Archives For Corporate governance

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.


Bringing down the barriers to shareholders subjecting company management to frank and public questioning at the annual general meeting will take more than a beefed up auditor’s report, says Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank


‘The first resolution of this AGM will be related to the receipt and consideration of the company’s accounts and the reports of the directors and the auditors.’

So there it is, the number one item at the annual general meeting of a typical quoted company. Cue a well-informed debate between investors who have studied all x hundred pages of the annual report, the directors who produced it and the auditors who scrutinised their work. Dream on.

In the real world the only contentious issue is likely to be directors’ pay. One audit partner told me that in many years of attending annual meetings he was asked only one question: ‘Is the audit partner here?’ The answer was ‘yes’ and that was it. A key point of initiatives to beef up the auditor’s report is that it will provide ‘hooks’ for a dialogue between the company and its shareholders, and even (whisper it softly) between the auditor and the shareholders.

So will it lead to a shareholder spring of protests at AGMs along the lines of those seen over pay? Maybe, eventually, but there are several barriers. Sadly, it is a romantic notion that the AGM is a forum for frank public debate on fundamental issues between a company’s owners and their managing agents. As the Kay Review of UK equity markets pointed out, ownership is very fragmented. More than 40% of the market is attributed to non-UK holders; UK pension funds and insurers hold only about 20%, individuals 11%.

But even for those based in the UK, the diversity of their portfolios and the concentration of AGMs into a March-June season make it physically impossible for most shareholders to attend; hence, the reliance on proxy voting agencies. An awkward question may be asked by an individual, but the risk is high that this tiny stakeholder will be fobbed off. It does help, however, if something specific in the audit committee’s report – and, in future, the auditor’s commentary – can be pointed to.

Another issue is the passage time between the preliminary announcement, the publication of annual report and the AGM. At present the most incisive bout of public questioning comes via the company’s webcast presentations to analysts on the day of the announcement. But two problems remain: the prelims do not have all the notes; and even when the annual report is published at the same time (hats off to HSBC), no one has time to study the information properly before the meeting.

The best opportunities to question management are afforded to big institutional investors, the ones the management wants to see, in one-to-one meetings in the days after the preliminary announcement. They should not get any new price-sensitive information, but such access is highly prized. The FT reported that some asset managers were paying brokers $20,000 an hour to meet CEOs. Better reporting by audit committees and auditors cannot improve the dialogue by itself. More opportunities need to be provided to pose the prompted questions – preferably in public via webcasts, and definitely not in paid-for privacy.

This process should start after publication of the annual report and run for some weeks, taking in the AGM. Questions could be emailed in advance to the audit committee chairman and the audit partner – some could be dealt with via a dynamic frequently asked questions page. The meeting itself should be asked to approve – not just receive – the financial and audit reports. Anything that aids a considered approach to a company’s accounts and prompts auditor independence should benefit the company, its long-term shareholders and market efficiency. That would be green shoots indeed.

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

Fairytales vs fundamentals

aksaroya —  8 February 2013 — 1 Comment

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

Out on the cutting edge of the technology sector, the grand corporate ambitions and the eye-popping financial performance are not always built on a foundation of solid accounting stone.

 circuit board


The eyebrow-raising allegations of accounting improprieties levelled at Autonomy by its acquirer, Hewlett-Packard, had me reaching for my ‘spot the dog’ checklist. This refers not so much to signs of financial distress – it’s too late by then – as to the big gap between valuation and reality which sets a company up for a fall.

The trouble starts with good news. Too much of it puts management under pressure. Autonomy, the software founder whose co-founder was chief executive at the time of HP’s $11bn purchase, was a poster child for innovative technology and rapid growth. In early 2003, when the market bottomed after the dotcom bubble, its shares were trading at around £1.20. In late 2011 HP paid £25.50 per share in cash. Between 2006 and 2008, Autonomy’s sales (measured in dollars) had doubled to about $500m and its operating profit margin soared from 27% to 41%. More of the same was clearly expected: its p/e ration at the end of 2008 was about 50.

Fast forward to Autonomy’s 2010 annual report – the last before the takeover. The first thing to note is that it was still a relatively small company with sales of $870m. The second is its astonishingly high operating margin of 45%. Revenue growth had, however, slowed to 18% – and to 16% in the first half of 2011.

As with other software companies, some revenues come from customer support contracts entailing payments in advance. This raises the questions of whether certain sales have been recognised early and also flatters the cash position. The issue of ‘deferred revenue’ is set out in the annual report, audited by Deloitte, via both explanations and line items.

Critics have made much of the accounting for sales through intermediary companies, or resellers. The accounting policy section has a note on the evidence needed to recognise such a sale. It is clear that judgement is involved and collection may be complicated. As for profits, the word ‘adjusted’ should always attract questions. Autonomy is not unusual in excluding amortisation and restructuring costs. However, by the time it has counted out interest on convertible loan notes, the gap  between IFRS pretax profits and its adjusted ones of $379m is nearly $100m. This is racy, but agin the company’s approach is clear.

The most puzzling thing is the issue of the those loan notes in March 2010, raising about $760m. The main aim was a war-chest for acquisitions. But the company had net cash and appeared profitable enough to support net debt of several hundred million dollars. So why raise it at all?

Also, Autonomy’s main source of growth was supposed to be organic. As it happens it had made significant purchases every other year since 2005, leading to nearly $1.4bn of goodwill on its balance sheet. Once again the reality did not match the spin, but this was not difficult to detect.

The same can be said of Autonomy’s corporate governance. Apparently, it was classic  chief executive and FD balanced by five non-executives. But one of the latter was co-founder Richard Gaunt (not claimed as an independent) and another had been around since 1998 and should not have been regarded as independent. That left three relative newcomers to challenge the incumbents if necessary.

