Off the hook

aksaroya —  17 May 2013 — Leave a comment

Peter Williams, accountant and journalist, explores the contrast between the impassioned scapegoating of the ratings agencies during the onset of the financial crisis with the meek acceptance of the recent UK sovereign downgrade.

credit-rating

Credit-rating agencies have proven remarkably capable of withstanding the opprobrium of politicians. At the start of the financial crisis, politicians pilloried the agencies, and warned of dire consequences for their part in the crisis. But the tough talk has barely touched the work and the output of the rating agencies.

Perhaps inevitably, the discomfort of a UK sovereign downgrade from its coveted AAA status by the rating agencies has been seen partly through the prism of the political damage inflicted on UK chancellor George Osborne. But he is not alone: the UK has merely followed in the footsteps of the US and France in 2011 and 2012. A few weeks before Moody’s delivered its ratings verdict on the UK economy – and some would say on the chancellor’s stewardship – European politicians delivered theirs on how rating agencies should act in future. Those judgements could hardly have been more different.

The new EU rating agency rules amount to little more than an invitation to carry on as before. The final package aims to reduce the over reliance on ratings and make it easier to sue the agencies if they are judged to have made errors when, for example, ranking the creditworthiness of debt. In particular, the agencies will have to be more transparent when they are rating sovereigns, respect timing rules on sovereign ratings and justify the timing of publication of unsolicited ratings of sovereign debt. The politicians’ stance softened markedly during negotiations with the agencies. The proposal for a state-funded agency was quietly shelved. It is a far cry from the blood and thunder that politicians were threatening back when the financial crisis was still raw and unfolding. The mood then was summed up by US politician Henry Waxman, who declared: ‘The story of the credit-rating agency is a story of colossal failure.’ The agencies’ failure to spot the problem with securities had broken the bond of trust and put the entire global financial system at risk. They were told to expect a radical overhaul, perhaps an entirely new system. The House of Lords report into the agencies in July 2011 was tellingly entitled Sovereign Credit Ratings:shooting the messenger?

Shooting the Messenger?

The four-month inquiry criticised the agencies’ role in the 2008 banking collapse but concluded its EU sovereign downgrades ‘merely reflected the seriousness of the problems in some member states’. The politicians’ overall view on the agencies? They should learn from their past failure to spot emerging risks. Well, yes. A little later, at the height of the Eurozone crisis in August 2011, one leading politician agreed with the Lords’ stance: ‘Credit-rating agencies, however imperfect, are trying to give market investors some idea of the creditworthiness of economies and businesses. They did not cause this.’ Such a view is perfectly reflected in the light-touch ratings agency regulatory regime now swinging into operation. The politician who struck the conciliatory note of reality? Yes, you guessed it: he of the recent credit downgrade, UK chancellor George Osborne.

This article first appeared in Accounting and Business magazine, UK edition, April 2013

In Economy, Uncategorized
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Why balanced finance capability matters in finance today

accapr —  15 May 2013 — Leave a comment

research-insights92

By Jamie Lyon, head of corporate sector, ACCA

Reading a lot of the commentary on finance and the role of today’s CFO you’d be forgiven for thinking that today’s finance function spends all of its time on strategy formulation and execution. I don’t doubt for one second how important the role of finance as a strategic business partner to the organisation is, or the critical role progressive CFOs increasingly play in strategic support to the organisation. But it is also worth remembering the role the finance organisation plays in what I would call the fundamentals – cost management, cash-flow management, finance operations and so on. There are of course differences and changes in priorities – the strategy of the business, the prevailing state of the economy, its industry sector – are naturally factors which shape and influence the focus of finance leaders and the function at any given time. But it seems irrational to think that great finance functions are still not held to account on the strength of control and financial management of the organisation. This indeed is at the core of its fiduciary responsibilities. It’s also critical to get this right if you truly aspire to supporting the strategic agenda of the business – these multiple aims of the finance organisation are not mutually exclusive. Having this bedrock of broad finance capability is also, of course, particularly relevant in a period of on-going volatility and growth challenges.

We recently produced a report examining the future needs of the finance function, and the implications for developing the capabilities needed. The report, the complete finance professional, draws on a wide range of studies, including ACCA research specifically with CFOs and other finance leaders, to test these ideas out. The conclusions were very simple. Great finance functions needs to be able to draw on a wide range of finance capabilities. They can’t survive on staffing their functions with people schooled on a narrow version of management accounting, and this isn’t particularly healthy for developing the capabilities needed in future finance leaders either. Let’s consider the roles some finance professionals perform to illustrate the point – can financial analysts drive truly effective decision-making if they don’t have a broader understanding of risk; can internal auditors perform their roles effectively without a strong grounding across financial and management accounting disciplines; can accountants with investment appraisal responsibilities get by with no awareness of tax, or regulatory changes which may have implications on project benefits…and so on. I don’t quite think so.

