worse off at the end of a business cycle than when it began. This risk of populist backlash will increase if business and finance are seen to be getting their way on everything, says Ted Alden, a senior fellow at the Council on Foreign Relations. Yet such nagging doubts may do little to temper business enthusiasm for Romneys plans. The starting point for most US elections is taxation. In their official capacity, most CFOs will look first at the presidential candidates plans for business levies. On the surface, there is a surprising meeting of minds. Both Obama and Romney want to slash the US corporate tax rate,

13

which at 35% is one of the highest in the world. Both would pay for this by closing tax loopholes. The nominal tax rate is largely a fiction, since few companies actually pay it, says Chris Edwards, director of tax policy studies at the Cato Institute in Washington. Romney is only slightly more indulgent to companies and shareholders, proposing a tax rate of 25%, compared with Obamas 28%. Still, this is where the similarity stops. Romney proposes a radical shift to a territorial tax system. At present US companies pay tax on their global income. This means that when they bring foreign profits home they have to hand over the difference between the lower foreign rate and the higher US one. Small wonder, says Romney, that businesses are reluctant to reinvest foreign profits in the US and tend to park cash overseas instead. This second layer of tax makes US companies less competitive, he says. Romney believes moving to a territorial system (taxing only that income earned in the US) would promote investment at home. Obama proposes a different more coercive method to extract cash from foreign profits. He has floated such measures as a minimum tax on profits

that are kept out of the country, which US multinationals will find distasteful. Obamas big concession to business is a special 25% tax rate for manufacturers, which is about 7% lower than their current effective rate. Although the US is manufacturing more than ever, it is doing so with ever fewer workers. There were more than 19 million manufacturing jobs in the US in 1980; today, there are a little more than 11 million. A lower tax rate, Obama believes, will help reverse this trend and perhaps win over some corporate sceptics.

will end up paying US$149,000 less a year in tax on average by 2015, with the top 0.1% saving an eye-watering US$725,000 on average. The outlook under Obama is almost the opposite: within three years the typical member of the top 1% would pay US$93,707 more and the wealthiest 0.1% US$510,724 more. Romney himself is a classic beneficiary of the current US tax system, which imposes an extremely low tax rate on those making their millions from investment. With an estimated US$250m fortune, Romney

THE UPCOMING CONTEST IS SHAPING UP AS A CONFLICT BETWEEN THE 1% AND THE 99% THE ELITE VERSUS THE REST
In practice, business leaders are likely to pay just as much attention if not more to the candidates plans for personal taxation. After all, executives and bankers are often among the top 1% of earners, precisely the group that Obama would like to see pay more. A few simple figures summarise the contrasting approach to personal tax by Obama and Romney. If Romney gets his way, the top 1% of earners surrendered just 15.3% of his US$21m income in taxes last year far below the 35% top tax rate. For much of his career Romney benefited from the 15% rate on carried interest the income that investors make from managing other peoples money. Obama would like to scrap this tax privilege. He has also proposed getting rid of the top rate tax cuts championed by George W Bush in 2001 and 2003. In addition,

14

*TAX AND SPEND: THE PLEDGES

* * * * * * * *

According to the US Administrations 2013 budget proposal, incumbent and Democrat candidate Barack Obama would: add US$6 trillion to the deficit over 10 years; levy a minimum 30% tax rate on households, making more than US$1m a year; let the tax cuts of 2001 and 2003 expire for the highest earners; lower corporate tax rates; spend US$300bn in one year on job creation measures, such as construction projects, teacher salaries and tax breaks to spur recruitment; cut military spending over 10 years by US$487bn; cut Medicare and Medicaid health programmes for the elderly and poor by US$278bn; and cut federal farm subsidies and federal employee pensions.

Demonstrators during Tax Day in Los Angeles call for increased taxes on the rich and for loopholes to be closed that allow corporations to pay lower income tax than most individual taxpayers

the budget; * balancebalanced budget amendment; issue a * cut annual tax revenue by about US$900bn by calendar year 2015 close to * a quarter of projected revenue; the 2001 and 2003 tax permanent; * make down individual income cutsrates by 20% from current levels the top bring tax * rate would fall from 35% to 28% and the bottom from 10% to 8%; estate tax on inherited wealth; * eliminate the on long-term capital gains, dividends and interest income for * scrap the tax income of below US$200,000; and households with territorial tax * introduce a earned outside system, imposing US taxes on US companies even for revenue the country.

According to the Tax Policy Center, Republican candidate Mitt Romney would:

A Romney supporter holds her bobblehead doll of the Republican presidential hopeful at his Florida primary elections headquarters in St Petersburg, Florida for many, Romney is seen as the closest that business and finance is likely to get to a dream candidate

the president has proposed a Buffett rule meaning a minimum 30% tax on millionaires. Not only would Romney urge Congress to make Bushs tax cuts for the upper echelons permanent, he would also lower all income taxes by about 20%. This would trim the top rate of US income tax from 35% to 28%. He would also scrap the estate tax. For tycoons wanting to leave their fortunes intact to heirs, this pledge is another great selling point for the Romney campaign. After tax, the biggest bugbear for executives and entrepreneurs is red tape. Romney has sought to portray Obama as a spinner of regulations that have been tying up businesses. Exhibit number one is the Dodd-Frank Act, which tightened regulation on the financial services sector after the

2008 financial crisis. Weighing in at 2,400 pages, the monster act is indeed riddled with complexity and will take years for regulators in the US to fully work through (although, to be fair, much of Dodd-Frank was the work of Congress rather than the president). Romney wants to simplify the framework. Though the former private equity chief claims he would merely reduce complexity, it is likely that he would loosen the shackles on financial companies. A roll-back of regulations does look far more likely under a Republican president, says Alden of the Council on Foreign Relations. Though he would really struggle to get a full overhaul through Congress as he has promised.

15

On environmental policy, Romney might have more flexibility. Unable to muster enough support in Congress for any form of tax on carbon, Obama has sought to fight the environmental war through alternative means. A host of new air pollution measures are making life ever harder for dirty coalburning electricity plants, forcing many to close. Under Obamas leadership, the Environmental Protection Agency is seeking to impose constraints on carbon emissions from electric generators. Romney would make life much more comfortable for polluters, subjecting all such regulation to a rigorous analysis of its cost to business. The trade-off between business profits and the environment would shift decisively in favour of the former. It is also worth noting that Obama does not entirely live up to the image of red-tape enthusiast painted by Romney. The president enthusiastically embraced the recent JOBS Act, which radically curbs the regulatory burden on smaller businesses seeking to raise money. Companies with less than US$1bn of annual revenue will now have five full years before they have to comply fully with the gamut of rules governing public companies, including some of the notoriously unpopular clauses of the Sarbanes-Oxley Act.

OBAMAS ALLEGED HOSTILITY TO FOREIGN OIL IS LARGELY FICTIONAL. HE HAS OPENED UP HUGE SWATHES OF FEDERALLY OWED LAND TO DRILLING
The fact that Obama signed the JOBS Act this spring will make it easier for him to hit back at Romneys regulation rhetoric. Still, a lighter touch on corporate disclosure would be likely under Romney. Nor is it just US businesses that stand to gain. Romneys desire to remove the last remaining restrictions on oil drilling in the US will cheer the likes of BP and Royal Dutch Shell. Following in the Republican tradition of drill, baby, drill, the candidate favours opening up oil drilling in most of the few areas still out of bounds to Big Oil, including the pristine and environmentally fragile Arctic National Wildlife Reserve. Obamas alleged hostility to foreign oil is largely fictional. He has opened up huge swathes of federally owed land to drilling, much of which oil companies have not yet exploited. In fact, under his presidency oil production in the US has actually increased for the first time since the 1970s. Even so, there is no doubt that chiefs of foreign oil and gas companies would find life somewhat easier under a Romney White House. A Romney presidency would also likely mean easier access to the US market. Romney has shown himself far more enthusiastic about opening the US up to foreign trade than his rival. As president, Obama has not negotiated a single free trade agreement. Romney promises far more action. For a start, he wants to fast-track negotiations with a group of Asia-Pacific nations including Australia, Chile and Singapore over the Trans-Pacific Partnership. Although Obama has not been nearly as antagonistic to business as his opponent claims, he is viewed with little affection by the corporate community. Romney, by contrast, is the closest that business and finance is likely to get to a dream candidate. The only drawback is that his policies would be perfectly calibrated to stoke anger at the top 1%. Perhaps US executives should be careful what they wish for. Christopher Alkan, journalist

16

Interview

CLOSER SCRUTINY
rofessor Ben Marx FCCA is as passionate about auditing as he is about a good vintage. A sign in his office reads: Auditing is like a good red wine the first sip may startle you, because youre not used to the mature oakiness. But then you have that next taste, and the full-bodied smoothness takes hold of you, and you wonder why youve never tasted red wine that way before. Marx is the head of auditing in the University of Johannesburgs department of accountancy. Situated in the economic capital of South Africa, the department of which he is currently acting head is a leader in the discipline in the country. The values by which he lives are those of any good auditor. Any accountant should act ethically with integrity, with objectivity, with professionalism. Those things for me are not negotiable. Those are your DNA, he says. Last year, Marx won the vicechancellors Teacher Excellence award at the university, which recognises outstanding contributions that individual academics have made to the promotion of teaching excellence and effective learning over a sustained period. It is also awarded to those who positively influence students and other colleagues. Being a good lecturer is probably an academics primary responsibility, because if you havent got a passion for teaching, you shouldnt be here, he says. But to be a good teacher I think you have to be active in scholarship as well. And thats where the research comes from.

A passion for audit has gone beyond the lecture theatre for Professor Ben Marx FCCA, who has built a reputation for award-winning research in South Africa

Accountancy academics, however, are not known for producing the same research output as their counterparts in faculties such as science and humanities. Accounting is very lecture-driven, Marx admits. If you go to all the universities in South Africa, you will find that research by academics in the accounting department is not as prolific as in some others. We as a department

Audit appeal
Although Marx may be passionate about his subject, how does he get his students fired up about it? Thats the biggest challenge, because students will quite often see auditing as I dont want to use the word boring lets say less spectacular. A subject like tax has appeal because everybody pays tax, he explains. So to make students passionate about

TAX HAS APPEAL BECAUSE EVERYBODY PAYS TAX. TO MAKE STUDENTS PASSIONATE ABOUT AUDITING YOU MUST BRING PRACTICE IN LINE WITH THEORY
are trying to activate scholarly activity, because to be a good academic, you have to be a good lecturer; you have to be active in scholarship, which means you have to be strong in research. Marx practises what he preaches. Last year, he won the Outstanding Contribution to Accounting Research Award from the Southern African Accounting Association and the International Association of Accounting Education and Research. He received the accolade at a conference attended by 446 delegates from professional bodies and major African universities. At the time head of ACCA South Africa, Nadine Kater, described Marx as a very worthy recipient, adding that research plays a critical role in the accounting profession as it informs curriculum content and it also ensures that accounting professionals continue to play a leading role in the sound functioning of business and economies worldwide. auditing you need to think about what you do and how you do it. For one thing you need to be a master of your subject and be absolutely cutting edge, but then you must be able to bring practice in line with theory, and make it interesting for them. And you must have a passion for it. I try to explain the importance of auditing in shaping their future. Its the bringing of practice in line with theory where Marx excels. He sits on the boards of two listed companies as an independent non-executive director and audit committee chair DigiCore Holdings, a fleet management and vehicle tracking company, and Morvest Business Group, a Blackempowered professional services and ICT company. Its nice that the university does allow us to do that, he says. Its important to stay in touch. If you sit on a board you deal with governance issues. Youre a non-executive director so you bring the balance.

17

18

The CV

Besides being a fellow member of ACCA, Professor Ben Marx is registered as a chartered accountant with the South African Institute of Chartered Accountants, is an associate member of the Institute of Internal Auditors South Africa, and a member of the Institute of Directors. He is also a fellow of the Chartered Institute of Secretaries. He began his professional life as an auditing clerk with Deloitte & Touche and after that began his academic career at South Africas University of the Free State. After rising through the ranks as a lecturer and senior lecturer, he was appointed associate professor there. A year later he was appointed professor at the department of accounting at Rand Afrikaans University, the institution that later became the University of Johannesburg. There, he heads the auditing department and the unit for chartered accounting studies. His doctoral thesis on audit committees was published internationally, and he has delivered numerous papers on subjects including corporate governance and sustainability and integrated reporting. He has written four textbooks. Outside work Marx, who was a keen rugby player in his youth, enjoys the gym. In addition he is a regular churchgoer and a deacon in the Dutch Reformed Church.

The tips

Marx believes that dedication, selfbelief and perseverance are key to succeeding as an accountant. Accounting as a profession is difficult and you need determination. Nothing ever comes easily. With hard work, perseverance and discipline you can achieve, he says. He also advises students to be patient with themselves and not to become despondent if they experience failure along the way. Most people will probably fail a test some time or another; you need to have patience with yourself, to pick yourself up and try again. Getting 100% for tests is as about as likely as winning the lottery, he jokes. Marx believes that accountants are key to the success of the economy and society at large. And all are important not everyone can become a CFO or CEO. The ultimate person at the top has a long road to qualify. If you take the integration, volume and complexity of the work, and take financial reporting and tax laws, to master all that when you qualify, thats challenging. Its highly complex and complicated, he says. There are challenges and faults along the way, he concludes. There are drop-out points, people change their minds. You need people at the top but you need general accountants [as well]. Not everybody can be a CEO. Whos going to do the work?

began after the JSE announced it would begin reviewing companies annual financial statements for compliance with International Financial Reporting Standards. Some 20 highly skilled academics now conduct reviews on annual financial statements based on predetermined risk areas, and they forward their findings to the JSE for action. Last year, they reviewed 56 annual financial statements, 16 of which were closed either with no comments or with letters detailing potential areas for improvement. The JSE then wrote enquiry letters to 40 of the companies.

