Investment in The Coconut Industry by Nancy Cheruiyot
World Watch Issue
1. www.pwc.com
World Watch
Governance, Reporting and Assurance
Issue 2 2011
In this issue:
Page 5
Investors want better
M&A disclosures
Page 6
Reporting must evolve,
not fail
Page 8
Confident about your
crisis response?
Page 11
IASB regime change
Page 13
Internal audit: Rising to
the challenge?
2. Contents
Opinion
Corporate Reporting
5 Better merger and acquisition disclosures, please Investors tell us that they need companies to explain their transactions more clearly.
Alison Thomas shares insight from the investment community
6 A critical system at risk Corporate reporting is at a ‘tipping point’, David Phillips argues. It is time to take action
and make sure that our reporting system does not fail
Governance
8 Are you confident about your response to a crisis? A poor response to a crisis can wipe huge sums off stock valuations, argue Martin
Caddick and Paul Robertson. But a focused response can have the opposite effect
Financial Reporting
11 IASB changes regime As Sir David Tweedie prepares to step down from the International Accounting Standards
Board, Hitoshi Kiuchi looks back on the highs and lows of his decade at the helm
12 Effecting change in a fast-moving environment The need for high-quality accounting standards is paramount, but is the current
standard-setting process effective? Peter Holgate weighs up the options
Assurance
13 Internal audit can shine The boardroom focus is now on growth and the future. But is internal audit responding to
the changing risk environment? John Feely explains why auditors should keep pace
News
Governance
14 US: Turning up the heat on executive compensation • Impact of Dodd-Frank reforms
• Clarification still awaited
15 What makes investors trust management? • Survey of investors and analysts reveals level of trust
• Investors rate usefulness of information
16 Survey highlights importance of speaking up • Support for whistleblowing encouraged
• Five milestones to develop a programme
16 COSO: Study of board risk oversight • Inconsistency in frequency and type of risk reports
• Scope for all companies to improve
17 EC: Taking a closer look at corporate governance • Green paper to assess effectiveness of corporate governance frameworks
• Focus on the board, shareholders and ‘comply or explain’
• Comments by 22 July 2011
17 UK: Directors subject to re-election from 2011 • New ‘comply or explain’ provision in governance code
• Investors warn of ‘short-term culture’ but over 75% of companies comply
18 Europe’s boards under pressure to appoint women • European Commission warns of regulation
• Pressing for voluntary increases in appointment of women to the board
18 UK FRC review of risk responsibilities • Review of risk oversight practices
• Project to explore good practice
19 Pakistan: Strengthening governance to attract • Delay to introduction of new corporate governance code
investment • Proposals to align with international best practice
19 Turkey: New commercial code provides • Code built around transparency, fairness, accountability and responsibility
blueprint for the future • Effective 1 July 2012
20 The internet just got scary • Cyber security tops list of ‘risks to watch’
• Tips to improve governance of information
20 How to assess green fraud risks • Rise in fraud with a green element
• Rise in cyber criminals looking for ‘soft targets’
• New risks from hackers, new carbon markets and bribery
2 PwC
3. Corporate Reporting
21 Tomorrow’s corporate reporting • Study finds reporting system at risk and highlights challenges of current system
• Outlines framework for global discussion (see also page 6)
22 South Africa: Direction for world’s • New guidance on content of integrated reports required for this financial year
first ‘integrated reporters’ • Boost for companies’ innovation and competition?
22 Investor view • Insight for companies from dialogue with investors
22 Mauritius: Effective reporting recognised • Annual awards celebrate integrated reporting but little overall progress found
• Judging criteria – content, clarity and correlation
23 IIRC: Global support for integrated reporting • International Integrated Reporting Committee gains support in China
• Discussion paper expected shortly
23 WBCSD: Measuring biodiversity risk • Failure to value ecosystems puts business at risk
• Valuation framework launched
23 Spain: Sustainability reporting • New law requires sustainability reports from 2012
24 Cut the clutter from annual reports • Report finds unnecessary information is obscuring relevant data
• Suggestions to help companies change behaviour
24 Sweden: Sustainable business strategies in practice • Handbook outlines practical advice for sustainable business development
25 CDP: Focus more on performance than disclosure • Changing emphasis on carbon information
• Opportunity to influence government regulation
25 Race for carbon disclosures and taxation • Governments looking at tax incentives to lower emissions and boost tax income
• Energy efficiency makes sense for companies as prices rise
26 Momentum for integrated guidelines • OECD and GRI sign Memorandum of Understanding
and reporting picks up • GRI G4 reporting guidelines by end of 2012 – stepping stone for integrated reporting
26 UK: Action on reporting quality • Regulator sharpens focus on risk reporting
27 South Korea: Reducing emissions • Legislation requires independently verified annual emissions data from 2011
• Mandatory cap and trade scheme delayed until 2015
27 Malaysia: Guiding directors through • Programme to raise awareness of reporting requirements
the sustainability agenda
28 UK: Proposals on reporting and audit • Recommendations to improve corporate reporting and audit models to benefit investors
• Reporting lab provides a safe haven for innovation
28 Differentiate yourself, companies urged • Launch of UN Global Compact Differentiation Programme
29 Puma: Environmental reporting breakthrough • World’s first environmental profit and loss account – a glimpse of the future?