Secondly, with public debt, currency instability, emerging market growth, commodity price rises and many other signs of significant volatility, finance leaders themselves are in a huge period of flux, change and uncertainty; we know the role of CFOs continues to evolve but it’s the shear breadth of skills and knowledge that is now called into play; also given the level of volatility in the global economy we see a real call out to balance the quest for growth with the need for control – this ‘balanced finance leadership’ really is as a hallmark of the top finance job right now. The report also comes to other simple conclusions – a recognition that the changing face of finance operations with the advent of shared services, outsourcing, centres of excellence and the retained organisation demands both excellence in traditional finance capabilities (e.g. process mastery, transparency in controls, specialised finance expertise) as well as new capabilities (transformation, project management, dealing with change, customer centricity and so on); and that strong finance functions earn the partnering mandate best by ensuring effective finance stewardship of the organisation as a strong foundation; in short you can’t neglect one for the other, it doesn’t quite work like that.

At ACCA we continue to advocate the need for breadth and depth of financial understanding in finance functions today.

In ACCA, CFO, Finance Transformation, Jamie Lyon , ,
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The future is integrated

aksaroya —  13 May 2013 — Leave a comment

Liz Hughes, head of ACCA Ireland, on the value of a new approach to financial reporting

integrated

The term “integrated reporting” may not yet be a part of your current accountancy vocabulary but the likelihood is that it will become a standard feature of reporting practices in the near future. Its move to prominence is being driven by three related developments.

Firstly, increased recognition that the traditional use of the financial statement as the sole measure of a company’s health and wellbeing can no longer go unquestioned. Secondly, the widespread introduction into entities’ reporting practices of a number of specialist reports, for example, reports on corporate governance policies and practices. Finally, and more generally, the steady increase in company disclosure requirements, which has led to corporate annual reports becoming extremely lengthy documents, sometimes running to hundreds of pages. This trend, while understandable, is contrary to the goal of achieving transparency in reporting practices.

There is now a developing body of opinion that we need to promote a new approach to corporate reporting, one that brings together all the material factors impacting on an entity’s standing and performance, and communicates them in a coherent ‘integrated’ way. Crucially, it is argued that an entity needs to weave these different strands of information into a coherent narrative that is driven an explanation of its strategy, i.e. plans it has to achieve its business objectives. The essence of this new concept then, is not to add to the proliferation of reported information but to identify the factors that are most material to a full explanation of what a reporting company is trying to achieve, and to make sure that a full and rounded explanation is conveyed.

The concept is now being taken forward by the International Integrated Reporting Council (IIRC), a new body based in London that is enjoying widespread support from business, the profession and regulators. IIRC is currently developing a framework to guide companies in how they should go about producing integrated reports, through a consultation paper on this framework. Depending on the feedback received, a final version will follow by the end of 2013. More information can be obtained at www.theiirc.org

This article first appeared in Accounting and Business, Ireland edition, April 2013

In IIRC, Uncategorized
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All change at the top

aksaroya —  10 May 2013 — Leave a comment

As a new CFO takes the helm at TCS, Cesar Bacani, editor-in-chief of CFO Innovation Asia, looks back at how the finance function has transformed and considers the wisdom that outgoing chiefs can pass on to younger colleagues.

IT Consultancy

Before I interviewed S Mahalingam, until recently the CFO of global IT services and business process outsourcing giant Tata Consultancy Services (TCS), I thought he had been in finance for 42 years. He set me straight. Although a chartered accountant, Maha, as he is known, had been in almost all functions except finance in 33 of his 42 years with the Tata Group.

‘I used to write [software] programmes, develop systems, do marketing,’ he said ‘I opened the international offices in the UK and the US. Basically, I have done almost all of the functions – I looked after project delivery management, I looked after HR and training.’

It was a career path that he feels made him a much better CFO when he finally headed finance. ‘I would rate that as the biggest part of it,’ said Maha.

‘Had I been a backroom person [in traditional finance], I think I would not have been able to counsel anyone. I would have reacted to decisions, rather than being a part of [decision-making].’