Integrated challenge
The challenge of implementing integrated reporting is also an area of key concern to Marx. The JSE requires that its listed companies comply with the King Report on Corporate Governance. The latest King report, the so-called King III issued in 2009, requires companies to produce an integrated report which includes details from both the companys financials as well as issues of sustainability. These include factors such as the environment in which the company operates, the risks it faces, and its strategies to deal with them. I think its a very good and credible development, Marx says. As for JSE-listed companies, some comply better than others as this practice is still evolving. Last year, with the 2011 financials that came out, companies were starting to move towards integrated reporting. Its new and thats the biggest challenge because some companies just took their old financial statements, their old annual reports and called them integrated reports. But nothing had changed, only the

In this way, the company benefits from his knowledge and expertise, and his students benefit from his exposure to the real world of business. Marx was also instrumental in establishing the collaboration between his university and the Johannesburg Stock Exchange (JSE) to monitor corporate governance standards of

listed companies. The World Economic Forums Global Competitiveness Report 2010-2011 placed South Africa first out of 142 countries for securities exchange regulation. The country also scored first place for accounting and audit standards strength, and second place for the effectiveness of corporate boards. Last February, the collaboration

19

The basics

ITS ONE THING TO PRODUCE STUDENTS THAT CAN GO OUT AND DO THE JOB, BUT YOU MUST ALSO PROVIDE A REPUTATION FOR QUALITY
name, which was not the idea. And then you had companies which really applied their mind and thought about how to go about it. Its evolving in different sectors, but your bigger listed companies are really starting to embrace it. Marx is the ACCA representative on South Africas Integrated Reporting Committee chaired by retired judge Mervyn King, a position he modestly describes as very nice. The professor also holds firm views on the sustainability of his own organisation and what needs to be done to ensure a bright future. Sustainability in education is key. Its one thing to produce students that can go out and do the job, but you must also provide a reputation for quality and for excellence to be sustainable, he says. If we want to be sustainable in the long term we must be excellent; we must have a transformed department and a transformed student body. And quality must always prevail. And we are doing that, which is great. In South Africa, having a transformed department and student body means creating space for talented, disadvantaged students who come from schools where teaching is often poor. The accountancy department has joined forces with the universitys economics department and mining house De Beers to establish its Soweto Campus Saturday School where high school children are taught commercial and science subjects. The department also conducts Saturday classes in 102 Soweto schools. Our students range from those from private schools to those from no-fee schools whose first language isnt English or Afrikaans, who through their circumstances didnt have exposure to

Marx describes sitting on boards as a win-win situation. He enjoys his involvement in the practice of business where he brings enormous benefits to the companies with which he works. He brings an independent, objective view as well as cutting-edge knowledge. But thats not all. People in business are busy they dont worry about integrated reporting and sustainability, he explains. I bring those important governance issues. Something thats very big now is sustainability, sustainability reporting and integrated reporting. So those are the things that a company must do and if you have a practical insight into this, then you are cutting edge because you know exactly what the issues are. Marx also believes that academics must apply their knowledge. There is a place for academics to get involved, he says. So if you have that cutting-edge knowledge, and can apply it in a company, or in the audit committee, then it benefits the company and their shareholders. The students benefit too: Going back to your classroom teaching, you see the bigger world, he says. You can tell them what the book says and then you can apply it to a practical situation as well. You need practical insight to prepare your students for the world of work.

this, Marx explains. The challenge is to not leave those who have struggled hardest to get to universities by the wayside. Perhaps some of them might just make passionate auditors. Nicki Gules, journalist based in Johannesburg

20

THE BEAUTIFUL
As Euro 2012 kicks off, we analyse the nances of previous championships and the projected revenues to be generated by this years co-hosts, Poland and the Ukraine

any of the worlds top football players Cristiano Ronaldo, Zlatan Ibrahimovic and Wayne Rooney to name a few will be taking to the pitch in the Euro 2012 tournament this month. But it is not just the winning countries that will ultimately be revealed, but also whether Poland and the Ukraine themselves will be viewed as winners in having co-hosted a financially successful tournament without major logistical problems. There those within UEFA that believe that simply staging the third biggest sporting tournament in Central and Eastern Europe for the first time represents a massive achievement only the Olympics and the World Cup are bigger sporting events. David Taylor, CEO of UEFAs commercial arm, UEFA Events SA, is among them. He believes a very important decision was made to go to Eastern Europe for the first time in our history. Ultimately, delivering a successful tournament is vital to the selfconfidence of the region to boost its profile and to potentially become a contender to host other major sporting events in the future. However, there is no escaping that finance is key. Estimated turnover of 1.4bn for the 2012 Euro tournament can be broken down into four main sources: media rights (62%), commercial rights income from sponsoring and

*DOWN TO THE LINE

A lot of red faces have been avoided after it was confirmed that all the tournaments new-build stadiums are ready in time but it was a close call for a while. The construction of the spectacular 58,000-capacity National Stadium in Warsaw scheduled to host the opening match between Poland and Greece on 8 June has not been a smooth process. Delays put construction behind schedule, causing tensions between those involved and the Polish government. The 50,000-seat venue was finally opened in January 2012 with a ceremony, fireworks display and free music festival. But as recently as February, problems continued to dog the stadium. It was due to host a Poland Super Cup match, but it was scrapped when police said they were unable to guarantee security because of communication problems inside the stadium senior officials were forced to resign. Mayor Hanna Gronkiewicz-Waltz said afterwards that all of these problems had been addressed and the police subsequently gave their approval for the stadium to be used. It will officially be handed over to UEFA on 9 May. Meanwhile, in the Ukraine problems have also been evident, including fears over the launch of high-speed railways between host-cities and the finalisation of construction and renovation of a number of main roads. Even UEFA president Michel Platini raised doubts over construction deadlines for the countrys four stadia to be used in the 31-game tournament, as they slipped behind schedule. Several alternative host nations were even mooted as fall-back options in the event the Ukrainian FA was unable to deliver on its targets to UEFA. Germany, Scotland and England were among the possibilities. What should not be overlooked is the investment involved. A new international airport terminal has been built in Ukrainian capital Kiev, while Poland has spent 21.6bn on infrastructure, with Euro 2012 as the catalyst. in Portugal in 2004. Looking even further back, the 2000 tournament in Belgium and the Netherlands generated 230m, while Euro 96 tournament in England produced approximately 147m.

merchandising (22%), hospitality (9%) and ticketing (7%). Official UEFA figures for Euro 2008 the previous tournament in Switzerland and Austria showed income totalled 1.3bn a 50% rise over the previous tournament

21

The new National Stadium, Warsaw, Poland, sporting the countrys red and white national colours

22

The rapid rate of revenue increase has been truly impressive, with the single biggest contributing factor being the massive increases in media rights revenues, which generated 801m in 2008 (up from 560m in 2004) and produced an operating profit of over 700m.

HatTrick score
These sizeable profits have been used to fund a multitude of worthwhile development projects, such as education and training centres across the 53 UEFA member associations through UEFAs assistance programme called HatTrick. Once these costs are taken into account, net profit for 2008 came in around 300m, which was then ploughed back into the game and used to finance all the youth and womens competitions from 200812, refereeing and coaching programmes, and various administration costs. Forward-wind to this summers tournament and UEFA originally stated in early 2010 that it expected revenues to be in the region of 1.3bn, again with the lions share coming from the sale of media rights. A spokesman for UEFA told Accounting and Business that despite

the general economic conditions: There has not been any decrease in the overall figures since the initial projections were made a little more than two years ago. However, ticketing is estimated to yield 125m (down 24m on 2008), while corporate hospitality is predicted to fall a massive 55m to 100m. This represents a sizeable drop and is perhaps the biggest single financial indicator that the event will be affected by the economic downturn. Football finance expert Simon Chadwick, professor at Coventry

University, says: The European Championship is becoming a phenomenon in its own right. It really is one of the premium sporting events in the world. The way it is packaging its sponsorship deals is similar to that used by the International Olympic Commission (IOC) and proving very successful. The marketing expertise is coming in from big international brands with extensive experience and commercial logic and it is showing.

Sharing the spoils

For the four years following this summers tournament (to 2016), estimates suggest almost 500m will be made available to the HatTrick programme and that each national association will receive up to 9.4m. If the forecast targets are met, it will also mean European Championship yield will have increased by more than 30 times over the last 20 years. But while revenue growth has been impressive, there are dark clouds on the horizon that continue to threaten the 2012 forecasts. The ongoing economic crisis is having an impact. Sports industry advertisers have slashed budgets, while sponsors and investors have reined in. There is also the real prospect that corporate hospitality packages for the competition may not sell out. The downturn has meant that boards of directors are looking closer at the link between corporate activity and the bottom line. Senior staff are, therefore, having to argue a much stronger case and demonstrate tangible business links before corporate hospitality is signed off, says Chadwick. UEFA are finding it no different to anybody else, but the fact that the Ukraine and Poland are not considered to have the cach of a Paris or Madrid and not considered

Poland and the Ukraine will be hoping footballing stars such as Cristiano Ronaldo prove enough of a draw

*EURO 2012 AND 2008 FINANCES (M)

Budget income Media rights Commercial rights Corporate hospitality Ticketing Overall turnover Costs Event costs Solidarity payments to UEFA associations Overall costs Net profit

2012 (est)
840 290 100 125 1,355

2008
801 294 155 101 1,351

TBC TBC TBC TBC

-600 -450 -1,050 301

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Officially licensed merchandise, such as logo-embossed footballs, is an integral income stream of any Euro competition

SIZEABLE PROFITS HAVE BEEN USED TO FUND A MULTITUDE OF WORTHWHILE DEVELOPMENT PROJECTS, SUCH AS EDUCATION AND TRAINING CENTRES ACROSS 53 UEFA MEMBER ASSOCIATIONS
important growth markets hasnt helped, he adds. There is also serious competition for Poland and the Ukraine from the Olympic Games in London. UEFAs quadrennial showpiece begins just six weeks before the opening of London 2012, whereas four years ago the Olympics were hosted by Beijing, making it rather more difficult to access from Europe, Taylor adds. These things inevitably have an effect. clients are prioritising the Olympics. A lot of clients are saying theyre going to do the big one this year, as opposed to some of the more perennial events they normally do. Meanwhile, at the time of writing, general attendance tickets remain on sale, although only around 5%. Reports of extortionate hotel charges and airfares have certainly not helped. There are also very real concerns that many key roads in Poland simply wont be finished in time. Ukraines jailed opposition leader Yulia Tymoshenkos ongoing incarceration hasnt helped the countrys international image. And there

*EURO 2012 TEAMS

Germany, Spain, England, France, Republic of Ireland, Sweden, Poland, Ukraine, Portugal, the Netherlands, Greece, Russia, Czech Republic, Denmark, Italy and Croatia.

Big one
Tony Barnard, marketing director at Prestige Ticketing, the London Games official on-site hospitality seller, says

has been a perceived failure by the host nations to whip up sufficient local buzz and tackle the overseas images and clichs of post-communist countries. Taylor has already expressed his belief the 2012 tournament is not going to be the most financially successful tournament of all time from a revenue or profit perspective. Playing down the importance of these issues, he says: We could have gone elsewhere if that was our objective. Nonetheless, all eyes will be as focused on the performances off the pitch as much as the players on it. Alex Miller, journalist

24

BEATING THE DRUM

With commercially minded investors joining in with ever louder calls for organisations to address sustainability issues, the Earth Summit in Rio this month highlights the subjects growing importance to the business agenda

he June 2012 Earth Summit in Rio de Janeiro will be even more of a focus for the worlds attention than the first UN Conference on Sustainable Development held in the same city 20 years ago. For one thing, there are about 1.6 billion more people in the world today. For another, the environmental agenda has moved even further towards the centre-stage of politics, society and the corporate world. Moreover, the environmental argument being put forward by mainstream stakeholders now is less about forcing big business to comply with rules, regulations and targets. It is much more to do with making the case that taking a responsible approach to sustainability is, in fact, in the long-term interests of companies and their shareholders. A group known as the Corporate Sustainability Reporting Coalition (CSRC) has called on countries attending the so-called Rio+20 event to develop a UN convention. This would require the signatories to compel company boards to think about the sustainability issues that affect them and to report on them in their annual report and accounts. Institutional fund management group Aviva Investors, the global asset management business of Aviva plc, led the formation of the CSRC, whose membership includes ACCA. Steve

Waygood, chief responsible investment officer at Aviva Investors, says: What we want is the boards thinking. What we dont want is the boards to simply delegate to their compliance teams that they need to report information that might be absolutely meaningless to their business. Made up of more than 40 financial institutions, non-governmental organisations, professional bodies and investors, CSRC is looking for an integrated report that brings together the financial and material non-financial information that investors need to get a more holistic picture of a companys performance. One of the drafts clauses in Rio+20 final agreement reads: We recognise the need for a global commitment on corporate sustainability reporting which promotes and encourages large private and public companies to take sustainability issues into account and to integrate sustainability information within their reporting cycles. Waygood says that, although a step forward, this wording does not give a strong enough commitment to be truly effective. But overall, what effect does all this have on how corporates treat sustainability reporting? Rob Lake is director of strategic developments at the UN-backed Principles for Responsible Investment

(PRI), a body led predominantly by pension funds and their fund managers. He says: Significantly better information from companies about their sustainability performance and sustainability risk exposure is absolutely crucial to what PRI investors are trying to do. PRIs role, Lake explains, is to find new and more effective ways to bring together and support groups of investors who want to take energetic action to exercise influence over companies.

Different criteria
The Johannesburg Stock Exchange (JSE) launched a Socially Responsible Investment (SRI) index in 2004. The criteria encompass a range of environmental, social, economic and governance indicators. While recognising that banks are different from mining companies or retailers, the criteria are not themselves specific tonnage targets, for example. Rather, they demand reporting on issues such as commitment to use targets, identification

25

Rio calling: countries that do not heed the message risk falling out of step with the latest thinking on integrated reporting.

of significant impacts, and outlines of processes, responsibilities and action plans. Corli le Roux, head of the SRI and sustainability at the JSE, notes that take-up from the investor community has to date been slow. There was little understanding of how sustainability could be incorporated into investment decision-making, she says. She adds that PRI has helped. However, le Roux points out: The index has been mostly driven from the issuers perspective. Between 85% and 90% by market capitalisation of the top 100 JSElisted companies meet the criteria. While the criteria are continuing to evolve, this figure suggests that companies still have some way to go and research suggests that JSE companies, for the most part, have yet to take real action by reducing their greenhouse gas emissions, for example. While sustainability has long-term implications, not every investor plays the long game. Savvas Savouri, chief

economist at London and Dubai-based hedge fund Toscafund, says: You can have those indices until theyre coming out your ears. They will always underperform because youre putting a constraint on things. If you restrict your [investment] choice set, it will be inferior to a more general choice set. Lake says its not about pulling out of investments that dont at present comply, but trying to stimulate a much more productive dialogue between companies and long-term investors so companies understand that they have long-term allies in long-term investors. In fact, the evidence is that companies that do well from a sustainability perspective also do well financially. Generation Investment Management, co-founded by former US vice president Al Gore, recently published a paper, Sustainable Capitalism (see next article), which suggests that environmentally conscientious companies can reduce cost of debt and face lower capital constraints.

In the private equity sphere, a recent paper by Doughty Hanson & Co and conservation group WWF points to other research that suggests businesses that are committed to environmental, social and governance issues earn higher market valuations. The paper, Private Equity and Responsible Investment: An Opportunity for Value Creation, addresses the chicken-and-the-egg syndrome: Companies lament that investors do not value their sustainability efforts, while investors complain that companies do not report sustainability initiatives in terms that they can value. There is still a long way to go. But now, thanks to the CSRC, governments are being called on to do something about the issue. At Rio+20, it wouldnt be surprising if there were a carnival atmosphere. It would be entirely appropriate: for the louder you beat the drum, the more difficult it is to be out of step. Andrew Sawers, journalist

26

Brazil, host of the Earth Summit, has a tradition of anti-pollution protests, as seen here during a 2003 demonstration against the pollution of the Jordao River.

