Audit Committees, Boards and IFRS 9 towards better governance

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Boards delegate their responsibility towards ensuring integrity of financial reporting to audit committees in listed companies and others use their CFO for the oversight of financial reporting. Legal and regulatory compliance is noted as a significant challenge for audit committees worldwide. Many of such audit committees focus on areas such as the risk of fraud and corruption or IT and regulatory compliance with somewhat minimal focus on the impact of new accounting standards.

As a real life case, just think about what’s happening currently. For example IFRS 15 and IFRS 9 are two important standards coming into effect from 1 January 2018. It is generally understood from global experience and preliminary work done in local companies that the impact from implementing the IFRS 9 standard in Financial Institutions would be significant. CFOs and Audit Committees have to ensure that such significant future impact is disclosed to the shareholders and the capital markets for good governance and transparency reasons even without the requirements of a Standard.

Anyway, the accounting standard also states “If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that fact and any known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement will have in the year it is applied. [IAS 8.30]”

However, in the case of IFRS 9 it is a concern to hear that banks cannot practically assess the impact for disclosure purposes, despite this Standard being issued many years ago. In all the European countries the impact assessment was done many years ago and the ECB and other central banks have managed the transition without much fuss. But in Sri Lanka, even after the standard has come into effect on 1st January 2018, they do not know the impact, which in all probability is supposed to be significant. Despite disclosing some limited information to the Central Bank of Sri Lanka on the potential impact, the banks are trying not to disclose the impact to the stakeholders, in their annual audited financial statements. Most of the banks are not even ready to apply the standard in the 1st quarter of 2018 and are lobbying the Institute of Chartered Accountants to get an exemption.

This lackadaisical attitude is a fundamental issue in many spheres in the country and therefore holding back the country from moving forward. Another case in point being the impact of the new tax law. The justification used by CFOs for not disclosing will give a bad impression of the Board, forcing people to ask ” If you are unable to quantify the impact of a known accounting standard, how can we expect them to understand future trends and risks that need to be mitigated for the growth of the company?” Audit committees should listen to good advice and protect the integrity of financial reporting without being misled.

One critical aspect to the success of every company is establishing a non-negotiable set of values around compliance and make it their culture. Companies should not stoop to low levels of trying to hide significant information due to tolerance of incompetence or a culture of promoting non compliance. It’s time to take the bull by it’s horns and disclose such significant matters in the financial statements to give credence to the claim of being a competent board and audit committee member.

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Happy Valentines Day ‘The smile on your face’

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My Valentine’s Day satirical song writing continues this year as well to poke fun at those auditors supporting management to manipulate accounts for the survival of both parties. Satirical essays are often aimed at political candidates, office behavior or situations that are absurd, but this particular one may not sound absurd?

“When You Say Nothing at All” is a countrysong written by Paul Overstreet and Don Schlitz. It is among the best-known hit songs for three different performers: Keith Whitley, who took it to the top of the Billboard Hot Country Singles chart on December 24, 1988; Alison Krauss, whose version was her first solo top-10 country hit in 1995; and Irish pop singer Ronan Keating, whose version was his first solo single and a chart-topper in the United Kingdom and Ireland in 1999.

I heard this song thrice in the morning, today, and that prompted me to think that it must be popular and hence people can connect the tune to the lyrics below. I have changed the lyrics to reflect the love some of the auditors have towards their suspicious clients, for fun;

The hole in your accounts
Lets me know that you need me
There’s no truth in your eyes
Cos you’ll always manipulate me
The frauds on your hand
Says I’ll also fall if ever you fall
Anyway I’ll do my best
To cover your back.

All day long I can hear
people talking about the fraud
But when you come near
you drown out the crowd
Old Mr. IFRS could never reconcile
What’s being stated between
your ledger and mine

Chorus….
The smile on your face
Lets me know that you need me

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Tax avoidance is no longer about legality, it is about Governance.

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Nine out of 10 people believe tax avoidance by large companies is morally wrong, even if technically legal, according to a survey that appears to reflect growing unease in UK’s unwillingness to tackle the issue, reported theguardian.com, recently. The Guardian also revealed the lengths to which companies will go to avoid paying substantial amounts of UK tax on some of the biggest property deals in recent years.

Tax evasion is the illegal evasion of tax, it often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting. In contrast, tax avoidance is the legal use of tax laws to reduce one’s tax burden.

According to HM Revenue and Customs (HMRC) in UK, tax avoidance often involves contrived, artificial transactions that serve little or no purpose other than to produce a much lower tax to the detriment of the government. It involves operating within the letter, but not the spirit, of the law. Therefore, both tax evasion and avoidance can be viewed as forms of tax noncompliance.

Globally, the biggest companies in the world are fighting many governments to prove they were not engaged in tax evasion. But the range of activities carried out to subvert the respective tax systems points to an intent by them to pay less tax than any commercial sense. It is also reported that leading accountancy firms could be seen recommending the use of offshore companies and a series of complex loans to minimise the tax bills despite only law firms being exposed in Paradise papers and Panama papers.