29 Investors call for action on ESG reporting • Stock exchanges lobbied for better corporate sustainability data
29 EC: Assessing sustainability reporting • Report looks at how companies report on ESG issues, and the challenges faced
Financial Reporting
30 Convergence shifts back • IASB and FASB extend completion date for joint projects
• Standards on revenue, leasing, financial instruments and insurance to take priority
31 US expected to adopt IFRS • Survey examines preparedness for IFRS. SEC decision expected late 2011
31 Canada influence on standard setting • Impetus to engage with the IASB. Significant adoption challenges
32 Mexico: Reporting progress toward IFRS • Quarterly IFRS conversion reports
• Monitoring group watching adoption progress
33 Brazil: IFRS proves a cultural challenge • Regulator highlights reporting difficulties
• Related parties, financial instruments and concessions are common problem areas
33 India: Slowing the pace of convergence • Deferral of plans to move to IFRS by April 2011
• No indication of revised timetable
34 Governance of the IASB • Monitoring Board undertaking structural review
• Consultative report open for comment until 31 August 2011
35 Challenges of tax reporting • Changes to accounting standards, tax requirements, business models and
stakeholder needs place demands on tax directors
35 IFRS interim financial statements • New guidance and checklist to help companies prepare
35 XBRL taxonomy draws an audience • Opportunity for regulators: better risk profiling, efficient processing, consistency
Assurance
36 Audit reporting: Is a global perspective possible? • Debate on the current standard form of the auditor’s report
• IAASB consultation paper by June 2011
37 The audit market in the spotlight • Responses to European Commission green paper on audit
• House of Lords Economic Affairs Committee publishes its findings
38 PCAOB calls for more insight from auditors • Survey of US investors. Concept release expected by late June 2011
39 What influences audit quality? • IAASB paper assesses the audit and invites comment
39 IAASB disclosures discussion paper • Review of financial statement disclosures and the impact on audit
• Comment period opens June 2011
World Watch Issue 2 – 2011 3
5. Corporate Reporting Opinion
Better merger and acquisition
disclosures, please
Investors tell us that they need companies to explain their transactions more clearly. Alison Thomas
shares insight from the investment community
forecast the underlying performance It would be helpful for acquirers to give
of a business, they are also increasingly the exact date of acquisition (or disposal)
concerned about the income statement rather than a vague indication. Modelling
effects that might arise from future cash flows is challenging without
implementing the revised business the exact dates. Investors also appreciate
combinations standard– for example, clear disclosure of the non-cash deferred
remeasurement of contingent consideration consideration.
and consideration linked to future
service of the selling-shareholders. What did a disposal raise?
Alison Thomas
It is not just the disclosures associated
Are the intangibles really with acquisitions that have drawn the
Given the economic significance of mergers goodwill? attention of investment professionals.
and acquisitions, it is not surprising that Having to capitalise acquired intangible The reporting of disposals is also a
the investment community tells us about assets separately from goodwill and source of frustration.
their intense interest in the disclosures then amortise these can be a source of
relating to them. But we continually hear frustration for investors. Some of the As with acquisitions, investors want to
concerns about the quality of disclosures acquired assets will have a finite life know the enterprise value realised on
for these transactions. This article (such as a patent), so an investor is happy disposals, in addition to cash received.
examines some of the areas commonly for there to be an associated amortisation Similarly, they want to be able to assess
cited by investment professionals as charge. However, investors may consider management’s stewardship of the assets
offering opportunities to improve the other intangibles to be goodwill, they have been entrusted with, and to
effectiveness of disclosure in this critical notwithstanding management’s have sufficient historical data to be able
area of reporting. classification as separate assets with to forecast the future.
limited lives. In such cases, investors may
When talking to investors about reporting, wish to reverse amortisation charges. Stewardship: Investors wish to hold
two themes come through time and management to account for its running of
again: first, the desire to understand In order to decide whether an amortisation the entire business. Financial reporting
if management are spending capital charge makes ‘economic sense’ or not, standards distinguish between continuing
wisely; second, the need to have the investors would like to see greater detail and discontinued operations; management’s
base of data to forecast with confidence. about the nature of the identified narrative often concentrates only on the
These themes dominate our discussions intangible assets. continuing operations. Management
with investors when talking about both could better meet user needs by
M&A and disposals disclosures. How has the acquired business presenting clear narrative and financial
performed since the transaction? information about the combined results,
What did the acquirer pay? including the disposed business.
Investors tell us that they want to know
Financial reporting standards do require
more about the strategy underpinning Forecasting the future: Current
management to report on the cash cost
an entity’s acquisition. They would like accounting standards require management
of an acquisition, but important detail
to know the rationale behind any to present quarterly comparative data only
about total cost can get lost. For example,
acquisition and whether or not it was a as each subsequent quarter is reported.
investors want to know the enterprise
success as measured against this strategy. This is not deemed sufficiently timely by
value of an acquisition – that is, the
transaction’s effective net value. And investment professionals, who wish to
Investors quickly lose visibility of update their forecasts for the residual
investors typically cannot see the debts previous acquisitions. This is because,
acquired or detailed information on entity immediately. They have told us
unless an acquisition is a reportable that they would like to see, at the date of
pension liabilities assumed unless segment in its own right, it is absorbed
the scheme is material to the acquirer. disposal, historic quarterly/interim data
into the acquirer’s business, with no that would allow them to do this.
detailed information provided. If
Some of this information might be
management thinks it important enough Alison Thomas is a PwC director
provided elsewhere in the annual report
to monitor the acquisition separately, and former investor.
or in analyst presentations – but the
that information is also important to Email: info@corporatereporting.com
investors we spoke to were concerned
investors, even if separate disclosure is for more Investor views
because such information is unaudited.
not required by the standards.
As investors need to assess and then
World Watch Issue 2 – 2011 5
6. Corporate Reporting Opinion
A critical system at risk
Corporate reporting is at a ‘tipping point’, David Phillips argues. It is time to take action and make
sure that our reporting system does not fail
Much has been written in recent be counter-productive. What is needed Questions to answer
decades about the shortcomings of the is a structured and properly sponsored For the architects of our market-based
corporate reporting model. Since the global programme to critically analyse system, here are perhaps the four most
industrial revolution, this model has the case for change. It could take two important questions that need
been predominantly focused on the years to properly assess the case and make considered answers.
output of business activity, measured recommendations, but the implications
in financial terms. Despite the world of this agenda are of such significance 1. What is the objective of corporate
being transformed in so many ways to long-term system stability that it can reporting, and is global convergence
over the past century and the limitations only have one sponsor – the G-20. a worthwhile goal?
of this focus on financial measurement It is clear that the original objectives
being recognised, it appears that the The work of the IIRC and its call for of corporate reporting differ around
system has been constrained by its change has recently been supported and the world and are in a constant state
historic roots and become incapable informed by a ground-breaking research of flux. Creating a path to the future
of meaningful evolution. study undertaken by Tomorrow’s requires these questions to be
Company, PwC and CIMA. Uniquely, answered in the knowledge that it’s
As each economic crisis passes and as each the study – Tomorrow’s corporate easier to get global agreement on
new social challenge emerges, the system’s reporting – has looked at the whole issues at the outset of change rather
inability to evolve and change becomes a reporting system (people, organisations, than after a period of rapid domestic
growing risk to society. rules and processes) rather than the innovation.
reporting model (specific requirement).
