AAT conference 2013: Authentic reporting

Monday, 21 October 2013 00:00 -     - {{hitsCtrl.values.hits}}

By Kinita Shenoy Held in the association’s silver jubilee year, this year’s AAT conference’s theme was “Authentic Reporting- Discovery Debate”. Bank of Ceylon Chairman Razik Zarook delivered the keynote address, highlighting the various differences between accounting practices and life itself in the 25 years since the association’s conception. Questioning the very theme of the conference, Zarook queried why we did not seem to think accounting was authentic as it stood. Discussing the inability to truly financially report an organisation’s most important asset- its people, Zarook insisted that it was important to intrinsically attach a value. With their own resources, companies create their own successful brands with long-term reputations. He added that reports must be intrinsically analysed beyond profit and loss, to decipher the figures that have not been included. Potential too is not reflected in terms of rupees and cents, and is a veritable treasure trove which may just be cast away as “unprofitable”. Zarook further challenged the credibility of rating agencies and advocated reliance on sound accounting principles.     Insights in Authentic Reporting The first session was conducted in a debate format, featuring Former Central Bank Assistant Governor Dr. Anila Dias Bandaranaike, Aitken Spence CFO Nilanthi Sivapragasam and Orient Finance Chairman Dr. Dayanath Jayasuriya as panelists and Colombo Dockyard MD/CEO Mangala P.B. Yapa as moderator. Dr. Jayasuriya kicked off the session by discussing one of the issues that caused a great amount of concern, which was considering “whether we should move toward a single regulator, as we had more than a dozen regulatory authorities”. He further mentioned that companies that adhere to the “true and fair” concept and remain technically fully compliant are the best in accounting terms and that there were a number of issues which come into the term “authentic reporting”. There are many objectives of disclosures driven by considerations. The highly desirable approach includes “information about financial position; performance; changes in financial position that is useful to a wide range of users in making economic decisions”. The cautious approach includes an information overload, things taken out of context, temporary fluctuations, and macro/ industry level negative trends. Jayasuriya added that the way forward would entail good corporate governance and high moral standards, make as much information accessible to current/prospective investors as you would like to have. Secondly, people of integrity must adopt a transparent attitude, even if this entails going above and beyond regulations to do the right thing. Looking at things from the perspective of corporate professionals preparing reports, Aitken Spence CFO Sivapragasam affirmed that despite serving on a monitoring board, her primary role is of a CFO preparing reports etc. She defined authenticity as verifiable data. “To what extent can information in annual reports fulfil all these requirements? The IFRS/SLFRS must be followed, and then financial statements must be audited. A formal format must be followed, as well as integrated reports and sustainable reporting. While the emphasis previously used to be based on the past, annual reports are now leaning more towards future plans, so that investors can gauge whether it is something they would like to be a part of. In this way, it is difficult to ensure that this is correct. The more information provided, the less authentic it may be as there is so much more material to verify.” Dr. Dias Bandaranaike then weighed in, saying: “For a non-accountant, it can be difficult for a layman to understand; it is a challenge auditors and regulators have to take into account. Discussing a basic premise we tend to forget- we want the business to be responsible to the clients, employees, investors and even the immediate environment. It is no longer a simple issue of looking at the profits. There is a much greater responsibility to the information given out from a business. Even 10/20 years ago, development used to be looked at in terms of numbers- GDP etc. now it is more in terms of human development- unhappy people will protest or create problems.” She added that it is a question between tangible reality “hype and gloss”, intent and implementation versus window dressing. Unless there is a commitment from those making the policy decisions, with the amount of information available it is easy to hide the truth. Her final point was that the world has become increasingly complex- more sophistication and more regulations. Sometimes it is necessary to perhaps simplify. Because of this complexity, we are going deeper into the reporting to try and stop loopholes and cracks. This makes regulator even more difficult. As a regulator, they called auditors in who looked at transactions two