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Tuesday, 3 June 2014 01:37 - - {{hitsCtrl.values.hits}}
Based on the topic of ‘Financial Reporting for Economic Development in Asia,’ the three day event was held under the title ‘South Asia Edition 2014: The Financial Reporting Supply Chain’.
The conference convened regulators, policymakers, business leaders, academics and professionals from across Asia to discuss with international experts the state of the financial reporting supply chain in the region and its relevance to private and public sector developments.
The financial reporting supply chain is a concept that recognises the large numbers of diverse stakeholders with legitimate interest in financial reporting standard and practices. From the standard setters through the preparers of financial reports, to the executives making decisions based on them, from the audit committees to the diverse end users who reply on audited financial reports to make informed decisions, the supply chain affects small businesses just as it affects large corporations, and individual investors, fund managers, credit agencies and government policy makers. The conference presented a rare opportunity to consider the supply chain from an outsider’s perspective.
‘South Asia Edition 2014: The Financial Reporting Supply Chain’ being the first of its kind to take place in the region, was aimed at boosting awareness amongst regulators and policy makers, particularly in South Asia in the role and importance of accounting and auditing in enhancing the business climate to boost shared prosperity and to strengthen public financial management to enhance governance and accountability.
The conference featured nine technical sessions, which were addressed by 38 experts on the subject from around Asia.
Who is accountable for what?
Noting that financial reporting is absolutely essential, IFAC Chief Executive Officer Fayezul Choudhury said it was necessary to enhance supplier benefits and accountability to the society in the manner in which they operate as they underpin investment decisions and effective capital markets.
“The point about high quality investor information is that it just doesn’t emerge as a result of what is being presented in the financial statement. In my view there is an imbalance in the public policy debate because too often the connection that is drawn, there is a need to improve the quality of corporate information,” he noted, while moderating a session on ‘Financial Reporting Supply Chain: Who is Accountable for What?’
The panel at the session featured Institute of Chartered Accountants of Australia Leadership and Advocacy Head Rob Ward, Aitken Spence Chief Financial Officer Nilanthi Sivapragasm, Asian Oceanian Standard Setters Group Chair Clement Chan, OECD Corporate Affairs Division Economist/Policy Analyst Akira Nozaki, Public Interest Oversight Board Member Chandru Bhave and Deloitte Haskins & Sells Mumbai Chairman P.R. Ramesh.
The immediate reaction is to always to look at ways in which the limitations can be underpinned on the auditor and ways in which the audit process is conducted can be changed.
When attempting to link financial reporting systems, it is important to start with the organisation that is the governing body. It is their responsibility itself, who are producing financial information and are accountable on ensuring that the financial reports that are issued are correct.
That has a number of elements, of which the first is the corporate governance structure. This is largely regarding the order in the organisations that can ensure that the information produced are reliable and are recorded to high standards.
The other is the preparer of the statements, they are highly important. Very often the preparer do not have the necessary qualification to do this job.
Then one moves on to what standards are needed to prepare the statements and in that there is the national standards that arise from the international standards. The external auditor, the regulator, credit rating agency and the investment analyst will then advise the public on the credit worthiness on the interested entity.
“Some of the issues are that we believe should be explored when looking at this. It is noted that the more vigorous the debate the more robust the outcome. We want to be provocative in this and more controversial about what should be done with financial reporting,” he said.
Choudhury stressed it is important to look at issues on corporate governance, why they are important and what standards should be followed.
On the preparers, what are the qualifications they need to have, should they be certified and should they have a sense of accountability of what they have prepared, are questions that need to be answered.
The standard setter, they should look if the financial standards are still appropriate and is it still enough to measure with a single indicator, which is the profit.
On the auditor, with different jurisdictions following different forms of standards, the quality of audits should be explored.
Changes in corporate governance and risk management
With governance structure specifying the distribution of rights and responsibilities among different participants in the corporation such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders, along with specifying the rules and procedures for making decisions in corporate affairs, OECD Corporate Affairs Division Economist/Policy Analyst Akira Nozaki noted that corporate governance is vital.
However, over a period of time, with the change in economic environment, corporate governance has become quite complicated. “With too many players with different incentives and too many procedures, there has been a bit of change in this area. Everything has changed in the last decade. According to the OECD principles, we have laid out guideline in this regard for individual companies and other institution in an attempt to provide confidence that is necessary for the proper functioning,” pointed out Nozaki.