Without a reporting system capable of It has tried to throw light on the issues 2. Who has oversight of the system?
properly measuring all the resources that can assist in a change agenda. For The way reporting has evolved, it is
being used by business, reported those considering the IIRC’s proposals, rare for any single organisation to have
performance based on profitability the study provides some important oversight of the whole reporting system
will present a flawed view – business insights on how structure, behaviours in a particular territory. For some, this
decisions will be sub-optimal, capital and incentives are critical ingredients fragmentation creates a weakness in
will be misallocated and society will for any plan to effect system change. the system and is one reason why the
have little ability to respond logically The report highlights the rigidity of the development of a more holistic reporting
and responsibly to the demands of a current system and the entrenched model, such as integrated reporting,
world with nine billion people. position taken by its key players. has not occurred.
A picture emerges of a system that shows
The case for change all the hallmarks of its original architects 3. Is the current reporting system
The case for a new reporting model and a behavioural response from all its itself a barrier to change?
will be made imminently when the stakeholders – companies, investors, The more one analyses the construct
International Integrated Reporting auditors and standard setters – that, of today’s reporting system and the
Committee (IIRC) publishes its long- while sufficient for the 19th century, established role and behaviours of the
awaited discussion paper on integrated have now become barriers to change. key players, the more one recognises
reporting. This discussion paper will why there has been little innovation
be open to consultation, and later in A roadmap for change and change.
the year the IIRC will be engaging Looking to the future, the research
governments on the need for reform to sets out a road map for change. It is 4. What are the implications for the
the current reporting model. This occurs this that sits comfortably alongside the structure and governance of
at a time when global agreement on progressive agenda encapsulated in the established institutions that are
almost any issue is difficult to achieve. concept of integrated reporting and central to the design and operations
But as with banking reform, the the ambitions of the IIRC. Central to of the reporting system?
reporting model is central to the this road map are a series of critical If integrated reporting is the future,
operations of the economic system on questions that need to be seriously then what are the implications for
which society is totally dependent for addressed by those who oversee the organisations such as the
its future wealth and well-being. reporting agenda, particularly its International Accounting Standards
health, relevance and ability to explain Board (IASB), the Global Reporting
While the IIRC will make the case for business performance in a world that Initiative (GRI) and the Carbon
change, the reality is that no new model is constrained not just by financial Disclosure Standards Board (CDSB)?
will emerge overnight, change will take capital, but also by our physical,
time and rushing to a new end game will human, natural and social capital.
6 PwC
7. The answer to these questions and others This provides a real opportunity – a The FRC’s work is also supported by
raised in the road map are important and chance to bring all these elements of the another branch of the UK government
cannot be taken lightly. As a minimum, reporting jigsaw together, to recognise (The Department of Business Innovation
we need a programme of structured the value that emerges from a more and Skills) who are considering
discussion and dialogue, ideally integrated model and the dangers that what actions can be taken to enable
commissioned by the G-20, to consider lurk in perpetuating a model that is ‘siloed’ companies and their boards to create
the need for and implications of in its architecture and its operation. a shorter, more strategically-focused,
introducing a new reporting model. While we focus on the separate elements report. This shift in thinking could
Realistically, the world has no more than in isolation, the synergistic value of an provoke the positive behavioural
five years to bottom out these important integrated model is lost. response – where ‘less is seen as more’,
issues if reporting is to play its central where boards are more inclined to
role in the operations of the world And finally, we need to think through influence content, and where
economy and help facilitate the shift in how change can occur so that our compliance information, while
performance measurement that is vital reporting system can evolve. How can provided, is not allowed to clutter
in our resource-constrained world. we move from ‘grid lock’ to a system that and undermine the critical elements
can flow and move forward freely? Are of information that companies need
Encouragingly, the time may be right for there actions that can be taken to unlock to communicate.
this agenda. The evidence from around processes of innovation even within the
the world suggests that there is a regulatory mode? Perhaps there are some For all the reasons set out above, it
growing realisation that reporting needs clues in the thinking currently doing the appears that we may be at a ‘tipping
to change. For the most part, the focus rounds in the UK. Here, two particular point’ in the future of corporate
is on selected elements of the reporting developments are worthy of note. reporting. For those with overall
model, such as fair value and insights leadership responsibility, for the
into the judgements and assumptions Time to innovate economic system and its longer-term
that underpin reported financial The Financial Reporting Council is stability, now is the time to act.
performance. But the prominence of one of the first regulators to publicly To kick off, a process to analyse the
other aspects of integrated reporting is recognise that reporting has become ability of the system to adapt to the
rising too – for example, there is more too voluminous and cluttered by economic and social needs of this
focus on the business model and risk information that is not assisting user century must be started, and should
disclosures, resource usage and emissions, understanding. It has come up with a culminate in recommendations being
governance and remuneration, as those radical idea of introducing ‘reporting made to the G-20. If we leave this
responsible for the system look for labs’ as a mechanism to promote agenda on the back burner for too long,
solutions to the last crisis. ‘stakeholder-led’ innovation in a safe financial reporting will survive, but the
environment. This innovation model whole system may fail.
that is close to the market will
encourage companies and investors to David Phillips is the senior corporate
come up with practical ideas to deal reporting partner at PwC.
with known shortcomings in reporting.