levels back and seemed clear, although if looked into five levels back there would be some borrowing which would turn out to be a slight scam. The whole concept of reporting has become very complex, added Yapa. Despite the gray areas, by and large, it can be seen as one area which can be verified and valuated. However, industry reports can sometimes be very biased. “If you want to create a rosy picture, you can only reflect one positive side of the picture. There is even more regulation and more complex systems, beyond even IFRS of late. Reports are not only for those who have prepared it, but for organisations’ multiple stakeholders.” Discussing Colombo Dockyard’s history with AGMs, he said that as a general rule, issues raised tend to be more personal issues rather than important/strategic issues. There is no true and honest engagement in this regard. The Annual Report, if prepared well, presents the most insightful analysis of the company’s position. A compilation of information coming from multiple sources, which if prepared well can reflect either a true account or sugar coated account. Sivapragasam added that most shareholders simply ask for free weekend packages and such, despite the board’s intense preparation for the AGMs. She concurred that most foreign funders and investors as well as stakeholder/shareholder engagement happen more through annual reports than AGMs. Dr. Dias Bandaranaike explained that a genuine effort to put out truthful information is really of use only to those who are engaging in the investment part of it or big clients.  She further questioned the other panellists as to the growing need for complexity in IFRS and other financial regulations. Sivapragasam responded that it was because businesses were becoming far more complex due to derivatives and other such mechanisms, as companies enter into varied transactions. The IFRS is trying to capture all of that in their reports as it was previously omitted. For non-financial people it can be difficult to decipher the complex reports. The laymen would generally just read the chairman/MD’s messages to get a picture of the company’s position. Yapa added that “With foreign stakeholders or investors coming in, there is also a need to have a common international environment”, as well as a need for comprehensiveness and inclusion of all necessary aspects. Dr. Jayasuriya, explaining that credit ratings agencies governance structures are insufficient, annual reports may reflect certain things because rating agencies queried it the year before. You try to follow the acceptable standards otherwise it becomes more difficult to raise funds from the public or the banks. “As interim reporting tends to be purely on financial aspects, the plans stated in one year’s annual report may have changed or proven to be not feasible by the next year- which leaves stakeholders questioning what happened.” Yapa responded that our integration into the global economy creates a certain dependency and inability to forecast future events or even plans, despite sufficient insight and information. Chairmen/CEOs can only state their current position at the time, which is something stakeholders need to understand, along with the industry’s complexity. Discussing the issue of the imprudence of full disclosure in reports, especially in terms of giving competitors information, Sivapragasam added that this was indeed a problem, but as a listed company transparency was a necessary element.     Using IFRS to bridge the gaps The second session looked at IFRS’ role as a tool to bridge the gaps and how successfully this has been accomplished. The section was opened by EY Partner and IFRS Asia Pacific Leader Tommy Fung looking at “IFRS 2012 Implementation: Experience and Review”. Financial reporting is a key element of authentic reporting. The statement of financial reporting can be analogised as a snapshot of a company’s financial status at a particular time- but this snapshot can be black and white, colour, or even 3D. Standards become more complex as the business grows more complex. Fung asserted that the IFRS is a high quality set of globally accepted accounting standards that aims to be principle rather than rules-based. He added that apart from better reporting and reduced costs, it also helps countries have better access to global capital markets. He referred to the implementation of IFRS as a beginning of a continuous journey since the IFRS adoption in January 2012. Long-term sustainability along with ongoing convergence beyond 2015 may prove to be future challenges. Fung added that “preparers implement IFRS with a range of elements, including mindset, implementation leadership, reporting aspects of daily operations and special transactions as well as business information, system and controls. People and expertise also factor in, along with communications with users, regulators, and other stakeholders and preparation for future IFRS changes.” Discussing long term