Not that he had no qualms about switching over to finance; things had changed so much since he qualified. ‘I don’t think anyone was called a chief financial officer,’ he recalled, ‘The finance manager and CFO as a distinct role really came in the 1980s and 1990s.’

‘I was a little worried as to whether I would have the capability to do the accounting,’ he added. And then I realised that the function has moved on far beyond that’ — something that’s not news for more and more of his peers today.

Standards and processes have become more structured and there are things like automation, straight-through processing, outsourcing and shared service centres — all of which Maha harnessed to free finance to focus more on value-added work. For, as the CFO found out, finance’s remit has expanded in all directions.

`You have to really work with the chief executive, to give the relevant drivers for running the business and making sure that you are not only helping in the planning process but also in measuring [performance],’ he said.

Not that the core of finance has been neglected at TCS.

‘Accounting is an expertise function,’ Maha explained, ‘My challenge in the last 10 years has been to create this expertise, in the same way that a specialist structure was also created around global taxation’ (TCS has 58 offices around the world).

I interviewed Maha after he was honoured as CFO Innovation Asia’s CFO of the Year in 2012. He retired on his 65th birthday in February but years before he had already started grooming a successor in Rajesh Gopinathan. An engineer with an MBA degree, Gopinathan was on the business side when Maha brought him over to finance.

`He is not a chartered accountant,’ said the new CFO’s mentor.

The way things are going, though, it seems that even a non-accountant can take the financial reins — provided that he or she is backed by the expertise of accountants, tax experts, treasurers and other specialists.

This article first appeared in Accounting and Business, China edition, April 2013

In ACCA, CFO, Finance Transformation
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When persuasion is not enough

aksaroya —  8 May 2013 — Leave a comment

The contentious issue of how to ensure enough women are appointed to boards of companies is dividing opinion, with some insisting that mandatory quotas are the only way to effect real change, says Errol Oh

diversity

It has been almost two years since the Malaysian Government set the target of having at least 30 per cent women at the decision-making level in the corporate sector by 2016. This is part of the country’s Economic Transformation Programme (ETP). Leveraging women’s talent to raise productivity is a policy measure under human capital development, one of the ETP’s six Strategic Reform Initiatives.

`The decision-making level in the corporate sector’, although not officially defined, is widely understood to mean directors, CEOs and other C-suite positions, particularly those of large corporations and the influential government-linked investment companies.

Most people agree the immediate and more realistic goal is to raise the proportion of women directors of listed companies to 30 per cent. However, the pursuit of this target is not driven by a mandate; the Government prefers to rely on persuasion instead of legislation. It is perhaps time to reconsider this. Malaysia is not alone in rejecting the use of compulsory quotas as a way to get more women into boardrooms.

For example, in the United States, there has been no serious discussion on the subject, although board diversity is a hot topic there, as it is elsewhere in the world. Nevertheless, countries such as Norway, France, Spain, Italy and Belgium have made it a must for their listed companies to have certain ratios of women directors.

Last November, the European Commission proposed that by 2020, 40 per cent of the non-executives on the boards of companies listed on member states’ stock exchanges are to be women. The imposition of quotas for women directors is open to debate. The worry is that they will lead to tokenism – women will be made directors more to satisfy the quotas than because they are qualified and can add value. This may undermine the argument that companies with more women directors tend to perform better. Some who oppose the idea regard quotas as patronising to women.

One of them is Mai-Lill Ibsen, who once had almost 200 boardroom seats in Norwegian companies. In an interview with The Guardian in January, she said: ‘I’ve never seen the glass ceiling, I’m against quotas, they are discriminatory in a way. I feel we [women] are so strong we don’t need that.’

On the other side of the divide are those who have a similar view as that of Viviane Reding, the EU Commissioner for Justice, Fundamental Rights and Citizenship. More than once, she has said she is not a fan of quotas but likes what they do. That is an important point.

Mandatory quotas for women directors force decision makers – in Malaysia, these are almost always men – to include women as candidates. This is likely to make a difference, especially in the selection of independent directors. Often, boards of directors are seen as thinly veiled old boys’ clubs, where even independent directors are associates of the controlling shareholders.

It is not the best setting for good stewardship that protects minority shareholders’ interests. However, there is little incentive for change if the ratio requirement is voluntary. Having women directors will not automatically improve a company’s governance, but if male dominance is no longer acceptable in just about every sphere of life, why should it persist in the corporate boardroom?

Errol Oh is executive editor of The Star

This article first appeared in Accounting and Business, China edition, April 2013

In ACCA, Women in Business ,
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