“Without a reporting system capable of properly
measuring all the resources being used by business,
reported performance based on profitability will
present a flawed view – business decisions will be
sub-optimal, capital will be misallocated and
society will have little ability to respond logically
and responsibly to the demands of a world with
nine billion people”
“If we leave this agenda on the
back burner for too long,
financial reporting will survive,
but the whole system may fail”
World Watch Issue 2 – 2011 7
8. Governance Opinion
Are you confident about your
response to a crisis?
A poor response to a crisis can wipe huge sums off stock valuations, argue Martin Caddick and
Paul Robertson. But a focused response that impresses stakeholders can have the opposite effect
High-impact risk is now firmly on the Board members appreciate the need simulation exercises involving specific
boardroom agenda, driven there by the for their organisations to develop functions, operations or geographies.
realisation of the damage certain events resilience – the capability to respond Simulations are invaluable in developing
can do to corporate and management in appropriate ways in the event that team capability; however, they don’t
reputations. High-profile environmental disaster strikes. However, they are also provide the truly challenging,
disasters, weather-related public increasingly seeking to gain confidence comprehensive and insightful learning
transport interruptions, natural in that capability, rather than simply experience of a real-time exercise.
disasters, machinery failures and assuming it exists and will prove
sensitive data leaks – to name a few adequate. This trend complements the Real-time exercises are effective
examples – grab media headlines. growing stakeholder interest – among learning experiences because they run
governments, regulators, standard concurrently with participants’ normal
The way that an organisation responds setters, business partners and the public working life. Whereas an isolated,
to such events is critical – more so now – in the sustainability of business. There half-day simulation is conducted in an
than ever. The public has expectations is mounting appreciation of the need to environment where participants are freed
of how an organisation should respond, sustain profitability for the long term, from normal distractions, the real-time
based on media coverage of past events. in ways that support the communities exercise creates additional demands
Business customers too have preconceived in which businesses operate, and with alongside ongoing daily responsibilities,
ideas about how their supplier or minimal environmental impact. Effective just as a real crisis would.
business partners should react in a crisis crisis management is one small, but
situation. A poor performance, which critical, requirement for such sustainable The real-time exercise can also involve
includes inadequate communication business activity. large numbers of people from different
with key stakeholders, can wipe huge departments, such as HR, IT, the supply
sums off corporate stock valuations. Building capability chain and finance, and potentially
On the other hand, a focused, swift several subsidiaries and locations.
Effective crisis management depends
response that impresses stakeholders This enables a far more complex crisis
on the board and the crisis management
with management’s capability can scenario to be developed, one that
team (CMT) having the capability they
actually increase corporate value – combines multiple strands requiring
need to respond effectively. Leading
beyond the level it would have reached responses from numerous parts of the
organisations are increasingly looking
had no crisis occurred. Employee business. This creates a more realistic
for ways to develop that capability, and
loyalty can also be strengthened and situation for decision makers – a series
turning to real-time exercises as the
retention rates dramatically improved of challenging events that occur over
most effective mechanism. Such
by demonstrating a high degree of several days or weeks and that gradually
exercises represent a step up from the
employer care in a crisis situation. build to a conclusion. Board members
more traditional half-day or one-day
“A focused, swift response that impresses
stakeholders with management’s capability can
actually increase corporate value – beyond the level
it would have reached had no crisis occurred”
“Real-time exercises are effective learning
experiences because they run concurrently
with participants’ normal working life”
8 PwC
9. and management have the opportunity experience, enabling the organisation
“The challenge for any organisation to behave as they would in a real crisis to analyse its crisis response and see
is to understand the points at
– being able to request information, how its capability has been developed or
which they should remain issues for
functional and operational teams delegate tasks and take strategic validated. Areas for future development
to handle, when they should be decisions over a period of time in and action can be identified, perhaps
brought to the attention of senior response to an escalating crisis scenario. addressing issues around resilience of the
management, and when a formal supply chain or other key third parties.
crisis management response should Another important characteristic of real-
be initiated.” time exercises is that information on the Building confidence
crisis can be fed into the organisation in
The completion of real-time exercises
realistic ways – using the channels of
builds capability in the organisation.
communication that would occur in a
And as capability develops, so boards
real-life crisis. Emails received by
become more confident that key personnel
participants appear to have come from
understand the actions required of them
appropriate people using the right tone
if a real crisis occurs. But this confidence
and terminology; dummy news websites
must also be underpinned by sound
reflect unfurling events in a highly
preparation and planning.
realistic manner. Staged media
enquiries, interviews or conferences,
Effective crisis management is an
and phone calls with government
ongoing process – a cycle of activity
officials can be arranged, providing
that revolves through planning,
added and realistic pressure on
response and subsequent review.
participants. Responses can also be
One essential element of the planning
monitored to inform the later review
process concerns the identification
process and learning experience.
of triggers – the events that could and
should trigger the initiation of formal
The real-time exercise culminates
crisis management procedures.
in a final simulation event, which
provides the necessary set up for final
decision-making. This is followed by
Continued overleaf
a closing review to wrap up the
World Watch Issue 2 – 2011 9
10. Some triggers will be obvious, such as Communication channels – when to
fire, floods or terrorist events. More escalate information, how and to whom Five questions every board
challenging are the triggers that arise – also need to be established. These should ask
incrementally. For example, the supply should encompass how to pass
chain may have normal fluctuations information both up and down the 1. How capable is the business of
such as occasional late deliveries or management chain. The overarching handling a crisis effectively?
quality concerns. But at what point does aim behind all such crisis management 2. How does the board gain
an increase in quality failures or supply planning is to save time when a crisis confidence in the organisation’s
stoppages move outside normal tolerance occurs. By identifying key personnel and response?
levels and into a crisis situation? Similar establishing communications and
scenarios can arise in all areas of response frameworks beforehand, the 3. How does our crisis management
business operations: in finance (foreign crisis response can get underway more strategy tie in to our organisation’s
exchange losses or cash flow shortages), quickly and effectively. risk appetite?
personnel (staff sickness or resignations), 4. What are the triggers that would
manufacturing (machinery breakdowns) Organisational maturity initiate a crisis management
or IT (server failures or lost email access). response in this organisation?