Overall, the Board of directors should drive good tax behavior and take responsibility for the tax risks of their companies. Any structuring should not be artificial to manipulate or push the boundaries of the law. If tax planning is part of the way business is conducted and makes commercial sense then that’s good business. With the global attention on avoidance and it’s ill effects, now is a good time for Boards to reflect on proper tax governance and implement a tax governance framework. Boards should ensure that tax risk management is part of their corporate governance framework.

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Broad-base SOE ownership for long term benefit thru good governance

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In November 2014, Michael Dell wrote in the Wall Street Journal, “Privatization has unleashed the passion of our team members who have the freedom to focus first on innovating for customers in a way that was not always possible when striving to meet the quarterly demands of Wall Street.” This gives a message that in public companies boards or CEOs are restricted from innovating for the long term, but try to keep a consistent trend to satisfy the analysts and investors in the short term.

This view is contrary to promoting a larger capital market with more listed companies. Though there’s an argument that with public scrutiny transparency and governance improves significantly, any idea that a private company can be more creative or innovative is counter intuitive. However, making a State Owned Enterprise (SOE) to be publicly accountable will achieve transparency, good governance and also better results due to better utilization of resources and less government interference. Therefore, a SOE should not be allowed to use the idea of Dell to divert attention on the core issues around governance, conflict of interest, transparency and under utilization of resources.

The Board is responsible for the long term strategy of the company. Composition of the Board will make or break a company. Therefore, the Board has an obligation to ensure the proper mix of knowledge, skills, experience and thinking in the boardroom. This process is managed through good nomination committees in listed companies. However, this benefit does not accrue to SOEs due to state authorities having the right to appoint anyone as a director. Certain public companies with very few significant shareholders may be more innovative in a private enterprise set up, as the few owners can be creative without too much public scrutiny to achieve short term returns. However, SOEs may do well in an environment of rules and regulations followed by listed companies due to their existing below par performance and varied governance issues.

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Governance down a slippery slope

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The slippery slope here is how to differentiate between sexual harassment and voluntary and consensual actions of two people that went sour.

On the back of many revelations in Hollywood inappropriate behavior and sexual harassment has taken front page news, recently. Surprise surprise, it’s in Hollywood of all places where sexual advance on both sides of the aisle should be a daily occurrence and done by both parties to take advantage of the others’ weakness for personal growth. Bill Cosby then Fox media mogul Bill O’Reilly’s departure now followed by film producer Harvey Weinstein’s firing by his own company named The Weinstein Company! There are enough rumors about similar behavior in Bollywood too. Will they make a song and dance about it after another decade?

To really understand harassment it’s important to get a definition of sexual harassment. It is said to be “Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature.” A critical aspect would be the word “UNWELCOME.” What if one may consent or agree to certain conduct and actively participate in it even though it is offensive and objectionable. What if there was no request but an offer of sexual favor resulted in the behavior? Even worse is when one person, who may be called the victim subsequently, actively influences the other to do what may be offensive or inappropriate. It is circumstantial as to whether the person in fact welcomed a request for a date, sex-oriented comment or joke.

Unwelcome need not mean involuntary nor should the victim always be the female, its gender neutral. Neither does sexual harassment imply that the perpetrator is of the opposite sex. It’s a slippery slope in the workplace because part of working together every day with the same people includes joking around and even a bit of teasing. Some people mix business and pleasure and call it networking. Therefore, calling out situations of harassment versus normal office banter or networking is tough.

A good way to avoid harassment issues and clearly communicate that ones behavior is going down the slope, would be to have the right tone at the top, which says any type of sexual harassment in the workplace will not be tolerated. This needs to be backed up by;

* A clear sexual harassment policy. This should be in the employee handbook with adequate details and examples of situations.
* Promote a culture of respect that discourages the use of sexy appearance, flirting or any form of verbal or physical conduct of a sexual nature to get things done.
* Education of employees. Conduct training sessions for employees, regularly.
* A good complaints process to investigate any complaint confidentially and also protect the victim at the same time.

Bottom line is people, i.e, men and women, have to feel safe and at the same time unrestricted, in the workplace. If you’re not sure of what could go wrong, the movie Fatal Attraction may give some idea!

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Accountants’ dilemma- Confidentiality vs Disclosure of Non compliance

 

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Accountants to become whistle blowers or lead the anti corruption fight in organizations require certain prerequisites. Like in the mafia type movies, Accountants will become the snitch that a mafia goes after and eliminates to keep their secret, if an enabling environment is not created. Therefore, it is a prerequisite to strengthen legislation and timely action which should increase calls for prosecution of company executives and public officials, in addition to actions against companies for corporate misdemeanours. A couple of examples where countries have laws to fight corruption are the UK Bribery Act and the Foreign Corrupt Practices Act in the USA. Many developed countries also have whistleblower protection laws to encourage disclosure.