STEVE WAYGOOD CHIEF RESPONSIBLE INVESTMENT OFFICER, AVIVA INVESTORS

We want boards to think about which parts of the available guidance matter to their firm and could affect future cashflows and the sustainability of their institution. It includes issues like the raw materials on which their company depends and the wastes that are created in the way that their product or service is distributed. Where companies are excessively short term in managing these issues, then that can harm company value and, therefore, the value of the pension portfolios we run. This is why we consider its important for companies to have support to think long term from investors and regulators. One appropriate way of doing that is for regulators and investors to ask companies to disclose their long-term strategy, or explain why they have not.

CORLI LE ROUX HEAD OF THE SRI AND SUSTAINABILITY, JOHANNESBURG STOCK EXCHANGE
We launched the Socially Responsible Investment index to crystallise the debate around sustainability and sustainable development, to recognise what companies were doing in this space, and to enable engagement and responsible investment by investors. Over the years that has crystallised into wanting to positively influence issuers and investors in the way that they do business. We have had a significant amount of influence over the issuers and how extensively they take account of sustainability considerations in their operations. We are also seeing that influence being brought to bear on investors, as more of them start thinking about how to incorporate the imperatives of sustainability into their investment decision-making.

RACHEL JACKSON HEAD OF SUSTAINABILITY, ACCA

The investor and finance community should be key actors in the future of corporate reporting. Both investors and the worlds stock exchanges need to engage in, and embrace, the changes ahead in corporate transparency in order to utilise new and material information, in both investment decisions and listing requirements. Investors have an opportunity to shape the development and frequency of integrated reporting, improve general corporate accountability and progress analysis methods to account for deeper ESG [environmental, social, governance] issues. They need to start changing the time horizons on which their decisions and analyses are taken, and both request and use additional material ESG company data.

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28

VISION

Compulsory integrated reporting and an end to quarterly earnings guidance will help achieve sustainable capitalism by 2020, say Al Gore and David Blood
Generation Investment Management recently published Sustainable Capitalism, a white paper that highlights the need for a paradigm shift to a more sustainable capitalism. It makes the economic case for mainstreaming sustainable capitalism by highlighting the fact that sustainability does not represent a trade-off with profit maximisation, but actually fosters superior long-term value creation. In this article, which is based on excerpts from the paper, the firms founders, Al Gore and David Blood, look at integrated reporting and the default practice of issuing quarterly earnings guidance. These themes embody two of the five key actions that the paper presents to accelerate the transition towards sustainable capitalism by 2020. Other key actions include the alignment of pay structures with long-term sustainable performance, the encouragement of long-term investing with loyalty-driven schemes, and the identification/incorporation of risks from stranded assets. The paper defines sustainable capitalism as a framework that seeks to maximise long-term value creation by reforming markets to address real needs, while considering all costs and stakeholders in a world facing such challenges as climate change, water scarcity, poverty, disease, growing income inequality and urbanisation. You can read Sustainable Capitalism, which includes footnotes not shown in this article, at www.generationim.com

ignificant progress has been made towards improving the reporting of sustainability metrics, such as the Carbon Disclosure Project and the Global Reporting Initiative. However, most disclosure is still not conducive to mainstream use by investors, since it typically lacks clear links with the companys financial performance and long-term prospects. Moreover, some companies that can measure non-financial data (many already do so for internal purposes) hesitate to publish any information that goes beyond regulatory requirements for fear it may help their rivals or increase their exposure to lawsuits. This is one of many reasons that new regulation must be enacted to level the playing field. Few fund managers have analysts with the skills needed to perform

29

Former US vice president Al Gore (left) is co-founder and chairman of Generation Investment Management, a partnership focused on a new approach to sustainable investing. He is also chairman of the Climate Reality Project and author of Earth in the Balance, An Inconvenient Truth, The Assault on Reason, and Our Choice: A Plan to Solve the Climate Crisis. He is co-recipient of the 2007 Nobel Peace Prize for informing the world of the dangers posed by climate change. David Blood is co-founder and senior partner of Generation Investment Management. Previously, he spent 18 years at Goldman Sachs, and served as co-CEO and CEO of Goldman Sachs Asset Management from 19992003. He is on the boards of Harvest Power, New Forests, SHINE, Social Finance UK, Social Finance US and the Nature Conservancy.

bottom-up analyses of non-financial metrics. Understandably, most therefore look to third-party rating agencies to analyse company sustainability disclosures and provide ratings for them to interpret. With more than 100 rating agencies providing such advice, there is significant variation in the quality and value of rating systems. We applaud the commitment that some mainstream data companies, such as Bloomberg and Thomson Reuters,

to the integration of sustainability and financial metrics in their annual reports, explicitly showing the link between the two and, in the process, reinforcing the business case for sustainable capitalism. Given that privately held companies have a greater degree of flexibility in reporting, they are in a position to provide leadership in developing integrated reports. Many leading global private equity funds, such as KKR and Doughty Hanson, have already

SIGNIFICANT, WIDESPREAD CHANGE WILL COME ABOUT ONLY WHEN INTEGRATED REPORTING IS MANDATED
have made toward sustainability and support their efforts to increase standardisation and improve quality. However, we believe that the bestrun companies are those that are not only already making the links between sustainability and financial performance internally, but are also sharing those links in their investor communications. Integrated reporting provides the framework to ensure that a company has a sustainable strategy and can improve internal decision-making by exposing itself to the discipline of the market. A handful of companies have already begun to make the switch taken steps to invest in improving the sustainability of their portfolio companies and are reporting on sustainability metrics. Funds could go further and persuade those companies comfortable with reporting the financial benefits of these activities to do so prior to going public. We support efforts by Professor Bob Eccles at the Harvard Business School, the International Integrated Reporting Council, and Aviva Investors, who collectively are pioneering the field of integrated reporting. Yet while these actors are playing a critical role in shaping this nascent idea and encouraging voluntary action by

companies, it is clear that significant, widespread change will come about only when integrated reporting is mandated. Although this policy intervention will vary country by country, securities regulators and stock exchanges are well suited to oversee the requirement for integrated reporting. In South Africa, the Johannesburg Stock Exchange set an exemplary precedent in its 2011 decision to require all listed companies either to produce an integrated report or explain why they were not doing so. Even so, the mandating of integrated reporting is just the first step, as reporting standards around ESG (environmental, social and governance) information and its link to financial metrics will need to be refined continuously. What is critical is that the information provided is material to investors and relevant to the specific sector and company. Cookie-cutter forms that do not take into account variations in what is most relevant from one sector to another are not adequate. Accountants must also work to provide assurance on non-financial information that is comparable to what they provide on financial metrics, and provide integrated assurance on both. We propose that integrated reporting should be mandated for publicly listed companies by the appropriate regulatory agencies and we encourage these companies to take voluntary

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action in the short term to provide integrated reports until such regulation appears. We also encourage investors, including private equity investors, to ask for integrated reports from their portfolio companies and incorporate this in their investment decisions. We also support the growing commitment by privately held companies to produce integrated reports.

Quarterly earnings guidance

Another key action that will accelerate the development of sustainable capitalism by 2020 is ending the default practice of issuing quarterly earnings guidance. In the modern world, we often appear virtually hypnotised by the short term in our politics, our culture, business and well beyond. In business specifically, the vast majority of managers are now clearly choosing short-term profits over sustainable long-term growth. We have long known that an important part of the reason for this distortion is that executives are encouraged by investor behaviour, incentives and business cultures to focus on the businesss short-term earnings. Investors have become increasingly impatient with the CEOs of publicly listed companies who focus on longerterm value creation, and are too quick to penalise stocks for shortterm underperformance even if that occurs in the context of a long-term investment plan.

In many cases, a companys ability to meet quarterly earnings guidance trumps the long-term performance incentives for CEOs and makes it much harder for them to focus investors on the long-term strategy. An empirical investigation conducted by Murad Antia, Christos Pantzalis and Jung Chul Park reveals that shorter CEO decision horizons are in fact associated with more agency costs, lower firm valuation, and higher levels of information risk. Research by John Graham, Campbell Harvey and Shiva Rajgopal shows that 78% of managers will reject a project with a positive NPV (net present value) if it lowers quarterly earnings below consensus expectations. And an astonishing 80% would focus on this recurring, short-term metric at the expense of building long-term shareholder value by making cuts in discretionary spending, including R&D and advertising. This kind of practice is managing for the short term, not managing sustainably. Work by John Asker, Joan FarreMensa and Alexander Ljungqvist reveals that this value-destroying habit is clearly manifested in data showing publicly held companies invest at half the rate of privately held companies when the gains from such investments will not be realised on a quarterly basis. They also show that this applies when an individual company switches between public and private ownership. And they make the obvious point that

Earth Hour: on 31 March, Hanoi in Vietnam (pictured at start of article) and Asuncion in Paraguay (pictured above) were among the places that turned off the illumination of public buildings for an hour as part of a global campaign to draw attention to the need to save energy to reduce global warming gases. it leaves public companies less able to exploit new business opportunities. Not providing quarterly earnings guidance would help some companies alleviate the pressure on managers to meet financial expectations on a quarterly basis, and allow them to focus on building the business for longterm profitability. However, because most public companies provide quarterly earnings guidance, there is a collective action problem for CEOs and boards that wish to end the practice. We applaud the few CEOs who, despite criticism, have decided to end earnings guidance and have talked openly about what investors should expect from the management time horizon. For other companies, quarterly guidance may be appropriate, but the decision to offer it ought to be part of a well-justified strategy and not simply an unthinking response to the prevailing habits of the market. We propose bringing together a significant group of CEOs who have already stopped providing quarterly earnings guidance with others who pledge to stop doing so as a catalyst for change around this practice.

waiting for america to turn on to ifrS

Has the US Securities and Exchange Commission moved any further ahead in its thinking around adopting IFRS, asks Ramona Dzinkowski, as the world still awaits a final decision

32

s of 2011, approximately 120 nations and reporting jurisdictions in total were using International Financial Reporting Standards (IFRS) for domestic listed companies, and approximately 90 countries had fully conformed with IFRS as promulgated by the International Accounting Standards Board (IASB). However, with the goal of the use of IFRS (or standards consistent with IFRS) in all major economies close at hand, several large hold-outs remain the most significant of which is the US. For many, it was thought that the US Securities and Exchange Commission (SEC) would be making an official statement in 2011 regarding if, how and when the US would adopt IFRS. The year marched on and, in December 2011, James Kroeker, SEC chief accountant, announced that any decision on IFRS would take a few more months. For those of us that have been waiting patiently through the SECs deliberations, a few more months may not seem like a long time. However, we must be reminded that US consideration of the adoption of IFRS (IAS) has been ongoing since 2000. Twelve years later we have to ask, has the SEC moved any further ahead in its thinking around adoption? With the majority of the fieldwork completed and one more final comprehensive report to come, the US is now poised to make a final decision about the use of IFRS in America. However there are strings attached. In order to move forward, certain conditions must be met. More specifically, in his remarks at the December 2011 AICPA conference, Kroeker articulated a framework for moving forward, one which for many raised questions as to whether IFRS is a real possibility in America. More specifically, Kroeker wants a framework that: demonstrates a high level of support for US commitment to the continued development and use of global, consistently high-quality

accounting standards; provides, both in fact and in substantive operation, clear US authority over standards applicable in the US capital markets; provides for and facilitates a strong US voice in the process of establishing global accounting standards; is responsive to the economic and other impacts of change; considers whether to retain US GAAP as the basis for US financial reporting, thereby mitigating the costs and complexity of introducing a new set

framework. You need a gameplan that would get the SEC and all domestic US issuers eventually using IFRS. As to the elements of the framework, close watchers of the SECs deliberations are neither surprised nor alarmed. As David Schmid, PwCs US Convergence and IFRS Assurance Leader, explains, the framework Kroeker outlines is not unexpected. The framework tells us that the SEC has come to the opinion that it would

Should the SeC move towardS IFrS, SeleCtIng a target date wIll ConCentrate everybodyS mIndS. ambIguIty juSt prolongS the agony
of standards under regulatory regimes, contractual documents, and US laws under which compliance with US GAAP is often specifically contemplated. The above certainly seems like a tall order, particularly during this election year, when we have to question whether the SEC will have the appetite to make any bold movements one way or another. Do these conditions foreshadow the US opting out of IFRS altogether? be best for US investors and the US capital markets for the US to use a globally consistent set of international standards, he says. Secondly, retaining clear US authority over standards applicable in US capital markets is a legal issue, says Schmid, not necessarily a practical issue. That authority was granted to the SEC by the Securities Exchange Act in the 1930s. It still retains that authority over the accounting standards used in the US. Also, having a strong US voice in the process of establishing global accounting standards is not surprising, adds Schmid. I think thats also consistent with the point of view of the chairperson of the IASB and not inconsistent with how some of the other major users of IFRS operate today. The SEC will want to make sure that they have a mechanism where the US point of view is heard. Thirdly, being able to respond to local economic and market conditions makes sense in certain circumstances. More specifically, says Schmid, there were certainly actions taken by the Financial Accounting Standards Board and the IASB regarding the use of fair value when responding to global capital markets. So I think having a mechanism in the US that provides the flexibility to respond to US-centric or US-only capital

Outright adoption
Paul Cherry, chairman of the Standards Advisory Council of the IASB and former chairman of the Canadian Accounting Standards Board, suggests quite the opposite. In his view, this could be taken as the signal that the US intends to adopt IFRS outright, and sooner than later. With reference to the framework, Cherry says: I think this conveys a significantly different message than what we may have heard several months ago. In fact, I believe that the SEC has shifted its view, which previously was inclined towards a condorsement/endorsement approach, or a gradual convergence of US GAAP and IFRS over time, item by item, to outright adoption. In that light, says Cherry, you have to appreciate the significance of Kroekers comment about needing a

33

market challenges or changes makes a lot of sense. Finally, retaining US GAAP in name, he says, is merely a practical consideration, given the potential cost of removing references to US GAAP that currently exist. Forward to 2012 we await the final comprehensive report of the US regulator summing up its conclusions on a variety of adoption issues and hopefully relaying a final decision around IFRS in America. What are the implications of additional and ongoing delays in an announcement from the SEC? On the one hand, we might hear a collective sigh of relief from those who think the US should pass on IFRS altogether. Smaller companies in particular are glad for the reprieve, claiming that adopting IFRS is a human resources exercise involving extra expense, while others look forward to a date being set so they can begin to allocate the required budget to the project.

Political issue
The potential costs of not adopting IFRS altogether could also be high, as Christian Leuz, Joseph Sondheimer Professor of International Economics, Finance and Accounting at Chicago Booth School of Business, explains. If the US is perceived not to be part of the effort towards one global standard, I can see substantial political ramifications. For one, the US will likely lose the seat at the table. Moreover, I still remember the response of the rest of the world when the US didnt participate in the Kyoto Protocol. So I am worried that there could be spillover effects to other areas of financial regulation for which we need international cooperation. At the same time, he says, should the US back away from IFRS, this would be a loss to the process overall because America has been

back, that was definitely the way to go. As for companies who will go through converting to IFRS, Cowan says theres also a need to get things done quickly and at the outset. If you have system changes, you want to know what they are and do them all together. Arnold Hanish, chief accounting officer at Eli Lilly, echoes these sentiments, commenting on the need for a specific date for adopting IFRS in America. In order for this to be done cost effectively, I believe there needs to be a definitive roadmap, he says. If we are to adopt the convergence projects only, then that is fine; however, if there is a requirement by the SEC to adopt some or all of the IFRS standards, we need direction. For us to modify our accounting, its going to require going into our core systems and changing the configuration of our enterprise systems; we would like to know the direction so we can put together a definitive project plan that can be executed over a 2436 month period.