The ultimate goal is to mature an
organisation through the various stages 5. Who is responsible for
The challenge for any organisation is to
of crisis management capability. This developing and sustaining crisis
understand the business implications of
begins with the achievement of core management capability?
all such events – in particular, the points
compliance – creating a robust crisis
at which they should remain issues for
management framework and plan –
functional and operational teams to
through to the development of
handle, when they should be brought
comprehensive capability, and Five tips for ensuring
to the attention of senior management,
ultimately the building of confidence – successful crisis
and when a formal crisis management
so that boards have sound reasons to
response should be initiated. Once a management
believe that their organisation has the
formal response is launched, senior 1. Identify triggers: events or
right teams, systems and processes in
management can consider the strategic situations that should result in
place to deal with any crisis effectively.
impact of the crisis situation, taking the organisation initiating its
strategic decisions to safeguard the crisis management response.
Achieving this greater maturity depends
business going forward, while operations
on the development of a programme of 2. Define, train and support your
teams handle the immediate problems
work, which enhances crisis management crisis management team.
being presented.
capability over a sustained period of
time. As increasing numbers of leading 3. Ensure that escalation
Crisis management planning also channels of communication are
organisations now realise, it also depends
covers the identification of response understood and that they work.
on the completion of comprehensive
teams. The CMT itself will generally
real-time exercises. These build capability 4. Create subordinate working
consist of senior board members: the
in the most effective way, which in turn teams (such as a support team)
chief operations officer or the CEO and
generate board-level confidence. that can work concurrently on
directors of key business functions (for
example finance, HR, IT, communications) different issues – conducting an
The ultimate proof of the benefits of investigation, assessing ongoing
as well as business unit leaders. This
such sustained activity and rehearsal operations etc.
group will typically need the support
comes, of course, when a real-life crisis
of another team drawn from across 5. Practise, practise, practise: the
does actually occur and the company
the business and consisting of senior extent and complexity of
must respond. Only then can the true
individuals, such as the director of exercises and rehearsals should
value of planning, real-time exercises
security, deputies of HR and finance. reflect your organisation’s risk
and review be fully appreciated.
This group will respond to the CMT’s appetite and the degree of
information requests and implement confidence required in its crisis
Dr Paul Robertson is the crisis
its strategic decisions. Additional management capability.
management leader in the UK and
subordinate teams may also be required,
Martin Caddick is the business
depending on the nature of the crisis.
continuity leader in the UK. They are
both members of the Governance
Risk and Compliance team at PwC.
10 PwC
11. Financial Reporting Opinion
IASB changes regime
As Sir David Tweedie prepares to step down from the International Accounting Standards Board,
Hitoshi Kiuchi looks back on the highs and lows of his decade at the helm
The phrase ‘regime change’ is generally on it in different timescales. Not framework. This, after all, is said to be
used in the context of countries seeing surprisingly, as the end of the Tweedie the foundation on which all standards
the need to replace a local despot, regime approaches, the two boards are are built. If we believe that, then we
usually someone who has been in place some way apart. should believe that it is something to
for around 30 years. Yet in the more write before the standards are written.
peaceful environment of international Working together towards convergence Writing it after the standards downgrades
standard setting, we see on 30 June is never easy, but more success has, it its importance.
2011 the end of the Tweedie regime – appears, attended the work on revenue
the end of Sir David Tweedie’s 10 recognition and lease accounting. Yet Other options for the future work
years as chairman of the International even here, where the objective was joint programme include: post-implementation
Accounting Standards Board (IASB) new standards by June 2011, the two reviews of existing standards; standards
– and the start of the Hoogervorst/ boards have had to announce (14 April on new subjects such as emissions
Macintosh regime. 2011) that a few more months are needed trading; standards on specific industries
to make sure that the standards are of the such as extractive; and the wider
David Tweedie has been at the helm of right quality and that constituents’ reporting agenda (integrated reporting),
the IASB since its inception, when the concerns have been properly addressed. including management commentary
IASB took over from the International (See news article, page 30). and reporting of risk, strategy and
Accounting Standards Committee (IASC), corporate social responsibility.
which had a part-time committee and So in practice, rather than inherit a clean
smaller staff. The IASB has had a position where a number of major projects The US question
full-time board and has been a serious are finished, Messrs Hoogervorst and Underlying all these decisions about
player with comparable resources to the Macintosh will have to spend the first agenda priorities is the question of
US Financial Accounting Standards Board few months finishing off the final stages whether the US SEC will approve the
(FASB). Indeed the joint agenda of the of these late-running projects. Their use of IFRS by US domestic companies.
IASB and the FASB has been a dominant hope, no doubt, will be that the July An announcement is expected later in
part of the IASB’s work in this last decade. 2011 board changes will not derail the 2011. The US is likely soon to be the
projects at their final stage. only major economy that does not
In many respects, the IASB has had a permit or require IFRS. Yet it is far from
very successful decade. It has grown in Which way for the new regime? clear that the SEC will vote in favour.
importance as more and more countries The new regime will want to consider Even if they do, there are likely to be
have adopted IFRS, with more at various their strategy. Indeed, a consultation on SEC interpretations of IFRS – which
stages of adopting IFRS, including the work programme and the priorities would presumably not apply elsewhere.
