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By Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank

the city

The Financial Reporting Council’s draft proposals to reform going concern and liquidity risk have been roundly criticised by some, but their main thrust is eminently reasonable.

In the post-crisis angst, one of the most awkward questions has been: why were all the banks that needed rescuing by the taxpayer given a clean bill of health in their last annual reports as going concern?

The cry that something must be done was irresistible – cue last year’s masterful report from Lord Sharman. And it did contain some radical suggestions: directors should focus on solvency as well as liquidity; they should think about threats to the company’s existence over the business cycle; and they should be more open with investors about the risks.

While the reform case is compelling, the implementation guidance from the Financial Reporting Council (FRC), was never going to be as elegantly written. Nevertheless, it should have been a simple exercise in putting into practice the principles that most had agreed.

So why has it caused a fuss? Some have declared the proposals will hit business growth, while others have fretted they will hinder UK companies in raising capital because potential investors will not understand the amplified reporting of uncertainties.

My sympathies lie with the FRC on this, although it has again committed the sin of over-prescription. Sharman may have had the radical elements, but there is no proposal for the UK unilaterally to lower the bar for preparing the accounts on the assumption that the business is a going concern rather than on a liquidation basis.

It is more tricky when there are ‘material uncertainties’ about the company’s viability for the ‘forseeable future’. This aims to get directors to think more carefully about the resilience of the business model and capital structure in the context of whatever cycle it is subject to. If they spot anything likely to threaten viability, it should be declared – and presumably accompanied by an ’emphasis of matter’ (EoM) item in the auditor’s report.

This, too, is a high hurdle. We are talking about potential insolvency, not just a profit warning. If it nudges the number of EoM paragraphs from a very low level, so be it.

But the most important reason for not getting hung up on the gone, or nearly gone, end of this debate is that the bulk of the improved disclosure will be in the narrative report. Users of accounts want better risk reporting. This includes prioritising the most serious risks and being much more transparent about how these might crystallise and their potential severity. The proposed stress tests are welcome on this count.

Practice is already improving – and so it should after all the other reforms on stewardship and governance. Take a look at the risk reporting of Premier Foods, a heavily indebted company operating under a lender agreement. The one thing missing from its helpful risk and risk mitigation layout is the specifics of the loan covenants.

So we get to the core of the issue: how does a board demonstrate good stewardship of a company’s assets and liabilities? Not by glossing over uncertainties for fear that investors will flee. On the contrary, honesty is the best policy. This includes being honest about the limitations of both going concern and risk reporting. The guidelines refer to ‘reasonably predictable’ shocks and ‘the inherent ability to predict future events’. As ACCA’s response points out: ‘There will always be events that cannot be foreseen.’

The overreactions to the FRC’s guidelines stems from concern that the regulator is asking too much of directors’ ability to predict. Strip away the unnecessary detail, however, and the main demand is reasonable: show us how you manage the known unknowns. As for the unknown unknowns, despite appearances, it is OK not to predict the unpredictable.

This article first appeared in Accounting and Business, June 2013


Perfect pairing

aksaroya —  23 August 2013 — Leave a comment

By Professor Barry J Cooper, ACCA President

The alliance between a small business and the accountant is good for both – and for the economy.

Barry Cooper-0513

While the role of the CFO in the major listed company or the work of the auditor in a multinational company may be the areas that dominate the headlines, ACCA has never lost sight of the fact that the work thousands of our members do in helping the development of SMEs is hugely significant for the health and growth of all economies around the world.

With 45% of our members having at some point worked for an SME, the finance professional clearly plays a major role in this sector. As a body which has long called on regulators and standard setters to ‘think small first’, we’re now focusing our attention on small businesses themselves to make them aware of the value of the professional accountant.

Our ‘Accountants for small business‘ campaign also aims to raise awareness of how new or young businesses can build professional finance teams and why there is such a need for complete finance professionals who can develop with these businesses. ACCA will also be working to build partnerships with business associations, government agencies and service providers to provide practical resources and support for SMEs looking to invest in internal finance functions.

There is a wider benefit to this campaign that goes beyond ACCA’s desire to ensure that businesses are aware of the skills our members can bring them. The campaign will emphasise the importance and benefits of having more formalised businesses in driving economic development, particularly in emerging markets, where a growth in such businesses will enable governments not only to achieve predictable revenues but also to develop and implement policy more effectively because such businesses have a greater voice and presence.

The accountancy professional is a natural ally in this process.

ACCA wants to play its role fully by ensuring that stakeholders in SMEs, whether they are business owners and management, finance providers, government agencies or employees, have the information they need presented in a way they understand to enable them to take the right action.

I have seen at first-hand the work that our members do for SMEs and I know they can meet the challenges and take the new opportunities that this new campaign will bring.

This article first appeared in Accounting and Business, June 2013.

By Ewald Müller, director, Financial Analysis, QFCRA

Oil and gas-rich Qatar is one of the fastest-growing economies in the world, reporting GDP growth of more than 14% in 2011. Since the turn of the century, though, the country has taken steps to diversify its interests and has established a successful financial services sector in Doha, known as the Qatar Financial Centre (QFC).

Qatar Skyline

The relative newness of Qatar’s financial services industry means that the regulatory system around it has also been created almost from scratch. The Qatar Financial Centre Regulatory Authority (QFCRA) was established in March 2005 and was tasked with building a principles-based regulatory and financial reporting regime that is aligned with best practice internationally.