Decision time
a tremendous force in developing reporting standards that are very high quality and are up to date in terms of how the capital markets have evolved. Alister Cowan, chief financial officer at Calgary-based Husky Energy, offers some advice to US regulators and US companies alike. Should the SEC move towards IFRS, selecting a target date will concentrate everybodys minds on the goal, he says. Ambiguity just prolongs the agony. In commenting on the initial reaction to the Canadian Accounting Standards Board announcement that Canada would be adopting IFRS as of 2011, Cowan says: Initially there was opposition against the wholesale change with a date certain. But looking As to the consequences of further delays in making a decision on the use of IFRS in America, Hanish says: There have been a lot of companies that have started and stopped their IFRS projects. Id like to see the SEC finally make a decision and communicate that decision so that it takes the uncertainty away and so that we in large multinational companies, or any company, at least knows where were headed and when were supposed to get there. The final comprehensive report of the SECs workplan is expected shortlywe think; after which time a final decision regarding the use of IFRS in America will be made. Stay tuned. Ramona Dzinkowski, journalist

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Comment

Good intentions gone to waste?

[
Ramona Dzinkowski looks at the COSOs revised Internal Control-Integrated Framework and nds that in the absence of legislation forcing companies to follow it, there is little appetite for change
the new version doesnt add value, but that the increased complexity and audit centric focus might cause busy executives to simply take a pass, particularly in small companies. This sentiment is not mine alone. Many observers point to the size of the model, and its 17 principles and 81 attributes as being the main deterrent for senior finance executives in smaller firms to even read the document unless required to. Second, while the framework attempts to be clearer, the difficulty in simply understanding and interpreting the comment letters underscores the added complexity. Criticisms range from apparent conceptual flaws in the basic structure of the document, suggesting that it seems to ignore the governance/risk management/ internal control hierarchy altogether, to the governance structure of the COSO itself. International observers are quick to point out that while the framework claims to be globally relevant, it mainly pertains to SOX certifiers; that the understanding of the relationship and roles of the board and management represent a distinctly US governance model; and that the composition of the COSO itself doesnt represent international views. Another failure, beyond the content of the framework, was the issue of due process. The three-month time frame was not sufficient to tackle the expansive tome and the fact that only six companies officially responded to the document bears this out. The COSO hopes to have a final version of the revised framework ready for early 2013. In the meantime, COSO/PwC will be busy at work attempting to untangle the many complex issues identified in the first round of comment letters and likely re-release a second draft for exposure prior to inking a final form. Ramona Dzinkowski is an economist and business journalist In December 2011, the Committee of Sponsoring Organizations of the Treadway Commission (COSO), one of the worlds leading contributors to thought leadership in risk and internal control, released its revised Internal Control-Integrated Framework, in an attempt to improve on its 1992 version. More specifically, it aimed to make the existing framework and related evaluation tools more relevant in the increasingly complex business environment so that organisations worldwide can better design, implement and assess internal control. The initial document and subsequent frameworks related to assessing organisational risks are recommended by regulatory/ industry bodies for US Sarbanes-Oxley (SOX) Act compliance purposes. The public review period for the new 150-plus page document closed on 31 March. The resulting comments, while unanimously applauding its objectives, suggest the document is fraught with problems. My conclusion, after reading the document as well as the majority of comment letters, is that the COSO might have done better by leaving it alone. If the 1992 framework, coupled with the COSOs 2004 Enterprise Risk Management framework, is already solidly engrained in the risk management and reporting environments of most US public companies, and the new version is not mandatory due to regulation, common sense suggests that most companies will maintain the status quo. Not that

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Comment

Integral benets

Focusing on integrated reporting at the Rio+20 summit will benet both companies and investors, says ACCA president Dean Westcott

Twenty years after the United Nations (UN) Conference on Environment and Development, Rio de Janeiro is again hosting a major conference this time on sustainable development. This gathering at the end of June better known as Rio+20 has two key themes: a green economy, sustainable development and poverty eradication; and the institutional framework for sustainable development. ACCA is focusing on one area of the policy which is to be debated at Rio+20 one which is of particular interest to the accountancy profession this is the integration of organisational sustainability reporting requirements into corporate reports. The aim of integrated reporting is to help corporate reports provide a bigger picture of an organisation, providing value to investors, businesses and the public. There is already a great deal of support for reform in the accountancy sector and wider business world, with organisations such as the International Integrated Reporting Council bringing investors and report preparers together, but support from the highest level at Rio+20 would be invaluable in moving integrated reporting forward and ensuring its worldwide spread. We want Rio+20 to lead to a commitment by UN member states to develop frameworks for sustainability reporting at a national level. While a global framework may be more ideal, an international commitment to nation-by-nation reporting might be more realistic. It would allow countries to propose frameworks suitable to their own needs and it would establish, at the very least, an international acceptable level of reporting. Making sustainability an integral part of the information presented to investors and the public would provide companies with an incentive to improve their own performance. By integrating their reporting, we believe companies will also have the opportunity to see themselves in a whole new light: one that allows them to identify areas of efficiency or inefficiency like never before. Integrated reporting can, ACCA believes, also help companies to develop more integrated strategies which can only help improve business performance in the long term. Dean Westcott, ACCA president and interim CFO, West Essex Clinical Commissioning Group, UK

Corporate The view from:

The UAE: Karuna Luthar, country manager, Elara Capital, Dubai
Q Your remit encompasses business development and client relationship management. How does being a qualified finance professional inform your work? A My qualification reassures clients that I have the planning, analysis and commercial skills required to properly appraise potential investments. I can provide perspectives on considerations beyond simply accounting, such as management capacity, operational profitability and long-term strategy. And as country manager for my employer, looking after not just the client side but also office management, staff development and regulatory compliance, Im able to apply the business knowledge I have acquired every day, one way or another. Q How have global and regional events been shaping business and career opportunities in the Middle East? A Its becoming clear that the Gulf will be a key business hub over the coming 10 to 15 years. India and China may be in the spotlight, but the Gulf is increasingly a hub or launchpad for companies expanding their interests in the Middle East, North Africa and East Africa. Q Who do you most admire in business? A For me, Indra Nooyi, chairman and chief executive of PepsiCo, represents a great model, especially for women in business. Q If you were granted a wish to do any another job for a week, what would it be? A Id take on the chief executive role of a global bank and give it a hefty dose of reality. Id bring the focus back round to customers.

37

GROUPON UPS GOVERNANCE

Groupon has strengthened its board and audit committee, after criticisms of its corporate governance. Groupon admitted in March to a material weakness in its financial controls and restated its fourth quarter revenues for last year. The companys share value is now just 40% of that when it first listed last November. Robert Bass, retiring Deloitte vice chairman, joins the board and becomes a member of the companys audit committee. Daniel Henry, CFO of American Express since 2007, also joins the board and audit committee. Henry is a former Ernst & Young partner and executive vice president and CFO of US Consumer, Small Business and Merchant Services. With their deep financial, accounting and operational experience, Dan and Bob will provide invaluable expertise to the board going forward, said Eric Lefkofsky, Groupons chairman.

37 Corporate The view from Karuna Luthar of Elara Capital; capital competition; successful business process outsourcing; interview with Beverly Stewart, CFO of TransCanada Turbines 45 Practice The view from Anjum Ehsan of Grant Thornton; standing out from your peers

CORPORATE LENDING SHRINKS

Corporate lending will continue to shrink and will not recover to pre-crisis levels until 2016, according to Ernst & Youngs ITEM Club Outlook report. The contraction expected in 2012 is more acute than the 6.1% contraction last year and means that the funding squeeze that corporates and SMEs have been experiencing is only set to get worse, said Neil Blake, senior economic adviser to the Ernst & Young ITEM Club. The UK governments three-year 20bn scheme to boost loans to small businesses is unlikely to result in a sharp increase in corporate lending.

FAST FACTS

Educated: Delhi Public School, India Former roles: Consultant, KPMG Advisory; head of corporate customer services, HSBC; managing partner, Paradigm Shift Management Consulting Professional activities: ACCA UAEs Women in Accountancy group; executive committee member for the Dubai Quality Group

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Corporate

Capital competition
There is real competition for capital, but companies can improve their chances of securing the right funding with some simple voluntary disclosures, says PwCs Alison Thomas
In the economic downturn and with the continued strain on the availability of financing, there is real competition for capital in the market. Investment professionals say that companies can improve their chances of securing the right funding at the right price with some simple voluntary disclosures.

Cash
Cashflow information is critical for investors, not simply as a critical input to the valuation of entities but because it allows them to understand

Key issues
Investors tell us that without good disclosure, the cost of funding goes sky high; companies that do not make their cash and debt disclosures clear and accessible risk a struggle to raise capital or borrow funds. Investors have highlighted three key areas from where management can make small changes to disclosures that would have a significant impact on their ability to compete for ever more scarce capital in todays market: cash, net debt reconciliations and debt. So why are these disclosures important to investors, and what might good practice disclosure look like for your entity?

managements ability to service the entitys working capital requirements and debt position, and any risks associated with it. Here are some areas where current reporting can be enhanced: Cashflow statement historical cashflow data is the basis for investors assessment of the adequacy of future cashflows to meet working capital and funding requirements. Yet investors tell us that understanding cashflow reporting is like doing a jigsaw with half the pieces missing and without the box. Investors are not technical accountants. They would like more meaningful descriptions of the adjustments made to derive operating cashflow so that these can be related to items on the balance sheet. They also say they would find it more helpful for the reconciliation of profit or loss to operating cashflow to start at the operating profit line (or pre-tax profit line) rather than at net income. This would simplify the disclosure and remove the need for spurious reconciling items, which may need to be both eliminated and then added back to arrive at a total for operating cashflow.

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Capital expenditure how much of an entitys capital expenditure is required to keep things ticking over? How much is being used to grow the business further? Understanding the split between maintenance and growth capital expenditure is important to an investor. This is partly because it gives an indication of the growth opportunities available to management; but of equal importance in tough economic times, it gives insight into those expenditures over which management has discretion and those that would be harder to postpone. Most entities disclose one number for capital expenditure in the investing section of the cashflow statement (albeit split between tangible and intangible elements). Investors would like disclosure of capital expenditure to be separated into maintenance and growth spend, as investors see working capital as a key funding need. Segmental information segmental cashflow information is highly valued. One analyst told us: It is rare to see good cashflow reporting at segment level. When I see it, I sing Hallelujah. Many investors believe that multisegment entities should use the reportable segment as the unit of analysis for providing cashflow information. Our research shows that, in addition to existing lines, the cashand debt-related lines that investors look for on a segmental basis include debt, operating cashflow, working capital and operating capital employed. Repatriation investors need to see clear disclosure of any restrictions on the repatriation of cash that might impede the ability to meet future financing needs.

assessing whether an entity that seems to have had a significant increase in cash has, for example, achieved this only by taking on a corresponding increase in debt. Without a net debt reconciliation, investors struggle to understand the impact of foreign exchange movements arising on debt, the value of debt acquired or disposed through business combinations, the impact of fair value and fair value hedge adjustments. Net debt reconciliations are not required by financial reporting standards, but investors tell us that entities that provide one really set themselves apart. While there is no standard definition of net debt, it generally includes the entitys borrowings, including finance leases, less cash and cash equivalents. Some entities also include deficits on defined benefit pension plans and an adjustment for operating lease obligations. The inclusion of other debt-like liabilities provides additional insight into entities significant expected future cash outflows. This variation means that it is important for management to explain clearly what it means by net debt and to keep that definition consistent over time. Having an accounting policy for net debt would be very useful.

Debt
In addition to the net debt reconciliation, investors would like to see enhanced disclosures around: Maturity information investors tell us that they need a comprehensive maturity table for all material components of debt, showing both the contractual maturity of each type of debt and when management expects it to be repaid (if different). Rather than reporting using broad buckets (for example, two to five years), investors are looking for detail of the debt repayments that fall due every

year (for a minimum of five years), as well as underlying par values and currencies of debt. Investors find it difficult to reconcile the numbers presented in the maturity schedules to the carrying values in the balance sheet. It would be a significant improvement if management could help them to tie the two sets of data together, showing principal and interest payments separately, and reconciling to the balance sheet (that is, showing adjustments for measurement at fair value, discounting, fair value hedges, swaps etc). Covenant restrictions and terms financial reporting standards require disclosure of any defaults or breaches of loan agreement terms that are not resolved by the period end. Additional detail of the terms and measurement of the principal covenants in place, not only when breached, provides investors with an understanding of the restrictions in place and the entitys compliance. Investors focus not only on whether covenants have been breached, but what those covenants and restrictions are, and the risk that they may be breached in the future. Disclosures on the key covenants for an entitys finances are of much greater value to the investors decision-making process than a statement that there havent been any breaches in the past. Details of average debt balances Another easy win is to disclose average debt balances throughout the year, rather than just the year-end snapshot, to enable users to understand the debt position over the year. Alison Thomas is a corporate reporting specialist at PwC. For more information on the financial reporting areas of most interest to investors and how to improve those disclosures, visit pwc.com/corporatereporting

Net debt reconciliation

An analyst recently told us: Without a good net debt reconciliation, we are flying blind. It is an easy way of

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Corporate

Keeping the love

Entering a business process outsourcing contract is like agreeing to a marriage, says KPMGs Claudio Altini. So it needs ongoing love, care and attention as it matures
The relationship between an outsourced service provider and a client is like a marriage, whether the service provider is a third party or a captive entity. At the start, both parties are flushed with happiness and hopeful their expectations will not just be met, but exceeded. Unfortunately, as the relationship matures, satisfaction levels can drop. In outsourcing relationships, with both parties having typically committed to it lasting between five and seven years, this happens when there is misalignment between services agreed in the contract, services expected by the client, and the services actually delivered. This misalignment is sometimes exacerbated by the role of the marriage arranger represented in outsourcing by the specialist teams from both service provider and client who negotiate contract terms. The negotiators are not necessarily those who will be providing and receiving the outsourced service, thus increasing the risk of misalignment between client expectations and the service agreed in the contract. For example, some services covered by the contract may be neither expected nor delivered, and are thus irrelevant. Other services may be agreed and expected, but not delivered. Service providers can also waste resources delivering services that are neither expected by the client nor agreed in the contract. There is a sweet spot where the services expected by the client are both agreed in the contract and delivered by the service provider. The bigger the sweet spot, the better. However, over a long-term relationship, careful management is required to avoid any creeping waste in service provision or growing misalignment between client expectations and service delivery.