Maybe the investigations prompted by HPs $8.8bn write down of the acquisition price will turn up something. It did, however, pay a premium of over 70% to a price already inflated by unrealistic expectations of sales growth, apparently naive acceptance of ‘adjusted’ profit margins, and oblivious to cashflow and balance sheet issues. The technology sector is littered with such dogs and it is not difficult to spot them.  

This post first appeared in Accounting and Business UK, January 2013.

By Paul Moxey, head of corporate governance and risk management

It’s now 20 years since the Cadbury Code was introduced. This is the code adopted by the Listing Authority and the London Stock Exchange to restore trust in the City and in financial reporting and ensure that scandals such as BCCI, Polly Peck and Maxwell could not happen again. It set out 19 best practice principles for corporate governance – few people had heard of the term then. Its provisions, in fewer than 600 words, covered the role and structure of the board, audit and reporting on the company’s position including going concern, board remuneration and internal control.

The Code has grown through the years as it went through several iterations. It is now administered by the FRC and called the UK Corporate Governance Code and its principles and provisions take up around 5,500 words, roughly ten times as many as the original code.

Has the Code done a good job? Most experts think it has. The UK has seen few corporate scandals in the last 20 years and many would say that is thanks to the code and they are probably right. But has governance helped create value? We have had the financial crisis and, for savers and investors, little growth in share prices for the last 10 years.

We have however seen the growth of an industry of governance specialists and advisors and we have seen the failure of several banks and, as a society, we bear the scars. ACCA says that the bank failures were governance failures. Others see things differently and in December 2010 the FSA concluded its first inquiry into the failure of RBS saying it did not find evidence of governance failure on the part of the board. This surprised many people. If a company fails surely that points to governance failure unless the reason for it was clearly not to do with the board. It is hard to think of how the failure of RBS was not to with the board unless we consider they were just victims of circumstances.

Is a board responsible for what goes on or a victim of it? Let’s consider Barclay’s role in fixing LIBOR? The Treasury Committee, in its inquiry this summer, heard that the FSA, in a recent review, had considered Barclay’s governance to be satisfactory. The official conducting the review was reported to have said Barclay’s governance was ‘best in class’. During the same period, others at the FSA were concerned about the culture of Barclay’s at the top. Lord Turner, the FSA Chairman, wrote to the then Barclay’s Chairman about what the FSA saw as behaviour at ‘the aggressive end of interpretation of the relevant rules and regulations’ and about the bank’s ‘tendency to seek advantage from complex structures or favourable regulatory interpretations’. Lawyers call this creative compliance and it sounds a little like Enron.

It illustrates the main problem today with both governance and regulation – there is more to compliance than compliance. The focus with both governance and regulation has been on compliance with provisions -in the case of governance, with the Code’s provisions, where the banks and other companies of course fully comply with the letter. It is much harder to tell if companies follow the spirit of the Code and it seems that essentially no one has been looking at how companies do this. The culture at the top of an organisation and the tone set by the board are crucial to whether or not there is good governance but it is very hard for outsiders to judge. Very few company governance reports convey a real sense of this although there is usually plenty of well-crafted text to tell us everything is just fine.

The FSA is changing its approach to regulation to one where supervisors are allowed to exercise judgement. This will make it easier for them to decide when the spirit of a code or regulation is being followed. It may be harder to get a board to respond appropriately. The Treasury Select Committee Chair interpreted Lord Turner’s letter to Barclay’s as a reading of the Riot Act. The Committee report however makes it clear that neither the CEO nor the Chair of Barclays seemed to get the message although Barclay’s board minutes recorded the seriousness of the matter as it recorded ‘Resolving this was critical to the future of the Group’. The Committee report says that judgement-led regulation will ‘require the regulator to be resolutely clear about its concerns to senior figures in systematically important firms’.

A judgement approach is needed for how everyone else looks at governance for companies – investors and their advisors, the media and regulators – and us. As we hear more and more stories about the tone at the top of organisations such as News Corp and the BBC, and about the minimal amounts of UK tax paid by UK household names such as Amazon and Starbucks, it behoves us all to look more closely at large organisations and how they are governed -not just whether they comply with the rules. We should be asking more questions of our leading corporations and holding them to account.

By Paul Cooper, Corporate Reporting Manager, ACCA

The IFRS Foundation’s review of its governance gives insight into how the IASB (International Accounting Standards Board) structures itself as an organisation.

The Foundation’s ‘Drafting Review’ proposes to formalise within its constitution a change which it has already made. The roles of the IASB Chair (principally responsible for standard-setting) and oversight (executive) functions are now held by different people. This is because the latter role might be seen to conflict with the functions of the Chair, such as with fund-raising.

Comments for the ‘Drafting Review’ were requested by 23 October 2012.

An executive director has already been appointed, so the Foundation wishes to change its constitution accordingly as soon as possible. The executive director has a staff role in the Foundation, and is not a member of the IASB.

The change was in fact a recommendation of an earlier review of the Foundation’s governance. ACCA’s response to the review in March 2011, supported the recommendation, but questioned the appropriateness of the title of the role, which at the time was to be chief executive officer.  The executive role reports to the IASB chair, so arguably the term ‘CEO’ is not entirely suitable.

ACCA’s response to the current consultation reiterates our support for the separation of the chair and executive functions, and support the title of executive director (rather than CEO) for the latter role.

The IASB also has a vice-chair now, part of whose role under the constitution is to represent the chair externally. The earlier governance review identified the matter of travel demands on the time of the IASB chair. As a solution, ACCA supported the appointment of a vice-chair.

The IASB positions referred to in this blogpost are currently held by the following people:

Chair – Hans Hoogervorst

Vice-Chair – Ian Mackintosh

Executive Director – Yael Almog