Canada, Japan and India. The IASB has from 2011 onwards has already been A possible outcome is ‘yes, subject to…’
developed new standards on various announced. Where should they start? followed by a list of conditions that
subjects, some in isolation but most in What should be the priority areas? might be difficult or take a long time to
conjunction with the FASB. These achieve. So it is possible that US GAAP
include share-based payments; business There is something to be said for a will still be in use in 10 years’ time.
combinations; financial instrument pause for reflection, to catch breath,
disclosures; and segment reporting. to allow implementation of the current The board of the IASB, under its new
batch of new standards. Perhaps, as leadership, has many major questions
The story has been less rosy in other was argued in 2001, there would be to face.
respects. For example, the standards on merit in stopping work on all standards-
financial instruments (IASs 32 and 39), level projects, to concentrate on Hitoshi Kiuchi is IFRS and Japan GAAP
inherited from the IASC in 2001, have finalising the updated conceptual technical leader at PwC in Japan.
been largely retained, with only a small
part replaced, by the first element of
IFRS 9; and that only in 2010. Financial
instrument accounting has been one of “There is something to be said for a
the areas where the IASB and the FASB
have sought to work together. Yet this pause for reflection, to catch breath,
has been an unsatisfactory process, with
the boards not increasing the chance of to allow implementation”
a common outcome by addressing the
project in different ways, coming up
with different proposals and consulting
World Watch Issue 2 – 2011 11
12. Financial Reporting Opinion
Effecting change in a fast-moving
environment
The need for high-quality accounting standards is paramount, but is the current standard setting process
effective? Peter Holgate weighs up the options
Sometimes, on the other hand, the need particular direction (say, a strong focus
to consult can be an excuse for taking a on assets and liabilities) and the desire,
long time. This can be very helpful if the or need, to consult in a genuine way.
official in question does not really want
to pursue the change in question. “It is A current example brings these issues
necessary to have a full and wide- into focus. The European Financial
ranging investigation of all possible Reporting Advisory Group (EFRAG)
viewpoints and to identify the potential issued a 51-page paper in January 2011
effects rather than act hastily...” By the – Considering the effects of accounting
time that has happened, there has been standards. The basic proposition is
a change of government, or a change in that the IASB should carry out “effects
the membership of the relevant body. studies” throughout the standard-
setting process.
In fields such as climate change, where
there are many opinions about the There is some ambiguity as to whether
urgency but also about the nature and the objective of these ‘studies’ is to
even the existence of the problem, there improve standards or increase the
are some who argue that the situation is accountability of the standard setter.
so extreme that there isn’t time to The proposals have the potential to be
Peter Holgate consult, merely time to act. In practice highly bureaucratic and could slow
the response of governments is to make down the standard-setting process
Much has been written on change incremental changes, for example to considerably. Of course, a standard
management. Often it seems to be a taxation, to encourage, or ‘nudge’, setter would want to be aware of the
matter of changing hearts and minds, behaviour in a particular direction. likely effects (costs, benefits, micro- and
of involving people through discussion macro-economic effects) of a proposed
and consultation. A government or other How do changes to financial reporting standard; indeed the IASB’s framework
benevolent rule-maker has an idea, fit into this? The need to reform envisages that it should take into
seeks views, moulds opinion, persuades accounting in the height of the recent account costs and benefits.
an initially-sceptical populace that the financial crisis was impressed upon the
new idea is what it really wanted all International Accounting Standards But what should be done if a macro-
along, and implements the change to Board (IASB) and the US Financial economic effect is identified? Say, for
warm applause. Accounting Standards board (FASB) example, a new standard on pensions
by the G-20, who gave the boards or leasing might result in the industry
There is a more jaundiced version, along ambitious targets and quite short changing or contracting as a result of
the following lines. The authority in deadlines. This seems to be not far from the costs of the activity being better
question has an idea that it wishes to a wartime basis, although the boards understood. Most accountants would
impose. It has decided in its wisdom seem to have taken longer than the say that it is not a reason to abandon the
that the change in question is necessary, G-20 envisaged to meet the deadlines idea if it would improve accounting and
either to improve a process or to resolve and yet still to be in business. transparency at a reasonable cost
a problem. It has to go through the relative to the benefits. Indeed it is
process of consultation, which it views In more normal times, the development positively a good thing to understand
as a necessary evil, so that it can be seen and reform of accounting standards the costs and risks associated with, for
to have been democratic and given seems, on a slightly generous reading, example, defined benefit pension plans.
constituents the opportunity to submit to fit into the category of gradual rule
views. It then proceeds, irrespective of change by consultation and consensus. A politician might think otherwise.
the submissions received, with what it But those who work in standard setting
had already decided was necessary. are not there entirely to run a popularity Peter Holgate is senior technical
contest. Indeed it would be a poor IASB partner at PwC in the UK.
Sometimes change has to be introduced member whose stance was: “let’s see
in a more brutal manner; in wartime, for what people think, because I’m far from The EFRAG paper is out for comment
example, governments make decisions sure what we should do here”. So in until 31 August 2011.
and implement them the same afternoon practice, there is often a tension between
(‘emergency rule’). the desire to push accounting in a www.efrag.org
12 PwC
13. Assurance Opinion
Internal audit can shine
The boardroom focus is now on growth and the future. But is internal audit responding to the
changing risk environment? John Feely explains why internal auditors should keep pace
After several years of extreme financial oversight to advising on a wide range the migration from financial risks to
uncertainty, there’s a surprising level of strategic, business and compliance more operational and strategic risks.
of confidence among chief executive risks, it is important that management
officers. Those who anticipate how assesses and recognises internal audit’s Leading CAEs consider the audit
business is changing and creatively skills and capabilities in these areas. committee as key to their relationships,
search for value in new markets with CAEs consistently told us that the skills interacting with them frequently outside
new customers and partners, expect necessary for success are: effective of scheduled meetings. Establishing
to find great opportunities. communication; an ability to build a good working relationship with
strong relationships with company the audit committee cannot be over-
As CEOs step onto a larger stage, their leadership and the audit committee emphasised. Because internal audit
internal auditors should be taking a chair; and the capacity to engage is well-positioned to see across the
similar approach by preparing for a best internal and external partners. If the entire enterprise, it has the perspective
supporting actor role. And as companies internal audit department isn’t involved and the objectivity to help the audit
focus outward, internal auditors would in significant initiatives, why not? Is it committee understand significant
be wise to expand their reach to encompass because the team lacks the required challenges and risks.