*SUCCESSFUL RELATIONSHIP GOVERNANCE *

* * * * * * * *

It is never too late to establish a leading practice outsourcing governance team: a lack of governance can erode deal value by as much as 15%20%. Realise that effective operations managers usually dont make effective governance executives. Shadow organisations often exist in client organisations, increasing cost: root these out. Outsourcing governance teams should ebb and flow as needs change through transition and steady-state phases: make sure your teams flex accordingly. Learn how to track the value of your outsourcing relationship. Focus on the what and not the how. Make sure your enterprise business intelligence and knowledge management initiatives include all data and information related to outsourced processes, and that its tracked throughout the lifecycle of the relationship. Track internal client satisfaction. Maintaining open dialogue and obtaining regular feedback from internal clients is key to maintaining expectations. Ensure you and your provider have aligned goals, or risk failure to deliver on the intent of the deal. Determine your organisations level of trust toward its provider. Do whatever is necessary to maintain or regain trust to avoid diminishing value.

Based on KPMG firms experience, value leakage in outsourced service relationships is most likely to stem from three core areas: operational, performance and portfolio management challenges.

Avoid duplication
Operational challenges arise, for example, due to the duplication of services provided by both service provider and client. To avoid this, attention needs to be given to redesigning and re-skilling the retained finance function, so that individuals are equipped for their new roles managing the service contract. Performance challenges can arise when problems are not managed or the service providers performance is not at expected levels. This could, for example, result from the high degree of personnel churn currently experienced by many service providers.

Turning to performance management challenges, value leakage can occur when service providers identify opportunities for improvements, but the client is unresponsive or fails to make adjustments. Improvement opportunities are likely to be identified once the service handover is completed and process standardisation achieved. Having analysed the clients data, the service provider may gain new information that could be applied to improve the service but client action will often be required. Existing contracts can be reviewed to identify where client organisations could be driving increased value from their outsourcing relationships. Reviews conducted by KPMG over the last 12 months, using our value assurance framework, reveal some typical areas of conflict between client and service provider. There are, for example, often issues around performance, with the credibility of performance metrics often

VIEW AN ACCA/KPMG OUTSOURCING WEBINAR

www.accaglobal.com/virtual

41

challenged. This may be exacerbated by insufficient pre-contract baselining. Clients moving from a decentralised service delivery model to an outsourced model are unlikely to have the right baseline information available. This makes it difficult to set realistic baseline service levels for the provider, or to hold the provider accountable.

Lack of trust
Problems arise with processes too, with efficiencies sometimes lost through clients failure to focus on end-to-end process optimisation. This can result from a lack of trust in the provider and an unwillingness to hand over certain processes. KPMGs reviews have also found problems in realising the full potential of outsourcing contracts. Some firms complain they are not receiving the

levels of innovation outlined in their contracts; but service providers are dependent on client cooperation to help implement innovative ideas. Other challenges arise in terms of a clients ability to implement change globally. First-level savings can be achieved through labour arbitrage, but achieving additional benefits requires more significant change. Unless these changes are made, service providers contracted to deliver cost savings will take the hit and suffer falling profit margins, with declining service levels certain to follow. Both parties must, therefore, agree in advance how they will work together to deliver additional savings beyond any easy, early wins. Finally, problems with perception often occur. Many CFOs often comment that, from what they have heard, their organisation has a poor relationship

with its service provider. On investigation, however, KPMG firms often find few significant issues; the CFO is simply picking up noise within the system. Day-to-day minor issues do arise, just as they did before the outsourced service contract was put in place. The noise they create is amplified, however, because now an external party can be blamed. Experience suggests that the higher up the organisation you go, the more noise in the system occurs. Such negative perceptions are dangerous and need to be managed. If key stakeholders have poor opinions of the outsourcing relationship, it will ultimately fail and achieving the expected value will prove impossible. Claudio Altini, head of the business process sourcing practice at KPMG, UK

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Corporate

Natural transition
With her many years working in heavy industry in Scotland the oil capital of Europe, Beverly Stewart FCCA was perfectly placed to move to Canada its heartland
When most people think about Scotland, bucolic highlands and quaint country inns are probably higher up the list than the business of overhauling industrial gas turbine engines for the international power generation industry. Not so for those who have come to know and work with Beverly Stewart FCCA, a former Aberdeen resident now living in Alberta, Canada. Stewart is CFO of TransCanada Turbines (TCT), a privately owned joint venture between TransCanada Corporation and Wood Group. With two main subsidiaries in the UK and US and more than US$170m in revenues annually, TCT is the only globally licensed repair and overhaul facility for aero derivative industrial gas turbine engines manufactured by Rolls-Royce and GE, used in the power generation and oil/gas transmission markets around the globe. Hailing from what is known as the oil capital of Europe, the transition to the Canadian oil industry heartland was a natural one, and as the daughter of an oil engineer, Stewart was no stranger to heavy industry, a sector she has worked in for 20 years. As the most senior female executive in the firm and in an industry that has historically been male dominated, Stewart brings a unique perspective to her role as head of the finance function. Perhaps I love this job so much, she says, even though Ive been one of the few women senior executives in this business, because I thrive on diversity, and being mother of two active children makes me highly qualified. Multitasking and being highly organised comes quite naturally. When one of the guys comes into my office with a question, and Im already doing three things at once, I just add one more. Not only is Stewart in charge of the finance function, reporting under International Financial Reporting Standards to the parent company, but she also handles the contract support function, risk management, and purchasing/logistics. Im also responsible for all banking matters including treasury, corporate trade and funding requirements, and as CFO, Im a key member of the senior management team and business, Stewart had to put a lot of effort into foreign exchange management and tax matters. I was able to bring to the table a wide range of experience in managing international tax exposures in jurisdictions ranging from South America, Europe, and the Far East as well as North America, she adds. The role of the CFO has changed since Stewart moved to Canada seven years ago, as there is a greater focus

ALTHOUGH WERE NOT A PUBLIC COMPANY, FINANCE IS MUCH MORE CONSCIOUS OF NOT JUST DOING THINGS RIGHT, BUT MAKING SURE THAT WE CAN PROVE WE DID THINGS RIGHT
participate fully in all strategic discussions, she adds. on documentation and control due to the economic turmoil and accounting scandals. Although were not a public company, financial reporting is still a big part of my job. Since Ive come to Canada, the finance function is much more conscious of not just doing things right, but making sure that we can prove we did things right. And thats caused quite a bit of sensation on all levels in the organisation, she says. You have to paper everything youve done now to make sure people can stand behind the process. So things are much more procedure-driven. I also think the world has become much more keen to litigate, and that involves reams of paper to prove what has happened. Weve also taken a much bigger interest in managing risk, and this goes down to every contract we have.

Welcome to Canada
One of the first challenges Stewart had on joining TCT was to reorganise the finance function into a reliable service provider for the rest of the business. This required a significant change in culture for the entire organisation, to ensure useful information was provided to management and shareholders. Another challenge was to provide guidance on the management of the balance sheet. After a programme of education and training at all levels within the organisation, says Stewart, improvements were achieved and borrowings reduced accordingly. In addition, the international nature of the business necessitated an international banking network to provide adequate support. My job was to successfully negotiate new corporate facilities with HSBC and oversee the smooth transition from the previous providers, Stewart says. Also, given the international nature of the

Refining fire
While Stewart is clearly making a major difference at TCT, one of her greatest achievements relates to when she was in charge of human resources

The CV
Appointed CFO, TransCanada Turbines, Calgary.

2005 2000 1996 1995 1992 1989

Becomes a fellow of ACCA.

Appointed finance manager of Rolls Wood Group (repairs and overhauls).

Obtains the ACCA Qualification.

Appointed trainee accountant of Rolls Wood Group (repairs and overhauls).

Obtains BA (Hons) in business studies from Robert Gordons Institute of Technology, Aberdeen, Scotland.

as well as the finance function at Rolls Wood Group in 2002. One of the biggest challenges I ever had was when one of the biggest facilities burnt to the ground. Luckily no one was hurt, but we lost an entire 35,000 sq ft facility, she says. The hardest thing Ive ever had to do in my career was to be part of the decision to tell the 100 people who worked in that shop that we would have to let them go right before Christmas. The company lost upwards of 35m worth of property and parts in a single

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Corporate

The tips
Q How can accountants move up the career ladder? A One of the things that has made me successful, more than anything, is the fact that Im so nosey. I have to know whats going on in the business, and I dont just speak from a finance point of view. If youre going to rise up through the ranks then you have to want to be involved with all aspects of the business. You cant just look at the numbers. Q What is the best way to become CFO? A If you aspire to be CFO, make sure you thrive on change. Theres no set pattern to any day. It changes by the second. This happens to be something I love, but not all people can work in this environment. Finally, to be a good CFO you have to step outside your comfort zone, to stretch yourself. Its a really busy position, with lots of responsibility. night and Stewart spent two years on the insurance claim working with loss adjusters, forensic accountants and insurance company representatives. Its the kind of learning experience you only want to go through once, she says. The one good thing was that the management team became so close. It was like we were brothers and sisters because we were all in such an awful situation together, and that in itself was very satisfying. But its not the sort of thing you want to do again.

IF YOURE GOING TO RISE UP THROUGH THE RANKS THEN YOU HAVE TO WANT TO BE INVOLVED WITH ALL ASPECTS OF THE BUSINESS. IF YOU ASPIRE TO BE CFO, MAKE SURE YOU THRIVE ON CHANGE
While reminiscing about Scotland, Stewart is reminded about the shock of moving to a different continent. One thing that took me back when I first came to Calgary was how overwhelming the Rocky Mountains were, and how straight the roads are. In Alberta you can drive in a straight line for hours. It was fairly unnerving at first, coming from a country with nothing but windy roads. It made everything seem so much more vast. As for hobbies, Stewart now enjoys watching her children play hockey and going to the Calgary Stampede, an annual rodeo, exhibition and festival held every July, billed as the greatest outdoor show on Earth. We take all our international clients there if theyre in town, and they just love it, she says. Ramona Dzinkowski, journalist

The basics
TransCanada Turbines (TCT) is a privately owned joint venture between TransCanada Corporation and Wood Group. It is a licensed repair and overhaul facility for a range of industrial gas turbine engines. TransCanada Corporation owns and operates 59,000km of pipeline, tapping into virtually all the major gas supply basins in North America. It is one of the largest providers of gas storage and related services with approximately 355 billion cubic feet of storage capacity. It also owns, or has interests in, approximately 10,800MW of power generation. Wood Group is an international energy services company with US$5.5bn in sales annually and employs over 34,000 people worldwide in 50 countries.

Practice The view from:

The UAE: Anjum Ehsan ACCA, Grant Thornton, Dubai
Q How do you typically prioritise your day? A I prefer to arrive at least half an hour before the corporate world opens here, although I usually do the next days diary before leaving in the evening. I head up the staff planning team, which means Im responsible for overall staff scheduling according to technical capabilities and experience, and identifying future staff requirements. So I start with planning meetings. Q How do you think professional services firms will successfully attract and retain staff? A Its tough in the audit profession, especially in such an open and competitive market. As well as development programmes covering technical training and soft skills, my recent experience tells me that mentoring or buddy systems can play an important role in retention. Its sometimes easy for people to get frustrated because of their hectic schedules or long hours; having people within the organisation who can share those experiences helps to reduce any element of dissatisfaction. We believe we have a responsibility for training accountants and business advisers; its vital to maintain a balance between being a successful business and being a training ground for future generations. Q Whats your secret for achieving a desirable work-life balance? A Its hard to find free time, because in practice, every day has a new challenge, although our organisation gives us the flexibility to manage our time, and also arranges family days and off-day sessions, where we socialise and dont discuss business.

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PCAOB WORKS WITH GERMANY

The US Public Company Accounting Oversight Board (PCAOB) and the German Auditor Oversight Commission have agreed to cooperate in the oversight of audit firms operating in the two jurisdictions. This agreement with the German audit regulator is a very significant step forward in our pursuit to improve audit quality and protect investors, said PCAOB chairman James R Doty. We are pleased with our continuing progress in overcoming obstacles to conducting inspections in European Union member states. The arrangement enables the two authorities to conduct joint inspections and for the exchange of information, in line with the DoddFrank Act. It also contains a data protection protocol that complies with German law. More than 900 audit firms currently registered with the PCAOB are located outside the US, spanning 88 jurisdictions, including 36 in Germany.

45 Practice The view from Anjum Ehsan of Grant Thornton; standing out from your peers 37 Corporate The view from Karuna Luthar of Elara Capital; capital competition; successful business process outsourcing; interview with Beverly Stewart, CFO of TransCanada Turbines

DUTCH AUDIT ROTATION

Dutch companies will have to rotate auditors at least once every eight years under new legislation being considered by the countrys parliament. The proposal has the backing of right and left-wing political parties and has been approved by MPs. It will need to be ratified by the Dutch Senate to become law, but this seems likely. The legislation also proposes tighter restrictions on auditors undertaking non-audit work for clients. The European Commission is finalising its own proposals for audit rotation.

FIRM FACTS

Coverage: About 100 staff in the main Dubai practice Typical UAE clients: Multinationals, large family-owned businesses, listed companies and those aspiring to be listed, in healthcare, hospitality, energy, retail, insurance and manufacturing

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Practice

Standing out from your peers

What do managing partners need to do to differentiate themselves in the world of professional services, ask Rob Lees, Derek Klyhn and August Aquila
The answer to this question has been at the top of the agenda of every managing partner (MP) we have worked with in our 20-year association with professional service firms. To answer the question and add to our anecdotal experience, we interviewed 150 practising and managing partners from accounting, law and consulting firms across Europe and the US. Our model of what successful managing partners do describes the behaviours under four broad headings: setting direction, gaining commitment, execution and personal example. Each of the broad headings has a number of specific behaviours under it and, in this short article, well highlight the behaviours from the model we believe are key. The fifth element, context, well return to at the end of the article. engage in every debate about the right course of action. And, these debates must take place. In the truly successful firms, the partners were always involved in the discussions about the firms future. Sometimes the discussions were easy, often they werent, but, critically, at the end of the discussions, the partners walked change argues strongly for the opposite. In lots of initiatives we know, the managing partners have started with only about half of the partners clearly with them but, crucially, they had clear plans about how to raise that figure quickly through their own efforts and those of the influential partners who were supporting the initiative.

IN TOO MANY FIRMS MANAGING PARTNERS FOCUS ON THE PEOPLE WHO DONT WANT TO GO WITH THEM, RATHER THAN THOSE WHO DO
together and focused as a group on delivering the vision (even though individual partners disagreed with some elements of the plans). One of the key behaviours in the engagement process is to keep repeating the message about why and how. As all of the highly regarded managing partners said to us, by the time youre absolutely fed up of hearing yourself saying the same thing, the partners will just about have got it. In nearly every firm we know, the partners prefer to focus their attention on serving their clients and not get involved in any firm-based activities, but when the managing partner is trying to ensure the firm is and remains best in class they must keep the partners focused on the bigger picture.

Help the partners to be effective leaders

As stated earlier, the partners are the people who make the vision a reality and, in our experience, a lot of partners struggle in their role as owners and leaders. So one of the key tasks of any MP (and its what the successful MPs spent lots of time on) is helping their partners be better leaders. That means dedicating a lot of personal time to talking to the partners about their role, how they are doing and how the firm can help them. It is a time-consuming task, but all of the partners we spoke to said that the truly successful MPs knew the importance of the task, gave their time freely, and ensured the partners received the help they needed.