benefits, Fung explained that apart from the existing IFRS positives such as lower cost of capital and easier foreign fund raising, that it actually reduces complexity of multiple national GAAPs and also improves internal management information for business operation decisions. The ongoing challenges however include the implementation of a long term strategy in systems/process to capture, process and generate IFRS information as well as comprehensive standards. The presentation was followed and supported by a panel discussion with Fung, Pricewaterhouse Coopers Partner Sujeewa Mudalige, Insurance Ombudsman Dr. Wickrema Weerasooria and Echelon Magazine Editor in Chief Shamindra Kulamannage as moderator. Mudalige explained that it took two years of preparatory work and discussions with regulators and consultants to set up the implementation of IFRS at the turn of 2012. He added that they also spoke to the banks and insurance companies and non-banking financial institutions as they wanted holistic input, knowing it would not be easy. As one entire financial year has now completed since the adoption, Mudalige assessed the progress admitting that they had a few hiccups but on the whole, the banking sector responded exceedingly well having the capacity to do so. They expect to fine tune the compliance. Over 29,000 companies in Sri Lanka are SMEs, thus it is only about a 1000 companies that will actually adopt the comprehensive SLFRS. Discussing issues related to accounting and corporate governance, Dr. Weerasooria said he’s always had a strong affinity for accountants, book-keeping. As we get globalised, we have to live up to global expectations. When insurance companies were recently told to de-segregate, they weren’t given a choice. But all these regulations are here to say, like it or not, and work toward the good of the country. He insisted that transparency is key. “Our financial scenario has been hit by a tornado. As companies have crashed one by one, the financial sector up to date has not had one report as to why these companies failed.  All these have been put under the carpet. The point is- I value auditors/book-keepers, and at every board I’m on, I insist that all non-financial board members be briefed as to IFRS standards.” Looking at the legal implications of the adoption of the framework, the floor was open to the audience. With IFRS promoting itself as a global standards, certain countries do not always have a choice. Some countries use IFRS across the board, and some use the standard for only their larger companies as SME regulations come in later and has been developed on the full IFRS set of standards. With this timing, we’ve noticed some countries mandating IFRS for all companies, and do not want to create a greater set of complexities. In HK, they do not mandate their SME standard but leave it as a choice. Other countries actually feel it is better to have both. Thus, it is a policy decision as to the cause and benefit as to how it will square up- there is no standard decision. Looking at the future of SME standards and the gap that may exist, Mudalige explained that 90% of the country’s companies are SMEs. Questioning whether we could do better, he said that the country originally looked at larger companies; listed and insurance etc. Of late, seminars and workshops to create awareness for implementation for smaller business have been carried out as AAT too has been a backbone of support to help SMEs improve their financial reporting and have the depth and skill to do so. But a lot more needs to be done because smaller businesses are spread across the country and most accounting bodies are concentrated in the main cities. Weerasooria looked at various issues: there must be public answers for the crash of certain companies (eg: Golden key, Pramuka) professionals must be brought to task by the court system. Unless the law is reformed and we consider professional issues and litigation which will open up the rules so we know how to improve the situation. In his capacity as the previous CB consultant, he added that the 1852 English law covers bankers but should also apply to professionals. In that way, any shareholder or individual who has been wronged by a firm can sue. Session 3 also featured a debate, titled the “Round table of users of financial reports”, with KPMG Sri Lanka Managing Partner as session chairman and GAJMA Partner N.R. Gajendran, Human Resources Senior Minister D.E.W. Gunasekera, and John Keells Holdings Director Dr. Indrajit Coomaraswamy as panellists. The fourth and final session addressed the issue of “Is integrated reporting the solution- if not, what is next?” The session was opened by a presentation by DIMO Director Suresh Gooneratne, supported by a panel discussion including Insurance Board SL Chairperson Indrani Sugathadasa as moderator, Dialog Axiata Group Corporate Office Head Michael de Soyza and SheConsults Director Aruni Rajakarier as panellists. Pix by Lasantha Kumara