a more diverse set of risks and engage knowledge or skills to contribute? Or,
it is because the internal audit function Some in the profession see a potential
stakeholders on the need for support in
hasn’t earned a place at the table? conflict between active relationship
non-traditional areas.
building and maintaining auditor
Our survey did indicate that internal objectivity and independence. Our
Internal audit leaders can help their auditors’ interactions with company
audit committees and management belief is that meaningful and sustainable
leaders are broadening. While the relationships are built on trust. For
understand the dynamic and complex highest level of interaction remains with
risk environment and make it easier to internal auditors, that trust is built
traditional finance and accounting through transparent and candid
adapt to a rapidly changing world. leaders, the survey also found a
Those who succeed in this endeavour dialogue with stakeholders, and sharing
considerable level of contact with a point of view that is not only fact based
will add tremendous value; those who companies’ operations leaders such as
but also reflects an understanding of
do not seize this opportunity risk losing the chief operating officer and chief
the business, its strategies, and its risks.
relevance within their organisation. information officer (see table). These
relationships are critical to internal John Feely is the global leader of
Internal audit response auditors’ ability to identify and respond internal audit services at PwC.
PwC’s 2011 State of the internal audit to a broader range of risks and continue
profession study examines how internal
audit is responding to this changing risk CAEs contact with people outside audit committee meetings
environment. The need to grow businesses
in emerging markets, staying competitive CFO 80% 12% 5%
by adopting innovative technologies Controller 75% 15% 6% 4%
and responding to a rapidly changing
regulatory environment underpin the Business unit leaders 62% 28% 8%
critical risks facing today’s businesses. CEO 59% 23% 14% 4%
General counsel 59% 21% 11% 9%
We interviewed chief audit executives
(CAEs) to learn how they are responding to CIO 55% 25% 10% 10%
today’s business challenges. They confirmed CRO 52% 13% 8% 27%
that leading internal audit functions have
COO 49% 22% 11% 18%
strategic growth initiatives, emerging
technologies and increasing regulation External auditors 49% 33% 16%
near the top of their risk and audit agendas Audit committee chair 24% 40% 23% 13%
(see below) and are preparing to play
Investor relations 21% 19% 24% 36%
a significant role in a changed world.
However, the survey data also shows a Audit committee members 11% 35% 33% 21%
lack of confidence in internal audit’s External counsel 5% 9% 33% 53%
ability to effectively address these topics.
Frequently: 10+/yr Periodically: 4-10/yr Occasionally: <4/yr Never
Scripting internal audit
Source: PwC
As internal audit organisations strive
to transition from financial controls
World Watch Issue 2 – 2011 13
14. Governance News
US
Turning up the heat on
executive compensation
The provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
will have a significant impact on the way public companies determine their executive compensation
arrangements. Although some of the requirements are effective now, clarification on many of the
implementation issues is still awaited.
A topic that has received extensive focus
in the ‘Wall Street versus Main Street’
debate has been the relationship between
executive compensation and the company’s
financial performance, and the vast
discrepancies between CEO pay levels
and those of rank-and-file employees.
CEO pay ratio
Dodd-Frank directs the SEC to adopt
rules requiring companies to disclose
the relationship between executive
compensation actually paid and the
company’s financial performance, as
well as internal pay equity or the annual basis. To overcome this, many The independence of compensation
so-called ‘CEO pay ratio’, to compare the companies will need to set up new consultants, legal counsel and other
total annual compensation of the CEO administrative systems and controls. advisors to the company will also be
to the median total annual compensation In recognition of these likely assessed. This will be based on factors such
of all employees. There are significant implementation difficulties, the SEC as whether the adviser provides other
questions and challenges associated has asked for comments in advance services to the company, fees received as
with these disclosures, particularly of issuing proposed rules. a percentage of the adviser’s total revenue,
for large multinational corporations. policies the adviser has implemented to
At issue are both the census of ‘all Independent compensation prevent conflicts of interest, any business or
employees’ and the definition of total committees personal relationships between the adviser
annual compensation. The SEC has and members of the company, and whether
Dodd-Frank’s provisions will require
tentatively scheduled proposed the adviser holds stocks in the company.
companies to ensure independence of
rulemaking for the second half of 2011.
compensation committee members as
Disclosure on compensation committee
well as their advisers. The Act requires
The implementation of the CEO pay independence is required in proxy
the SEC to direct national securities
ratio disclosure is likely to be difficult statements for annual shareholder
exchanges to prohibit listing of any
and complex, particularly for large meetings occurring on or after 21 July 2011.
company that does not have an
multinational corporations. Total annual
independent compensation committee.
compensation, as defined in the act, Dodd-Frank requires the SEC to perform
would include all components of a study of the use of compensation
In determining independence, securities
employee income, including stock consultants, and the effects of their use,
exchanges are instructed to consider
compensation, deferred compensation with a report to Congress by 21 July 2012.
relevant factors including any consulting,
arrangements, pension and other
advisory or other compensatory fees
post-retirement benefits alongside salary For more information on the
paid to the director by the company, and
and other elements. Few companies requirements of the Dodd-Frank Act,
whether the director is otherwise
maintain information on these various see World Watch, Issue 1 2010, page
affiliated to the company.
components for all employees on an 20 or visit www.pwcregulatory.com
14 PwC
15. SURVEY
What makes investors trust management?
Governance – News
A survey of investors and analysts
reveals that although trust in Usefulness of capital market communications
management is now lower than
Income statement
before the credit crisis, the majority
still trust CEOs and CFOs. Balance sheet
Cash flow statement
The global analyst and investor survey
was conducted in late 2010 by PwC and Segmental information
the Rotterdam School of Management, Notes to financial staements
Erasmus University. As part of the
Management discussion and analysis
research, 1,400 sell-side and buy-side
analysts and portfolio managers worldwide Earnings press release
were asked for their opinion on the level
Earnings conference call
of trust they place in the CEO/CFO,
what traits make them trustworthy, One-on-ones
and the usefulness and reliability of Sustainability reports (by the company)
capital market communications.