Create a compelling vision and get the partners on board

With so many firms trying to do broadly the same thing and with differentiation in professional services only achieved through delivery, how the vision is delivered is the critical element. And, as the partners are the people who ultimately deliver the vision, they must be brought onside, which means involving them in the debate and decision-making process. No MP should attempt to do everything and this is especially true when it comes to making sure the partners are onside. In every example we heard about, the MPs who succeeded in generating the commitment and participation of their partners started by getting the firms influential partners onside first and using them to influence the other partners. This is especially important in multi-office/multi-country situations, when it is impossible for the MP to attend all of the partner meetings and

Focus on the people who want to go with you

In too many firms managing partners focus on the people who dont want to go with them, rather than those who do. In doing this, they inevitably reduce enthusiasm and momentum. The natural temptation in a partnership is to focus on the whole, but all of the research on creating and sustaining

Never accept second best

Not every firm can be the market leader, but every firm can have a reputation for being outstanding at everything it does. The successful MPs understood this and never settled for second best, always exhorting the partners to find new and better ways of doing things. All of the MPs were trying to create a situation where

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Successful management model

challenge was a natural part of their firms culture but that never meant sacrificing things that were crucial to the firm and what it stood for.

Direction

Take tough people decisions

The need for the managing partner to deal with underperformance came up in every discussion. Underperformance needs to be dealt with in line with the firms values and the individuals given help and support to turn things around. However, if they dont, the successful MPs recognised the negative impact across the firm of not dealing with the issue.

in our experience most people cant. So the challenge for MPs is to develop a number of potential successors capable of addressing the different issues the firm is likely to face in the future then choose the right one. Rob Lees is a founding partner of Mller PSF Group and consultant to professional service firm leaders. He is also co-author of When Professionals Have To Lead. August Aquila is a speaker and consultant to professional services firms. He is also the co-author of Compensation as a Strategic Asset and Client at the Core, and CEO of Aquila Global Advisors. Derek Klyhn is a founding partner of Mller PSF Group. For a full copy of the study Leadership At Its Strongest: What Successful Managing Partners Do, on which this article is based, please contact Derek Klyhn at derek. klyhn@mollerpsfgcambridge.com

Context

Personal Example

Context

Context

Commitment

Execution

Appoint the right person for the circumstances

One of the things that great MPs do is plan their succession, which brings us back to context. While there are undoubtedly some people who can do everything regardless of the challenge,

Source: When Professionals Have To Lead by Thomas Delong, John Gabarro and Robert Lees

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Technical
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Weighing up your options

This month Dr Tony Grundy demonstrates how to get the most out of strategic thinking by creating and evaluating strategic options for the business
The third in this series of five articles examines a crucial phase of the strategy development process: generating and evaluating strategic options (defined as alternative strategies in the first article in this series). This follows on from the more analytical tools explored in the second article, and entails a great deal of strategic thinking.

The strategic option grid

Criteria Strategic attractiveness Financial attractiveness* Implementation difficulty Uncertainty and risk Acceptability (to stakeholders) Attractiveness score: 3=high 2=medium 1=low benefits less costs net cashflows relative to investment Option 1 Option 2 Option 3 Option 4

As many legs as you like

Few systematic models exist for generating strategic options. Igor Ansoff created a very simple but rather limited grid (the Ansoff matrix) which displays existing products versus new products along one axis, and existing versus new markets along the other. To go beyond that I have created a more powerful method that accommodates far more than just two variables or degrees of freedom. I call it an optopus as it has eight variables (although in practice you can have as many or as few variables as you want) ranged around and linked to a central circle that lists the options created by those variables. The eight variables are: value creation: the different ways in which your product adds value for the customer value delivery: the technologies, media and distribution to take the product to market alliance: different partners and different types of alliances, doing different things acquisition: different types and different targets to do different things divestment or outsourcing geography: national, regional, global market sectors customer segments.

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These variables can be refined or added to for example, brand and pricing options could be included. Lets explore the potential of the optopus through the Virgin Galactic. Essentially, the idea behind Galactic was to develop a technology capable of delivering paying passengers into space for a suborbital flight. Travelling at a height of around 50 miles above the Earth these passengers would then see the planet from a distance in all its glory and in a state of weightlessness at a budget price of $200,000. The reusable spacecraft would be so light (and could fold its wings to create extra drag) that it could dispense with a heavy heat shield to prevent it burning up on re-entering the atmosphere. And with a fin to act as a sail, it wouldnt need so much fuel.

I visited Virgin Galactics HQ in 2008, taking with me around 90 strategic business ideas generated from the optopus, including: market sectors: corporates (eg acquisition deal meetings), governments (eg to promote ecological awareness) customer segments: business millionaires (by industry), celebrities/wives (footballers/pop stars, etc), the not-so-rich (by sponsorship or lottery), groups of friends value-creating activities: astronauts club/season ticket holders, as a present (a very big one!), differential pricing (premiums seats/service), two or three flights at once, 50-mile-high club, weddings value delivery: TV channels (eg

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TO GET THE QUESTIONS GO TO

www.accaglobal.com/cpd/strategy

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celebrity knock-out programme in space), alliances, NASA divestment/outsourcing: different aeroplane manufacturers geography: by customer (eg US, Europe, Middle East, Japan, China), by flight anywhere subject to launch sites (world network). On the basis of these ideas, Galactic certainly has potential for being a global business. The so what? arising from this analysis is the sheer richness of opportunities that the technique reveals within the Virgin Galactic context. It appears far more effective than brainstorming.

Discussion of the criteria and scores should not be abstract but as specific as possible. Each criterion is scored for attractiveness: very attractive gains three ticks, moderately attractive two ticks, not very attractive one tick; half-ticks can also be allocated (for example, a high implementation difficulty and uncertainty and risk might muster one tick combined). The strategic option grid can be used for many options including market development, product/services, new technology, sourcing, acquisitions, divestment and alliances. The grid is effective for a number of reasons. Visually it has columns for

whats the one * ask yourself missed? the big thing youve challenge process Count up the number of ticks each option has. Those with a total of 12 to 15 ticks are attractive strategies on the face of it but will still need testing; those with 10 to 11 ticks probably lack cunning; those with eight or nine will need a lot more work; those with five to seven are off the menu unless they can be completely rethought; and those with fewer than five ticks shouldnt be touched with a bargepole. These scores will move up and down quite a lot as you goes through a challenge and build process. Try to make them more cunning, so that shifts of two ticks in the total scores are common. Possible pitfalls of the grid are: strategic attractiveness may be scored without real thought about the environment or Porters forces financial attractiveness may be conceived solely in the context of the short and medium term, and not include long term as well implementation difficulty may be largely subjective, based mainly on the general kind of strategy rather than detailed thinking about enablers and constraints, and particularly how these will change over time; it may also lack much thought about the how uncertainty and risk may be merely a global assessment and lack any granular thinking about specific assumptions stakeholder acceptability may be done without thinking who all the stakeholders are, and how their agendas differ

evaluations look very sensitive

STRATEGIC OPTIONS THAT AMASS FEWER THAN FIVE TICKS ALTOGETHER IN THE GRID SHOULDNT BE TOUCHED WITH A BARGEPOLE
Strategic option grid
Once the optopus has been created, it is time to do the option evaluation with the help of the strategic option grid shown opposite. The grid has the following five key criteria: strategic attractiveness: the external market attractiveness (based on market growth, Porters five forces and perhaps PEST analysis) and the relative competitive position financial attractiveness: the long and short term returns implementation difficulty: the sum of difficulty over time to achieve the strategic goals uncertainty and risk: the volatility of the key assumptions stakeholder acceptability: the extent to which stakeholders look favourably (or not) on an option. four, if not more, strategic options, which will help foster creativity among senior managers. The decision criteria allows managers to think about options in a more objective way. They also reflect the unconscious and informal, decision-making rules that managers actually use especially the criteria of financial attractiveness, and uncertainty and risk. The best way to use the grid is to: explore the available options look at the degrees of freedom consider how a strategic option might be achieved, and the timing options develop a cunning plan for each of the options do the evaluation scores, based on what is behind these criteria check out any facts where

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Technical

CPD
units on the web

cunning plan at * there may be nobe done and how;all, or for what will as a result, many of the scores may end up looking weak simply because of a lack of truly inventive thinking. Most managers and accountants will relapse into mediocre thinking

Make your product easier to buy Just removing the difficulties of buying something can lead to increased sales. Alternatively, making it easier for the customer to buy more (mentally, emotionally and physically) can facilitate sales volume.

Change the rules of the game The rules are not fixed and you can change them. Suppose you were starting an estate agency industry from scratch at the present time. Would you have expensive BMWs for your senior sales agents? Smart cars? Abandon mindsets (at industry, company and personal levels) Forget not only how your industry (and company) does things currently, but also how you yourself do and even think about things. Imagine you just started in the organisation today Forget your own experience, agendas and thought patterns which have been shaped by the organisation. If you were not in the market already, how would you now enter it and with what business model? Advise yourself Here it may pay to conduct a special version of the out-of-body experience, imagining you are your own management consultant. Dr Tony Grundy is an independent consultant and trainer and lectures at Henley Business School in the UK www.tonygrundy.com

SIMPLY AVOIDING THE DESTRUCTION OR DILUTION OF CUSTOMER VALUE CAN GENERATE REAL COMPETITIVE ADVANTAGE
especially where there are low scores it is a lot to ask to be cunning and to evaluate at the same time. An example of what can be done can be found in my book, Be Your Own Strategy Consultant, which contains a list of cunning checklists developed for Dyson. Make your product irresistible Set yourself the mental goal of making your proposition so compelling that it becomes irresistible. Study your competitors Competitive analysis is not particularly done well by many companies; some dont do it at all. But doing competitor analysis is only the first stage in answering the question, how can we do things even better than them? Building barriers to imitation It is not always important to protect against imitation. While in theory each part of a businesss competitive advantage might be imitated, it would be very difficult indeed to copy all the elements of that advantage.

Tips and tricks

If there is a constraint, think why it is there and how it can be avoided Rather than by resorting to simplistic brainstorming, it may help to consider why a constraint exists anyway. Focus on constraints one at a time, always beginning with the most critical Instead of focusing on all constraints simultaneously, pick them out one at a time to challenge and dissolve, beginning with the hardest. If that one is simply too daunting, pick off a number of the easier ones first. You dont always have to add value Most writers on strategy focus on adding value, but simply avoiding the destruction or dilution of customer value can generate real competitive advantage, as Dyson demonstrated when it said goodbye to the bag.

LAST MONTH THE TOOLS OF THE TRADE: SWOT, GAP PEST AND , PORTERS FIVE FORCES

Technical

51

Accounting solutions
In this months column, PwC authors answer technical questions on business combinations and the recognition of goodwill; and on related party disclosures

Entity A acquired entity B some time ago and recognised goodwill on that business combination. The goodwill was then allocated to entity Bs two cash-generating units (CGU Y and CGU Z) based on the synergies that were expected to be derived from the acquisition. During the current year, entity A announced a restructuring plan of its global operations. The restructuring will result in most of CGU Zs assets being transferred into a new division that is separate from entity B. CGU Zs remaining assets do not support the originally allocated goodwill; management is therefore considering impairment. Is managements thinking right? Not necessarily. IAS 36, Impairment of Assets, requires reallocation of purchased goodwill when an entity reorganises its reporting structure, and that reorganisation changes the composition of one or more cashgenerating units. The reallocation should be based on a relative value approach unless management can demonstrate some other method that better reflects the goodwill associated with the reorganised units. The restructuring of the CGU Z appears to be a reasonable trigger for entity As management to consider the reallocation of goodwill. The standard is not prescriptive about how this reallocation should be performed. If entity As management chooses the relative value approach because there is no better method available, it must establish a reasonable method

Q A

for determining relative value. The reallocation might be performed, for example, based on relative value in use or fair value less costs to sell measures or even on the existing carrying values of the two cash-generating units. It is likely that some possibly all of the goodwill in CGU Z should be transferred to the new division.

XYZ Ltd has entered into an arrangement with its finance director in the year ended 31 December 2011. The entity is in the process of relocating its head office and requires the FD to move to another location. It has agreed that it will purchase the FDs residential property from her in the event that she is unable to find a buyer for it before 31 June 2012. XYZ Ltd is preparing its accounts for the year ended 31 December 2011. Is disclosure of this agreement required in the financial statements? IAS 24, Related Party Disclosures, includes members of key management personnel within the definition of related parties. The standard also notes that key management personnel includes all directors of the entity (whether executive or otherwise). So the FD is a related party of XYZ Ltd, and the agreement between the two parties should be disclosed in XYZ Ltds financial statements if it meets the definition of a related-party transaction. IAS 24 was amended for annual periods commencing on or after 1 January 2011. As part of this amendment, a requirement was added for an entity to disclose commitments with related parties, including a commitment to do something if a particular event occurs or does not occur in the future. The arrangement for XYZ Ltd to purchase the property from the FD if she is not able to sell it should therefore be disclosed in the accounts under this requirement, even though the actual purchase of the property has not occurred during the financial year. This months solutions were compiled by Imre Guba, Richard Tattershall and Iain Selfridge of PwCs Accounting Consulting Services

Keep up to date with the latest IFRS developments through PwCs twice-monthly email update. It provides you with a summary of the latest issues and links to further guidance. To subscribe, email corporatereporting@uk.pwc.com requesting subscription to mailshot. Or sign up for the IFRS RSS feed at pwc.com/ifrs

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Technical

Expats and tax liabilities

Foreign companies must be aware of the tax implications of sending employees to work in Chinese afliates, reports Charles Gong
Chinas continuously booming market continues to attract foreign investors to the country to explore potential growth for their businesses. Recent years have seen the evermore common practice of foreign companies sending their employees to their Chinese affiliates to perform functions such as management, supervision and consulting under crossborder arrangements. For a foreign company whose country of origin has signed a double tax agreement (DTA) with China, whether a China Permanent Establishment (PE) is deemed created is crucial in judging whether or not such foreign company has a taxable presence in China. As the Chinese tax authorities have stipulated more comprehensive laws and regulations applicable to crossborder employee assignments and tightened the scrutiny over such arrangements, the related China PE exposure is becoming a growing concern for either the foreign investors or their Chinese subsidiaries. Dual/split employment: if a dual The earns profits * (or split) employment arrangement * fromparent companyby virtue of the subsidiary is adopted, the assigned employee is able to keep his employment relationship with the foreign company under his existing overseas employment contract while at the same time conclude a new employment contract with the Chinese affiliate in line with Chinese laws. Secondment: under a secondment arrangement, the assigned employee can work in the Chinese subsidiary under his existing employment contract with the foreign company. the assignment. In light of the substance over form principle, even under the above assignment arrangements where an employment contract is concluded between an expatriated employee and the Chinese subsidiary, or the employees remuneration is borne by the Chinese subsidiary, once the foreign parent company has control over the employees work in China and undertakes the related risks and responsibilities for the assignment, the foreign parent company is still deemed the real employer of the employee. When certain other conditions are also met (as mentioned later in this article), a China PE is very likely to be constituted by the parent company with regard to the employee assignment. On the other hand, if a foreign parent company assigns an individual to work for its Chinese subsidiary and the subsidiary has the right to control the work of the individual and undertakes the risks and responsibilities for such work, the Chinese subsidiary is regarded as the real employer of the individual. The remuneration paid to the individual is then regarded as compensation reimbursement paid to the subsidiarys own employee, no matter whether the payment is made directly by the subsidiary or indirectly via the parent companys account. Thus, the foreign company is not in this situation deemed to constitute a PE in China in connection with such individual work. Moreover, it is notable that, although the current related Chinese laws and

Key factor
The key factor for determining whether the three arrangements for overseas employee assignment will give rise to the existence of a China PE lies in the judgment over the real employer of the expatriate employee. China has adopted the substance over form principle under an approach consistent with the 2010 OECD Model Tax Convention. If a foreign parent company assigns an individual to its Chinese subsidiary and one of the following conditions is met, the parent company is most likely to be considered the real employer of the individual: The parent company has the right to direct the individuals work and undertakes the relevant risks and responsibilities of the assignment. The parent company decides the number and the grade of the assigned individual. The salary of the individual is borne by the parent company.