There are now plenty of toolkits that are in place for corporate governance such as performance based compensation systems, establishing board and committees, and others. However, just installing these toolkits without assessing the validity will bring more problem than good, he emphasised.
“Corporate governance issues in general include the lack of awareness on the board in this area. Just writing a nicely worded code that prescribes the board’s responsibilities is not enough. I think it will be more important for board members to send his or her message on corporate governance to the public. Fortunately in Asia, it is noted that a significant effort is made in this regard,” Nozaki said.
Looking at risk management, there remains some confusion between risk governance and risk management. While risk governance is a broader concept that includes the board on the assessing methods, Nozaki noted that some of the regulators are trying to pitch that risk governance should be done as a line of defence.
The lines of defence include the support functions such as risk management or internal control systems and internal audit functions. However in 
practice these lines of defence do not function well when they work in isolation since each line will only give an assurance for the previous level of defence. No line has a particular mandate or function of defence.
He pointed out that many case studies have shown that many catastrophes emerge from human behaviour. Therefore defence against people risks is a key issue for corporate governance. To increase the board awareness and responsibilities on the rightful approach to address risk is imperative.
Why does corporate governance matter to investors?
Asian Corporate Governance Association Research Director Sharmila Gopinath answering the question on why corporate governance matters to investors noted that usually when everything is working well there certainly is higher investor confidence.
“Many investors, especially the ones that are coming from abroad can be naïve when they come into Asia. This is because Asia is still developing and lot of the issues that we face here are not things that you would face in the West,” shared Gopinath at a panel discussion on ‘Corporate Governance, Risk Management and Internal Control’.
The session was also addressed by OECD Nozaki, Pakistan Institute of Corporate Governance President and CEO Fuad Azim Hashimi and Institute of Chartered Accountants of Australia Leadership and Advocacy Head Rob Ward.
Asia has many family-controlled firms which are the norm in this part of the world. The issue is that there are large sums of money being committed to Asia, and investments by pension funds are expected to total over $ 2,300 billion by 2015. Regular crises in the corporate and regulatory level demonstrate systemic weaknesses. The recent example on this is the proposed Alibaba IPO in Hong Kong.
“Improved governance is not just an investment issue. It creates a platform that is better and allows strategic decision making in environmental practices and benefits the society and economies as a whole. Many global pension investment funds would like to see themselves as responsible investors and they want to get good returns. This has become more prevalent since 2008. But to do so, they are also more accountable to their own beneficiaries, and have strong views as to where their pension monies should not be invested,” she observed.
On the regulatory context in Asia, before the crisis in 1997, it was observed that China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand did not have a proper governance code. Independent directors and audit committees were not required. Since that crisis, things have changed quite drastically and while all the countries have a code in one form or another, except Japan since there is still no consensus, they all came into being at different levels.
Financial reporting in the public sector
One of the key elements of public sector financial reporting is that there is a different framework and that is the public service. World Bank Chief Financial Officer Jennifer Thompson moderating a panel titled ‘Financial Reporting in the Public Sector’ said while different cases in this area in the public sector should be understood, within that itself there is reporting, budget execution reporting and then financial reporting.
“There are different elements. You need to keep in mind that the same professional standard of applying a framework for financial reporting applies for the public sector. You have a whole range of concepts to learn and principles to understand and to be able to deal successfully in both public and private financial sector reporting. “It is important to look at some of the underpinning elements of the profession that would contribute to good quality financial reporting in the public sector,” she stressed.
The move towards accrual accounting
With the need to evolve from old accounting standards to ones that suit the current environment, International Monetary Fund South and South East Asia Regional PFM Advisor Suhas Joshi noted that many countries were attempting to move towards accrual accounting.
Accrual accounting is a method that measures the performance and position of a company by recognising economic events regardless of when cash transactions occur. The general idea is that economic events are recognised by matching revenues to expenses, the matching principle at the time in which the transaction occurs rather than when payment is made or received. This method allows the current cash inflows and outflows to be combined with future expected cash inflows and outflows to give a more accurate picture of a company’s current financial condition.
However, despite attempts, accrual accounting has not worked well in Asia. While a number of countries have expressed their intention to move to this method since 2004, to date not one has been successful.
“Why is it so? When you see anything and implement any measure, there is a cost of implementation and the benefit. And it is only an unwise man who will go ahead at the cost and the benefit to see what makes sense,” said Joshi.