0 1 2 3 4 5 6 7 8 9 10
Source: PwC & RSM
Impact of behaviour
The research looked at how the CEO’s
Reliability of capital market communications
and CFO’s behaviour can win or lose
investor trust. It identified frequently Income statement
changing accounting policies as the
Balance sheet
way most trust is lost, with providing
inaccurate information a close second. Cash flow statement
Investors and analysts are concerned
Segmental information
that companies opportunistically
change accounting policies – a worrying Notes to financial staements
concern given the large number of Management discussion and analysis
new accounting standards that the
Earnings press release
International Accounting Standards
Board and the US Financial Accounting Earnings conference call
Standards Board are proposing to One-on-ones
introduce. Companies that are unable
to appropriately explain what they are Sustainability reports (by the company)
changing may struggle with negative 0 1 2 3 4 5 6 7 8 9 10
perceptions and the loss of investor trust. Source: PwC & RSM
Not surprisingly, investors lose trust
with CEOs who behave offensively. peers. This reinforces what CEOs and Reliability of communications
This includes those who complain CFOs say they see in practice. Although investors rate face-to-face
about shareholders, refuse to answer meetings above all other capital
questions and belittle analysts or Usefulness of information market communications, the tangible
investors. However, trust can be gained Investors and analysts were asked to communication they value most is the
through empathetic behaviour, such rate the usefulness of the capital market cash flow statement (see table above).
as asking investors for their views. communications available to them. And when investors have high trust in
the auditor, they rate the reliability
Investors said reporting good performance While most components of the financial of all publicly disclosed information
prompted the biggest gain in trust, with statements score between seven and higher. The fact that a trustworthy
other good news gaining equal trust as eight (on a score of one to ten), the auditor has thoroughly examined the
material good news. However, material management discussion and analysis business seems to enhance the perceived
bad news results in a much larger loss of (MD&A) scores significantly lower (see reliability of all public disclosures by
trust than bad news with no material chart above). In theory, the MD&A the company, whether audited or not.
impact. This implies a limit to the trust that would appear well suited to reporting
can be gained from good performance. information such as progress against Find out more about the RSM Global
strategic objectives, which fall outside analyst and investor survey at
The findings confirm that consistently the framework of the primary financial www.rsm.nl/home/news/detail?p_
increasing earnings result in more trust statements and notes. However, item_id=6417982
than earnings that develop less investors say they get more useful
predictably; and trust is reduced by information from one-on-one meetings
having more volatile earnings than with management. World Watch Issue 2 – 2011 15
16. WHISTLEBLOWING
The importance of speaking up
Legislation around the world is upping said senior management was very or fostering an open culture. There is
the stakes for organisations in terms of quite supportive of promoting an open no ‘one size fits all’ solution. It does,
their provision of whistleblowing speak up culture, 42% also thought that however, set out five milestones
arrangements. However, in many more support from senior management as a framework to help organisations
entities, more support from senior would be advantageous. develop an effective, tailored
management would be ‘advantageous’. whistleblowing programme.
As the paper notes, organisations must
A PwC paper, Striking a balance: be guided by jurisdictional requirements
Whistleblowing arrangements as part when developing whistleblowing The five milestones
of a speak up strategy, highlights the arrangements. They should not
1. Gain top-level commitment
importance of an open ‘speak up’ underestimate the impact of the Bribery
culture, where individuals feel able to Act in the UK and the Dodd-Frank Act in 2. Develop a whistleblowing policy
raise any business or ethical concerns the US, for example. European data 3. Design whistleblowing
they may have. Its content draws on an protection and other laws also bring reporting mechanisms
online survey among members of the constraints, as well as raising the bar in
PwC Fraud Academy and a roundtable terms of regulators’ and other 4. Embed a whistleblowing
discussion with clients, as well as PwC stakeholders’ expectations. programme
experience in general. 5. Monitor, evaluate and report on
Against this background, the paper the whistleblowing arrangements
The findings show that more can be encourages organisations to establish
done to establish open cultures. arrangements that reflect their
Although 80% of survey respondents individual make-up and approach to www.fraudacademy.pwc.co.uk
COSO
Board risk reporting has
room for improvement
A study of the risk oversight processes types of risk reports that the board might
applied by boards of directors found receive on a periodic basis to inform its
inconsistency in the frequency and type risk oversight. Respondents were asked
of risk reports that the board is asked to to identify how frequently each is
review. Although evidence suggests that received in their organisation.
the boards of public companies fare best,
in some organisations directors receive The top three reports that boards
risk reports less than once a year. received at least once a year are:
• High-level summary of the top risks
The survey was commissioned by the for the enterprise as a whole and its
Committee of Sponsoring Organisations operating units (71%)
of the Treadway Commission (COSO). It
asked over 200 directors to assess the • Periodic overview of management’s
current and desired future state of risk methodologies used to assess, in capabilities for managing key risks
oversight applied by the boards on which prioritise and measure risk (65%) and the status of initiatives to address
they served. The findings suggest that while • Summary of emerging risks that those gaps.
many believe their boards are performing warrant board attention (59%)
their risk oversight responsibilities In general, public companies provide
diligently and achieving a high level of According to the majority of respondents, more regular reporting to the board
effectiveness, a strong majority indicate reports that the board does not receive on risk-related matters. However,
a lack of formality in executing mature at least annually include: scenario the report finds there is scope for all
and robust risk oversight processes. analyses evaluating the effect of companies to make their risk reporting
changes in key external variables that more effective through an improved
The survey, Board risk oversight – A have an impact on the organisation; a risk-reporting process and increased
progress report: Where boards of directors summary of exceptions to management’s regularity of reporting.
currently stand in executing their risk established policies or limits for key
oversight responsibilities, identified nine risks; and a summary of significant gaps www.coso.org
16 PwC