Overseas expat arrangements

Under current business practices, there are three main approaches for foreign companies when implementing an overseas assignment arrangement in China, namely: Sole Chinese employment: the overseas expat employee under a sole Chinese employment arrangement is obliged to terminate his existing employment contract with the foreign company and enter into a new employment contract with the Chinese subsidiary subject to Chinese laws.

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regulations only cover PE determination with respect to crossborder assignments of employees between a foreign parent company and its Chinese subsidiary, it is believed that the principles shall also apply to any similar assignment between any foreign company and a Chinese company.

Other factors
If a foreign company is regarded as the real employer of its employee assigned to China, there are two more conditions, as described below, which if either is met, such foreign company is deemed to constitute a PE in China under an overseas expatriation arrangement: The assigned employee provides services wholly or partly through a fixed place of business in China The definition of a fixed place of business when deciding on the existence of a China PE comprises the following three features: I a physical existence, referring to a certain space at the disposal of an enterprise, regardless of whether the enterprise owns or leases the space II relatively fixed, with a certain degree of permanence for example, a representative office, a branch or an office provided by service recipients for the individuals exclusive use III a place at which the business of an enterprise is wholly or partly performed. The assigned employee has stayed within the territory of China for a period or periods aggregating more than 183 days/six months within

any 12 months for the purpose of providing their services. There is a strict calculation of 183 days (or six months under certain DTAs) for the determination of the existence of a China PE. The duration of the crossborder assignees stay in China for providing their services is calculated from the assignees arrival date in China until the date of the completion of their service in China, with days outside China excluded but holidays, weekends, vacations or other off-duty days in China most likely included.

OECD commentary coherence

A China PE of a foreign company related to its crossborder assignment of employees to China may be much more easily exposed than previously. The current interpretations of a China PE are generally based on the OECD commentary, which suggests that a taxpayer is able to invoke the OECD commentary for application to its case where the existing laws and regulations do not specify otherwise.

* *

* * * *

China tax liabilities and the PE

If a China PE is determined to exist due to overseas expatriation arrangements of a foreign company, the relevant income that the foreign company extracts from its Chinese subsidiary due to the expatriation is regarded as the PEs revenue, including but not limited to management service fees and the expatriate individuals remuneration, etc. Corporate income tax (CIT) at 25% shall be levied on the total income attributable to the PE. If the PEs revenue is significantly

low or the attributable income cannot be verified to the tax authoritys satisfaction, the tax authorities may levy CIT on a deemed profit basis, ie the tax authorities would deem a margin based on the PEs costs and expenses according to the following formula: Taxable income = costs and expenses / (1 deemed profit margin) deemed profit margin The above costs and expenses of the PE include the individuals remuneration attributable to the PE and other expenses of the individual such as travel and accommodation, office rent, etc. Pursuant to the relevant Chinese tax laws and regulations, the deemed profit margin shall be determined based on the following criteria: for construction projects, and design and consulting services, the deemed profit margin shall range from 15% to 30% for management services, the deemed profit margin shall range from 30% to 50% for other services or business activities, the deemed profit margin shall not be less than 15% if the competent tax authority is aware of evidence indicating that the actual profit margin of the PE is significantly higher than the above standards, the applicable deemed profit margin can be raised to a higher level. Charles Gong is tax CEO, RSM China Certified Public Accountants, and managing partner, Zhongrui Yuehua Tax Advisory Company Ltd

54

Technical update

A monthly round-up of the latest developments in nancial reporting, audit, tax and law FINANCIAL REPORTING
IASB/FASB UPDATE The International Accounting Standards Board (IASB) and US standard setter the Financial Accounting Standards Board (FASB) have issued a joint update note setting out the progress made on convergence between IFRS and US GAAP . The note primarily provides an update on the projects contained in the Memorandum of Understanding (MoU) between the two parties. The note identifies that most of the short-term projects identified in the MoU have either been completed or are close to completion. One project, income tax, has been determined as being of lower priority than originally assessed and no immediate action is planned. Of the longer-term projects, several are now complete but there are three where technical decisions have yet to be finalised: leases, revenue recognition and financial instruments. The note anticipates that standards for these three projects will be issued by mid-2013. (See feature, pages 3133.) IFRS FOR SMEs For preparers and users of financial statements that apply the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), the IFRS Foundation has provided some new and updated guidance. A revised version of A Guide to the IFRS for SMEs has been produced. The guide is written in nontechnical language and is intended for use by lenders, creditors, owner-managers and other users of IFRS for SME financial statements. Four final questions and answers have also been issued by the SME Implementation Group addressing the following topics: * application of undue cost and effort * circumstances where a jurisdiction requires fallback to full IFRS * fallback to IFRS 9, Financial Instruments * recycling of cumulative exchange differences on disposal of a subsidiary.

OECD
RICH COUNTRY TAXES ON RISE The Organisation for Economic Cooperation and Development (OECD) has released a detailed report on how taxes are paid and structured in its 34 member countries, noting that they rose in 26 countries during 2011. Ireland, Luxembourg, Portugal and Slovakia taxpayers were among those hardest hit, with taxes falling in the US and New Zealand. The report, Taxing Wages, covers personal income taxes, social security contributions, payroll taxes and cash benefits paid to working families. The purpose is to illustrate how these taxes and benefits are calculated in each member country and to examine how they impact on household incomes, said an OECD note. More at http://tiny. cc/2qy4dw

AUDITING
IAASB ANNUAL REPORT The International Auditing and Assurance Standards Board (IAASB) has issued its annual report for 2011 entitled Foundations for the Future. The report highlights the new and enhanced international standards issued by the IAASB as well as implementation support and guidance material. The report also includes details of more than 100 outreach activities undertaken in the year with investor groups whose input is seen as critical to the development of auditing standards. Yvonne Lang, director, Smith & Williamson

previous exemption for such accounts issuers the new exemption has been backdated until then. The Commission has also now formally accepted that the accounting systems of China, Canada and South Korea are IFRS compliant. And it has explicitly given India more time also until December 2014 to bring its accounting systems in line with international norms. US companies will also be allowed to continue using US generally accepted accounting principles (GAAP) for EU filings. The measures mean that foreign companies listed on EU markets will continue to be able to file their financial statements prepared in accordance with those GAAPs, noted the Commission. More at http://tiny.cc/aty4dw TRADING TIME PROPOSAL With the European Parliament starting its debates on the proposed European Union (EU) Markets in Financial Instruments Directive, the MEP coordinating the process has proposed the ultimate accounting rule: financial trades should be valid for at least 500 milliseconds. The aim is to secure some control over fastpaced, high-frequency trading, although some MEPs on the parliaments economic and monetary affairs committee doubt its viability. The committee

EUROPEAN UNION
NON-IFRS FILING EXTENDED The European Commission has extended until December 2014 the right of non-European Union (EU) countries companies and public bodies to issue within the EU accounts that clash with International Financial Reporting Standards (IFRS). Brussels has to be convinced that governments are moving towards using IFRS, and the move follows the expiry on 31 December 2011 of a

55
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should agree amendments in July. E-MONEY THREAT The European Commission is threatening legal action against Belgium, Spain, France, Cyprus, Poland and Portugal over alleged failures to bring their national electronic money regulations in line with European Union (EU) law, notably the e-money directive 2009/110/ EC. The legislation tries to harmonise marketentry conditions amidst a common level of prudential supervision. More at http://tiny.cc/ exy4dw MEPS BLOCK DISCHARGE The European Parliaments budget committee showed its authority over the standard of European Union (EU) accounts by refusing to discharge the 201011 books of the European Medicines Agency, European Environment Agency and the European Food Safety Authority. It also refused to accept the books of the EU Council of Ministers, although there is a technical debate over whether it can supervise

these, given that the council is a co-legislator within the EU, alongside the parliament. More at http:// tiny.cc/h0y4dw ACCOUNTS NEED WORK The European Unions (EU) financial watchdog, the Court of Auditors, has said that the European

Commission should do more to force improvements to national accounting of EU regional development spending. It wants Brussels to give more priority to its auditing of these national structural funds accounts. The court said that the Commission should

release checklists of accounting best practice to member states and ensure financial corrections cover all expenditure impacted by deficient management and controls. More at http://tiny. cc/61y4dw Keith Nuthall, journalist

*DUBAI

DIFC JURISDICTION EXTENDED Law No 16 of 2011 has been passed, extending the jurisdiction of the Dubai International Financial Centre (DIFC) Courts. This allows parties from any jurisdiction to agree to submit their disputes to the DIFC Courts, even if they (or their activities) have no connection to DIFC, which was a requirement under the original law. Thus, the option to appear before a court in Dubai (DIFC) under the common law system and one whose official language is English is now available to

corporates and individuals all over the world. This is a welcome amendment that has been lauded, especially by corporates in the Middle East and North Africa (MENA) region. Furthermore, for small and medium-sized entities, an attractive remedial forum now would be the DIFC

Small Claims Tribunal (SCT), where procedures are simple, swift and costefficient. Claims that can be heard by the SCT include those where the amount of the claim does not exceed AED100,000; where it is an employment dispute involving amounts not exceeding AED200,000; or where the amount of the claim does not exceed AED500,000 and the parties agree to submit it to the SCT for decision. At the DIFC, almost 90% of cases are resolved within three weeks, a track record that has been maintained since 2009. Saad Maniar, managing partner, Crowe Horwath, Dubai

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ACCA Careers gives me the latest and most varied range of job opportunities from all the major organisations and recruitment rms, along with great tips and advice to help me push my career forward. Ian Chadaway, Burgis & Bullock To advertise with ACCA Careers there are 2 options, using our online self-service you can post a job right now at accacareers.com or you can contact our dedicated account management team on +44 (0)20 7902 1210

AgoodMBA writesthescriptfor careerprogression

feltIhadreachedapointinmycareer I whereIneededafurtherchallengeone thatwouldbroadenmyhorizonsandbe beneficialregardlessofwhichroutemycareer took.TheOxfordBrookesglobalMBAhas givenmeabetterunderstandingof,notonly theorganisationinwhichIwork,butofthe worldofbusinessingeneral. 

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59

Long-distance relationship
[
Distance-learning MBAs, increasing in popularity, may provide a exible solution for time-pressed professionals. But what is the reality and do they really measure up against traditional programmes?
Deciding to study for an MBA is a big decision and it can be difficult to juggle work, family and study. For these reasons distance-learning business education is gaining in popularity and turning into something of a success story. For instance, according to the FT s Online MBA 2012 Listing, SBS Swiss Business School offers a global distance MBA and currently has 387 students enrolled, 82 of whom are international, while 72 of the 117 students enrolled at Spains IE Business School on its global executive MBA are from overseas. These days anyone from anywhere can do an MBA without having to physically turn up to a classroom and learn. Yet students who take their MBAs at a distance can find themselves facing a certain amount of snobbery from some employers and full-time counterparts. So what are the advantages and disadvantages of distance or online learning, and do the rewards make up for any perception of inferiority? The first thing to understand is the intrinsic and perpetual value of an MBA. Stacy Blackman, CEO of Stacy Blackman Consulting and MBA blogger, says: An MBA is a clear stamp on a resum that says an individual was top companies are already filled with MBAs who are more than happy to network with and hire fellow alums. Paul Allen, associate director at Coutts & Co, is distance studying for an MBA at Durham Business School. I have always had a deeprooted desire to challenge myself, perform and prove that the environment in your formative years neednt be an inhibitor to your future success. The MBA was another personal challenge and one that I hope will afford me a degree of occupational flexibility. Im a firm believer in giving yourself options, and I feel that an MBA can be an excellent way to demonstrate a broader understanding of business which can ultimately open the door to switches in occupation and industrial sector. While Allen admits that he underestimated the commitment to sustaining his studies while working full time, he has chosen to complete the course in the quickest time possible two years in the knowledge that he could extend his studies by an additional three years should he wish. This flexibility is essential and, coupled with the support and availability of the tutors and access to

screened by the very best, and made it through. Its validation and a helpful tool for recruiters screening numerous resums. Top employers still run heavy recruiting programmes on campus at business schools. Its a big priority for them and for some its really the only way in to the company. Finally, most

60

Careers
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the online learning resources, provided me with the confidence to pursue this method of study, he says. The degree is broken down into core and elective modules followed by a dissertation. Each semester starts with the home delivery of the module notes and learning materials. The business school provides hard copies, CD media and online access to all course notes, which affords maximum flexibility. My preference has always been for the hard copy materials as I can make notes easily and then draft practice papers from these, says Allen. Given the nature of my job I spend a lot of time travelling and so planes and trains have been my primary place of study, with weekends reserved for exercise and assignment work. Modules are made interactive via a portal which facilitates learning. Here, group work can be undertaken where students can work together on a variety of tasks. This is a key feature of the distance-learning medium, as part of the value in undertaking a traditional MBA is in the people that you meet, Allen says. Developing networks and learning from other cultures and professionals from different industries neednt be the preserve of full-time MBAs.

bandwagon. But with the irrefutable advantages in terms of flexibility with both schedule and location, more business schools are signing up to it with some offering blended schemes, a mixture of distance and classroom learning.

On and off
If you are going to invest time and money in an online MBA, you should evaluate it with the same criteria as you would an offline MBA, Blackman advises. You would want to look at the programme reputation and career offerings following graduation, the strength of the alumni network. You should evaluate curriculum, teaching style, strength of faculty. Of course you may decide that the convenience outweighs a lower ranking in some categories, but you absolutely want to

take all of these criteria seriously to ensure a smart choice. I spent a lot of time researching business schools and MBAs, here in the UK, North America and Asia, says Allen. International recognition of the school, degree content and quality were of primary importance to me. The various league tables notably the Wall Street Journal rankings confirmed the international pedigree of Durham Business School above and beyond anything. It also helped having access to international recruiters who spoke very highly of Durham MBA graduates. Allen has a final piece of incentiveled advice. I took the decision to finance my own studies; Im convinced that having skin in the game helps focus the mind! Beth Holmes, journalist

*CASE STUDY

Missing the energy?