IFAC in 2017 introduced a new international ethics standard, Responding to Non-Compliance with Laws and Regulations (NOCLAR). It sets out a framework to guide professional accountants in what actions to take in the public interest when they become aware of a potential illegal act, committed by a client or employer, including issues of fraud and bribery. Professional accounting bodies globally are currently reviewing how to incorporate NOCLAR into their Codes with additional guidance where appropriate. In brief, accountants will be required to disclose material non compliances to internal management and external regulators as defined in the standard.

For such procedures to be successful and to eliminate the risk of retaliation, companies and boards of directors should be legally held responsible to implement systems and procedures to promote an anti corruption culture. Such actions increase the pressure on the public and private sector company boards to mitigate fraud and corruption risks. In such a situation the accountants can be given the added burden of reporting on NOCLAR. Because under this process those in charge of Governing the Company who are responsible for preventing the non compliance have to first take corrective action based on the reporting. An interesting aspect would be how accountants will deal with tax evasion and will be required to prevent such behavior. For example, the UK is poised to introduce a new corporate offence of failure to prevent the criminal facilitation of tax evasion, under the proposed Criminal Finances Act. Thereby, the accountants will find it easy to comply with any disclosure requirements under NOCLAR.

According to the COSO Fraud Risk Management Guide, deterrence is achieved when an organisation implements a fraud risk management process that:
* Establishes a visible and rigorous fraud governance process
* Creates a transparent and sound anti-fraud culture
* Includes a thorough fraud risk assessment periodically
* Designs, implements and maintains preventive and detective fraud control processes and procedures
* Takes swift action in response to allegations of fraud, including, where appropriate, actions against those involved in wrongdoing
A similar anti corruption guide will be required to achieve deterrence of corrupt practices. Because the frontline in fighting fraud and corruption lies with employees. They are the first line of defense. The company should create the right culture for ethical behavior by recruiting and promoting appropriate people. If such an environment is created there’s no doubt accountants will take responsibility for disclosing non compliance with laws and regulations.

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Accountants fight against Corruption

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Poverty reduction may be an idea in every political agenda just until they win the election and then it’s about reducing poverty of the poor parliamentarians! Bribery & corruption has a destructive effect on economic growth and erodes public confidence in government, the police & the judiciary.

IFAC the international body of accountants has published its research on how the accounting profession is playing a major role in tackling corruption, recently. They say that the positive role played by accountants worldwide in the fight against corruption is clear, and professionalism is highlighted as an essential component for success. Professional accountants are one group among a number of vital actors in the economy, including business leaders, governments, and the financial sector, that are key to tackling corruption.

KEY FINDINGS FROM IFAC- “THE ACCOUNTANCY PROFESSION–
PLAYING A POSITIVE ROLE IN TACKLING CORRUPTION”

Where the governance architecture is stronger, the role played by professional accountants in tackling corruption is amplified.
Professional accountants are a part of the governance architecture that serves to tackle corruption, and their positive contribution is amplified where the rest of that architecture is stronger. The link between the prevalence of professional accountants in the workforce and more favorable scores on the main global measures of corruption is stronger in G-20 countries, and in countries that have adopted anti-money laundering laws in line with international recommendations.

Professional accountants are playing a major, positive role in tackling corruption, along with other key actors in the global economy.
The work of professional accountants is crucial to the governance architecture of economies, and along with other key elements serve to underpin transparency, accountability, and the rule of law. There is a strong link between the percentage of professional accountants in the workforce, and more favorable scores on the main global measures of corruption.

Professional ethics, education, and oversight—at the core of the global accountancy profession—are key to the positive role played in tackling corruption.
Core qualities that make accountancy a global profession are its robust international ethical code, comprehensive educational requirements, and ongoing monitoring and oversight mechanisms. The link with more favorable corruption scores is three times stronger for professional accountants that have committed to these qualities than for individuals who may identify as accountants but do not possess professional qualifications (for example, in countries where professional qualifications are not required, for individuals working in support roles).
Source: IFAC publication.

The adoption and implementation, across all jurisdictions, of International Financial Reporting Standards, International Standards on Auditing, the Code of Ethics for Professional Accountants, issued bfy the International Ethics Standards Board for Accountants® (IESBA®), and IPSAS has contributed to the integrity of the profession.

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Higher the number of accountants, better the corruption perception index of countries. Another non formal research finding is a positive relationship between the number of IFAC body accountants and economic performance. Higher number of accountants lead to higher GDP. Naysayers may try to ridicule the idea by citing some unrelated correlation between the number of religious places and pubs. But the reduction of corruption will always lead to better business confidence and better economic performance as it allows everyone to compete on a level playing field. Providing opportunities for many more people to contribute to the economy will uplift many more from poverty and lead to economic growth.

On a negative note any government that does not want to combat corruption may reduce the support for professional accountants of IFAC and recruit non professional accountants to do their job thus leaving much to be desired on the transparency and accountability front.

 

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