QFCRA’s objectives include the ‘maintenance of efficiency, transparency, integrity and confidence in the QFC, as well as the maintenance of financial stability and reduction of systematic risk’. Effective risk reporting is an essential element of that objective, but is something that is relatively new to companies based in Qatar. The prevalence of risk reporting has increased across the Middle East in the past few years, but there is a lack of a broad understanding of risk reporting, a lack of skills around risk reporting, and a lack of understanding among users about what risk reports are meant to convey.

In many developed countries, the global financial crisis has been a catalyst for a more focused conversation about the value of risk reporting. One of the difficulties for those hoping to encourage better risk reporting in Qatar, though, was that the impact of the crisis was not felt as keenly in that country.

One of the benefits of starting with a blank piece of paper is that the QFCRA has been able to focus on what it sees as the essentials of good risk reporting: brevity. In Qatar a lot of what we’ve focused on in terms of risk reporting has come from the IMF’s financial stability indicators, which is not a vast set of data. It is a very good starting point, in the sense that it reflects the work of the entire world and focuses only on key indicators.

The biggest issue for me around risk reporting is quality versus quantity. Internationally, I think there’s so much disclosure that often users can’t see the wood for the trees and risk reports do more to confuse them than they do to help them. As far as I’m concerned, the crux of successful risk reporting is that it tells me what is useful – and materiality plays probably the single biggest role in that. Brevity is the key, and that is driven by materiality.

So far companies in Qatar have been “very appreciative” of the work of the QFCRA from a prudential perspective and there is an appetite for better risk reporting. Good risk reporting, which is linked to transparency, is a cornerstone to good governance. If risk reporting becomes a habit, it will create value. The problem is that the flipside is easier to prove – those who do not report risk well probably have something to hide.


Ewald joined the QFC Regulatory Authority in April 2012 from the South African Institute of Chartered Accountants (SAICA) where, as Senior Executive: Standards, he influenced developments in international standard-setting and South African legislation and regulation.  Prior to his position with SAICA, Ewald held senior roles in financial management, regulation, financial analysis and investor relations, primarily in the financial services industry.

By Craig Vickery, head of ACCA Scotland

The current drive towards better environmental accountability by the world’s businesses – through measurement and reporting – comes at a time when the future of corporate reporting is the subject of intense debate, in particular its complexity and increasing disclosure requirements.

ACCA believes that the accounting profession has an important role to play in encouraging sustainability. I was delighted to host a roundtable at Durham University where we were joined by a panel of academics and other interested parties to discuss the future of environmental reporting and the role that the accounting profession should play in encouraging sustainability.


Our discussions revealed a big question mark around the value of the annual report, with recent ACCA research showing that two-thirds of investors place greater value on information they found elsewhere. There is also widespread acknowledgement that the biggest problem around sustainability is that it is not easily measurable. The real cost of an industrial accident is a life, or irreparable damage to the ecosystem – how do you place a value that?

Looking to the future

One of the strongest forces in better environmental reporting is Generation Y, particularly the new graduates entering the workplace. This generation has a strong interest in green issues and has the potential to radically influence sustainability reporting in the future. Companies need to harness this passion and let new ideas flow into the company.

Sustainability must also be embedded into a company’s business strategy – and this will only happen when there is buy-in at board level. This should be driven by a non-executive director with a strong environmental record.

For a more in-depth analysis read our roundtable summary.

By Aidan Clifford, FCCA, advisory services manager, ACCA Ireland 

The accountancy profession is fond of using Lord Justice Tope’s assertion that ‘the auditor is a watchdog not a bloodhound’. Whatever the characteristic of the animal, the European Commission has decided that audit in Europe is not fit for purpose and has set out on a torturous road of taking it to hell.

eu flags

As part of our EU presidency obligations, it now falls to Irish ministers and civil servants to lead the debate with their EU colleagues on the Commissions proposals.

In properly functioning business environments, audit is good for business, good for jobs, and yes, even good for small to medium-sized enterprises. However, we recognise that we don’t live in a perfect world, and that parts of the model could be improved. In this context, the Irish presidency starts with a flawed set of proposals, built on flawed judgement rather than business reality and, because of this, has a real challenge ahead.

Brussels, among a number of other proposals, wants to place restrictions on the provision of additional non-audit services; provide for audit only firms; require audit firm rotation after a fixed period; and encourage more cross border audit firms. Some proposals are more laudable than others, but they are all lacking empirical evidence supporting how much they might contribute to audit quality.

The proposals from the EU would change the role of the auditor from watchdog to something of a watchdog/bloodhound cross, but ACCA argues this in not enough. In many of the high-profile failures of late, there have been marked deficiencies in the operation of the audit committee and directors. Any new proposals would need to task the audit committee with communicating with the auditors on areas of audit risk, attach more responsibility to report directly to shareholders on the performance of the audit, and to assist in the appointment of the auditors. this is something ACCA strongly supports and is something that is happening in well-governed companies already.

ACCA would like to see the directors and audit committees fully trained up and competent to discharge their side of the audit function, with both the legal empowerment to perform the function and legal responsibility for failure to perform. The European Commission is attempting to retrain the dog, when in fact, at least some of the focus should be on retraining the owner.

The article first appeared in Accounting and Business, June 2013