But Blackman has reservations. I do not think that online MBAs are as effective, she says. Thats not to say that there is not value there, but being in class, in person, meeting the teacher, the guest speakers and, perhaps most importantly, fellow classmates, is a huge benefit. The energy created by having so many people together in a room is enormous and exciting. This lingering question mark over whether online courses are as good as classroom-based ones has meant that the more prestigious schools may have been slower in jumping on the

Prague-based ACCA member Jan vorc is a manager in a Big Four management consulting department. He embarked on Durham Business Schools global MBA (finance) programme as a distance learner. There are, he says, four key advantages to the programme: good quality and reputation of the school, reasonable fee, flexibility and specialisation in corporate finance. Before enrolling, vorc had studied for the ACCA Qualification, where preparations for exams were held mostly in distance-learning mode, although some classes were also available for the modules. I was pretty comfortable with this way of learning as it brought the results and was suitable for me because of the flexibility, he says. vorc hopes that the MBA will bring two main benefits. Firstly, I think it helps to consolidate and cement my knowledge in various managerial topics, he says. My professional career brought a great deal of pieces of experience and managerial knowledge, but they were unstructured. Secondly, I have learned how to approach business research and build up my reports. To complete a typical module, vorc expects to spend several days actually, nights working on the formative assignment and about two weeks for the final one. If there was an exam in addition, the preparation takes about 10 evenings and a weekend at minimum. It depends on the topic. vorc admits that working full time and studying during the evenings and weekends has taken its toll on his social life. But his hope is that achieving an MBA will propel him to a senior position in financial management at a mid-sized, internationally operating company.

61
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ACCA news

Europe: calm before the storm?

A recent ACCA UK event on the effect of the eurozone crisis highlighted the consequences for a country exiting the eurozone
No matter what assurances are given by politicians, the dark clouds gathering over the eurozone refuse to clear. Last year it was all about Greece. By autumn 2011, the country was teetering on the verge of bankruptcy. It had a 165% government debt-to-GDP ratio, was losing, according to the Tax Justice Network, 27.5% of its annual GDP to tax evaders, and was uncertain as to whether it could continue to pay its pensioners and civil servants. Wary of the economic and political repercussions of a disorderly Greek default, Greeces European partners and the International Monetary Fund agreed in October to bail it out to the tune of 130bn (on top of a previous bailout of 110bn in 2010). The country underwent the biggest government debt restructuring in history with bondholders notching up losses of up to 74% as their existing bonds were converted into new, less valuable loans that paid lower interest rates. Passed off as a credit event, it was a default in all but name. Nevertheless, the markets rallied in the run up to the bailout, in the hope that the worst of the crisis had passed. But, unfortunately, the crisis hasnt passed and uncertainty has increased in the wake of the recent general election in Greece. The eurozone, like the UK, is in recession and the economic forecast for many European nations remains bleak. Overall debt in the eurozone countries is 87.2% of GDP according to the European Union , Statistics Office (the highest level since the euro was created in 1999) and much attention is focused on the socalled PIIGS Portugal, Italy, Ireland, or monetary policy cannot devalue their currencies to stay competitive. For all the speculation about the long-term prospects of the eurozone, the reality is that member states are unlikely to relinquish a single European currency willingly. The euro is the banner policy of the EU, says Miles Saltiel, a senior fellow with UK policy thinktank The Adam Smith Institute, and a speaker at a recent ACCA UK event on the effect of the eurozone crisis on the UK. There is a tremendous amount of political and economic momentum behind it. Monetary union was always intended to be an irreversible commitment; hence, there is no Portentous clouds over provision in the 1992 Treaty of Norway: countries on the European Union (also known as the edge of the eurozone are Maastricht Treaty) for a state to exit watching developments of its own accord or to be expelled with concern by other members. Charles Proctor, a partner with law firm Edwards Greece and Spain. Italys debt is 120% Wildman Palmer and another speaker of GDP while both Ireland and Portugal , at the ACCA UK event, says that the have government debts of 108% of most likely exit scenario for a country GDP But it is Spain, the worlds 12th . would be to walk away from union largest economy, which has emerged with the support of other countries. It as the new danger nation. While its would be political and not legal. So government debt is a relatively modest if Greece, for example, were to leave, 68.5% of GDP its private non-financial , it would have to temporarily close its debt is a terrifying 220% of GDP and banks and create a new currency and a its banking system is on the brink of new conversion rate. Its new currency collapse after financing a real estate would then swiftly depreciate against bubble that has since burst. House the euro. That would make its economy prices have fallen by over 20% since more competitive, but it would be a 2007, the country has slipped back disadvantage in terms of paying back into recession and its unemployment its debts as these would remain eurorate is nearly 25%. denominated. In other words, Greece Sustainability issue might end up in a worse predicament Meanwhile, the sustainability of if it left the euro than if it stayed in it. European monetary union and the Simon Hayes, managing director future of the euro have inevitably been of Barclays Global Research Division, called into question. Countries with believes that the short-term costs of no control over exchange rate policy a eurozone break-up are so enormous

63

DESPITE SPECULATION ABOUT THE EUROZONE, MEMBER STATES ARE UNLIKELY TO RELINQUISH A SINGLE EUROPEAN CURRENCY WILLINGLY
that it wont happen. The two main consequences for a country exiting the eurozone would be currency devaluation and no access to the capital markets for many years. Greek voters dont want to leave the euro, he says, adding that the European Central Bank, which has already dished out 1 trillion in cheap loans to prop up the European banking system and enable the banks to buy government bonds, still has enough firepower to buy government bonds itself if necessary. Saltiel disagrees: I dont think theres enough money in the European banking system to sort out the euros problems. And at the moment, there is no incentive for Asian economies to involve themselves in Europe. As nearly half of UK exports go to the eurozone, the recession there has put the brakes on our own economy. Tom Rogers, a senior macroeconomic adviser with Oxford Economics and a member of the Ernst & Young ITEM club, says the chaos in the financial markets in the second part of 2011 dented the UKs export prospects. The export-led recovery that was expected in 2012 has not materialised and we face fierce competition from other European nations when exporting to emerging markets. By 2016, exports will be over 30bn a year lower than we thought they were going to be last year, says Rogers. Thats a permanent loss in output for the UK economy. He describes 2012 as a lost year for growth and warns that unemployment in the UK will continue to rise as companies cut back on investment due to the decline in exports. It will be at least another year or two before firms put their hands in their pockets and start investing, he warns. He adds that although the UK government is benefiting from lower borrowing costs as a result of the crisis (because it is outside the eurozone and is seen as a safer bet than many European countries), low growth means that the country will be in budget deficit for longer. Its going to take us an extra year to get back to balance.

Backlash blues
If you think the situation looks bad now, it could get even worse. As governments turn to austerity measures to get state finances back on track and meet debtto-GDP targets laid down by the EU, civilians grow discontented and fearful for the future. There have already been riots in Greece, Spain, Portugal and Italy and, in April, 77-year-old Greek pensioner Dimitris Christoulas killed himself near the Greek parliament in protest at the government slashing his pension. There was even turmoil in the triple-A rated Netherlands at the end of April when the Dutch government resigned after it failed to get parliamentary agreement on a plan to bring its deficit in line with EU rules. As a result, it seems unlikely that the future of the euro will be decided around a conference table in Brussels the people themselves will almost certainly have the last word. So are current events in Europe the calm before the storm or a storm in a teacup? Will the euro be gone tomorrow or here for centuries to come? Even the experts admit that they really dont know. When it comes to predicting how long the dark clouds will stick around, your guess is as good as theirs. Sally Percy, journalist

From top: Miles Saltiel, Adam Smith Institute; Charles Proctor, Edwards Wildman Palmer; Simon Hayes, Barclays Global Research Division; Tom Rogers, Ernst & Young, ITEM Club

64

ACCA

CPD: getting into good habits

ACCA has developed several tools and resources to help members plan their CPD effectively, such as ACCA Compass and the Professional Development Matrix
In addition to improving the focus of your career development, setting time aside for planning your CPD can save you money and time. see a surge of CPD activity during the last quarter from ACCA members. This suggests that CPD may be viewed by some as something they have to do, rather than an ongoing process of professional development. CPD is really just a practical expression of professionalism, and something you are likely to be doing on an ongoing basis as part of your working life. Dont forget you can include activities you undertake in the workplace; for example, briefing sessions, learning from experts, and coaching and mentoring. identify your preferred learning style and the knowledge, skills and expertise you may need in either your current role or in roles which you are interested in for the future. It will also help you to produce a personal development plan. There is also ACCAs CPD i-guide, which you can use to coach and support you through CPD.

Plan to succeed
It is no secret that members who take time to identify their development needs in advance of selecting learning activities are more likely to put together a more effective development plan and obtain their CPD easily. Planning your CPD early enables you to think strategically about which learning mediums will be the best fit for different areas of development. Face-to-face may be best for some types of learning, whereas e-learning, research or learning on the job may be more effective for others. It is important to undertake CPD activities that are relevant to your role. Practising members should aim to ensure that an appropriate amount of their development is undertaken in their area of technical specialism. If your career has moved away from accounting and finance, you should undertake learning which is relevant to your new role. Remember that your CPD is about technical and nontechnical areas. You dont need to leave all your CPD to the end of the year. Every year we

What happens next?

Weve talked about how to plan your CPD, but we would also recommend a learning cycle of Plan, Do and Review as best practice. Doing your CPD is about carrying out the right learning opportunities. Once you know what you need to learn or develop, you can browse and select learning opportunities from ACCAs new CPD online section. Its a one-stop shop giving you access to articles, podcasts, online seminars, research and qualifications from our partners all in one place. Reviewing your CPD activity involves thinking about what you have learned, how you will apply the learning, and providing evidence for it. For more on CPD and the learning cycle, visit our new and improved CPD section at www.accaglobal.com/cpd

Resources to help you

ACCA has developed several tools and resource web pages to help you succeed in planning your CPD. ACCA Compass is an interactive tool that allows you to assess your level of experience and skill and compare this to a recommended market average for 20 different job titles. ACCA Compass allows individual members to undertake a competence self-assessment process to encourage a more focused professional development, making it a perfect resource for the beginning of the CPD year. Acting as an electronic coach, the Professional Development Matrix (PDM) is designed to help you

ACCA news
NEW MEMBERS WELCOMED IN LAHORE
Valued Approved Employers and workplace mentors come together for special ACCA Pakistan ceremony
job opportunities, but to work hard, be patient and focus on their longterm success. Arif Masud Mirza, head of ACCA Pakistan, highlighted opportunities for members to access better employment through ACCA networks. Chief guest Tariq Bajwa, finance secretary of the Punjab government, said that the government was supporting ACCA through its Punjab Educational Endowment Fund (PEEF) project. He added that ACCA was helping to increase accountability and transparency in the profession. Branding was a crucial part of the event and there were backdrops with comments from members and employers. Employers commented on their long relationships with ACCA and many said members were preferred employees, as they had strong technical and communication skills from the outset, meaning less investment was needed in training. In addition, exclusive videos with new members and employers were recorded, long-standing workplace mentors were recognised for their services to trainees and new Approved Employers received certificates for providing job opportunities to ACCA affiliates.

65

Fawad Ameen Qazi FCCA (left) receives Kansai Paints Approved Employer cert

Addressing the group: Haroon A Jan, head of ACCA Pakistans Lahore office One-hundred and forty-five people were welcomed into ACCA membership at the much-awaited ACCA Pakistan New Member Ceremony in Lahore on 16 March. The ceremony was attended by around 200 people, including existing members, employers, Approved Learning Partners and the British Council. Employers present included CocaCola Beverages Pakistan Ltd, Kansai Paint Pakistan, Mitchells Fruit Farms Ltd, Nestl Pakistan, Ernst & Young Ford Rhodes Sidat Hyder, KPMG Taseer Hadi & Co, Packages Limited and Descon Engineering. Atif Fayyaz, CFO of Mitchells, encouraged ACCA students not to get frustrated or be concerned about

Mufassar Ghani of Next Pharmaceuticals Products Private Ltd (left), with Fareed Uddin Ahmed (centre) and Kamran Iqbal Yousafi, both of KPMG Taseer Hadi & Co

Khurram Raza Bakhtiyari of Packages Ltd (left) receives his workplace mentor award

Success: the New Member Ceremony was attended by 200 employers, members, Approved Learning Partners and the British Council

66

ACCA news
Crucial role for profession
Vice president Martin Turner addresses UNCTAD
Martin Turner, ACCAs vice president, told the 13th session of the United Nations Conference on Trade and Development (UNCTAD) in April that high-quality accountancy, financial reporting and auditing can play a crucial role in improving economic performance around the world. As part of the conference, held in Doha, Qatar, UNCTADs Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) held an event on 22 April focusing on the role of the accountancy profession. At the ISAR event, Turner emphasised the importance of capacity building in the accountancy profession to ensure that there are the necessary number of qualified accountants to guide economic development in emerging markets at all stages of their economic growth. He also focused on the crucial role of accountants in promoting sustainability, drawing on material from a policy paper The Role of the Accountancy Profession in Economic Development that ACCA prepared to coincide Doha, Qatar with the event. ACCA was pleased to be part of this high-level ministerial event and to have an opportunity to emphasise the Martin Turner crucial role we believe the accountancy profession plays in supporting sustainable economic development, Turner said. UNCTAD-ISAR has been tireless in its efforts to enhance the capacity and ability of the global accountancy profession to help bring nations into the world economy. A key part of its mission is to promote globally sustainable economies, a goal which ACCA wholly endorses. During the event, UNCTAD launched its new Accounting Development Toolkit, comprised of an accounting development framework and a set of accounting development indicators. This is designed to provide guidance to policymakers on the current level of development of a countrys accountancy infrastructure in order to identify gaps, define priorities and help focus national efforts to improve. The Role of the Accountancy Profession in Economic Development is available at www.accaglobal.com/ accountancyrole

Inside ACCA
65 Celebrating membership ACCA Pakistan welcomes new members 64 CPD: planning Get the low-down on ACCA Compass and the Professional Development Matrix 62 Euro crisis Report form a recent ACCA UK debate

INVESTORS VIEWS LOCKED OUT

Investors should be placed at the heart of global financial and accounting standards, say ACCA and Grant Thornton in a new report. However, it warns that investors views on shaping future standards are not being heard. Putting Investors at the Heart of the Financial System is based on a series of roundtables for investors and investor representatives held around the world. It says that the piecemeal, fragmented way in which solutions to global economic uncertainty are proposed and the lack of focus on investors in the reform process prolong global economic fragility, and proposes seven steps

to improve matters. Investors should be the primary focus for global financial and accounting standards, yet their voices are not being clearly heard, said Sue Almond, director of technical at ACCA, adding that the investor community opinion isnt necessarily homogenous, but this doesnt mean all voices should be ignored. Read the full report at www.accaglobal.com/investors Sue Almond

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PRESIDENTIAL ELECTION
TAXING PROPOSALS IN THE US AND ABROAD

AWAITING AMERICAS DECISION PAKISTAN CEREMONY PRACTICE LEADERSHIP EUROZONE CRISIS DEBATE

IFRS ADOPTION