This issue was discussed at the Dutch Parliament and when looking at the cost it amounted to Euros 219 million. The operation costs were too high. “If one is going to spend that much money in doing accrual accounting, you need to see if there is capacity in the ministry of finance and in the line ministries to use the information that will come out of the system, that is if the information comes out,” noted Joshi.
There are countries in the region where when they start to do accrual accounting there is no asset register and they are unsure on the exact value of their assets.
“We did a back of the envelope and found that to actually build an asset register, it would cost more than the annual budget of the government. So the first thing is that if you cannot do good cash accounting, you cannot do accruals. You need cash accounting. And the problem that comes is that when you start doing this, many are faced with additional problems.” One issue is consolidation. The Asian region works in a manner where the central government passes money on to the local government within the budget. With this practice, it is difficult to see who got what. Another is the information management system. At certain instances the chief accountant is unaware of how to make use of the system to explain where the money to the institution comes from.
The other is the measurement of value. In the private sector it is easy to measure since it deals with profits, but it is difficult to judge value in the public sector since they deal with service. Then it all eventually comes down to who has the authority in the accrual budget.
Need to strengthen the supply of public sector professionals
Noting that private sector economic development growth actually requires public sector investment, CIPFA Strategy and Development Director Alan Edwards said that public sector investments will only come when public finances are well-run. However, the public sector faces a lot of different pressure in this regard.
While the region itself is facing pressure, Edward said they are stepping up to the plate as there are a couple of the projects going on.
“If we are going to get development, then we are going to need to get capacity and capability. If we are going to implement these little changes, we are going to be capable financial sectors. It is 39 years since the government finance profession was created in the UK and since then the number of finance professionals working in central UK has gone from 1,000 to 10,000. So a lot of change has taken place there. But we all know that the supply in the public sector for finance professionals is constrained. Often the professionals feel that they are not rewarded in the same way as their colleagues in the private sector,” he shared.
Edward stressed there is a need for much greater investment in the supply of public sector professionals. Taking the example of the Philippines, which according to him has done exceptionally well in this regard, by borrowing from Australian aid, has implemented a project on competencies where they are looking at the skills, attitude and the behaviours they need in addition to paying attention to the performance framework. Speaking on Sri Lanka he said the nation is trying to create a public sector window by reaching out to finance sector professionals across government.
It is also trying to increase the involvement of this wing by reaching out to other provinces for staff.
In Pakistan, he shared that a university was funded by the USA to put out a course on funding the government. That was very successful and it is being conducted again as they have understood that investment in continuous development and capabilities are just as important as capacity development. “It is also about capability and there is a need for development in the staff who are already working with the finance profession in the government. We need introduce international standards in the issues we were addressing,” he said.
Public sector financial reporting in Africa
While globally public financial management systems are assessed using a tool called public expenditure financial accountability, which has 28 indicators, the African region, while it is doing good, needs a lot of improvement in the reporting area, noted World Bank Senior Financial Management Specialist Patrick Kabuya.
“One aspect is incomplete information. Another issue is that we find lack of qualified officers within the organisations.
We have only 3% of the 4,000 members of the South Africa Institute of Accountants in the public sector. It has become a big realisation that something needs to be done to strengthen the quality of the financial sector in Africa,” he said.
One realisation for any country is that it cannot do financial reporting by itself. It has to be part of the agenda within a country. For that a nation has to be successful in having quality financial information. Africa, similar to many countries, has a framework governing the public sector and a finance management act. Africa is in the process of setting up public sector accounting standards.
There are many countries that have come onboard with the African region for the initiative, with eight countries in the Western Africa region attempting to have these implemented by 2016.
“Many consultants have realised that when going with an accrual basis of accounting, the question is ‘how can this be executed?’ One needs to be very careful in this regard.
The question is ‘how do we implement the standard?’ Africa is trying to have a homegrown solution on government accountants’ certificates and there is a program that links from a very low level to people becoming professionals. This has helped in two ways. One is that they know their career progression and are keen to move upwards,” said Kabuya.
Another issue is that the qualifications offered for financial reporting do not target the public sector, but usually cater to the private sector alone.
“It is imperative that we include public sector subjects in those qualifications. When doing public training in public institutions it is also important to register training officers. Secondly we need to push for the government to implement these practices and the partnership.
The importance here is dialogue. Many governments have not come to appreciate that we need to have the standards and this way we are better engaged,” asserted Kabuya.
Pix by Upul Abayasekara
