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World Watch Issue

  1. 1. www.pwc.com World Watch Governance, Reporting and AssuranceIssue 2 2011In this issue:Page 5Investors want betterM&A disclosuresPage 6Reporting must evolve,not failPage 8Confident about yourcrisis response?Page 11IASB regime changePage 13Internal audit: Rising tothe challenge?
  2. 2. ContentsOpinionCorporate Reporting5 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 community6 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 failGovernance8 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 effectFinancial Reporting11 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 helm12 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 optionsAssurance13 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 paceNewsGovernance14 US: Turning up the heat on executive compensation • Impact of Dodd-Frank reforms • Clarification still awaited15 What makes investors trust management? • Survey of investors and analysts reveals level of trust • Investors rate usefulness of information16 Survey highlights importance of speaking up • Support for whistleblowing encouraged • Five milestones to develop a programme16 COSO: Study of board risk oversight • Inconsistency in frequency and type of risk reports • Scope for all companies to improve17 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 201117 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 comply18 Europe’s boards under pressure to appoint women • European Commission warns of regulation • Pressing for voluntary increases in appointment of women to the board18 UK FRC review of risk responsibilities • Review of risk oversight practices • Project to explore good practice19 Pakistan: Strengthening governance to attract • Delay to introduction of new corporate governance code investment • Proposals to align with international best practice19 Turkey: New commercial code provides • Code built around transparency, fairness, accountability and responsibility blueprint for the future • Effective 1 July 201220 The internet just got scary • Cyber security tops list of ‘risks to watch’ • Tips to improve governance of information20 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 bribery2 PwC
  3. 3. Corporate Reporting21 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 investors22 Mauritius: Effective reporting recognised • Annual awards celebrate integrated reporting but little overall progress found • Judging criteria – content, clarity and correlation23 IIRC: Global support for integrated reporting • International Integrated Reporting Committee gains support in China • Discussion paper expected shortly23 WBCSD: Measuring biodiversity risk • Failure to value ecosystems puts business at risk • Valuation framework launched23 Spain: Sustainability reporting • New law requires sustainability reports from 201224 Cut the clutter from annual reports • Report finds unnecessary information is obscuring relevant data • Suggestions to help companies change behaviour24 Sweden: Sustainable business strategies in practice • Handbook outlines practical advice for sustainable business development25 CDP: Focus more on performance than disclosure • Changing emphasis on carbon information • Opportunity to influence government regulation25 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 rise26 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 reporting26 UK: Action on reporting quality • Regulator sharpens focus on risk reporting27 South Korea: Reducing emissions • Legislation requires independently verified annual emissions data from 2011 • Mandatory cap and trade scheme delayed until 201527 Malaysia: Guiding directors through • Programme to raise awareness of reporting requirements the sustainability agenda28 UK: Proposals on reporting and audit • Recommendations to improve corporate reporting and audit models to benefit investors • Reporting lab provides a safe haven for innovation28 Differentiate yourself, companies urged • Launch of UN Global Compact Differentiation Programme29 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 data29 EC: Assessing sustainability reporting • Report looks at how companies report on ESG issues, and the challenges facedFinancial Reporting30 Convergence shifts back • IASB and FASB extend completion date for joint projects • Standards on revenue, leasing, financial instruments and insurance to take priority31 US expected to adopt IFRS • Survey examines preparedness for IFRS. SEC decision expected late 201131 Canada influence on standard setting • Impetus to engage with the IASB. Significant adoption challenges32 Mexico: Reporting progress toward IFRS • Quarterly IFRS conversion reports • Monitoring group watching adoption progress33 Brazil: IFRS proves a cultural challenge • Regulator highlights reporting difficulties • Related parties, financial instruments and concessions are common problem areas33 India: Slowing the pace of convergence • Deferral of plans to move to IFRS by April 2011 • No indication of revised timetable34 Governance of the IASB • Monitoring Board undertaking structural review • Consultative report open for comment until 31 August 201135 Challenges of tax reporting • Changes to accounting standards, tax requirements, business models and stakeholder needs place demands on tax directors35 IFRS interim financial statements • New guidance and checklist to help companies prepare35 XBRL taxonomy draws an audience • Opportunity for regulators: better risk profiling, efficient processing, consistencyAssurance36 Audit reporting: Is a global perspective possible? • Debate on the current standard form of the auditor’s report • IAASB consultation paper by June 201137 The audit market in the spotlight • Responses to European Commission green paper on audit • House of Lords Economic Affairs Committee publishes its findings38 PCAOB calls for more insight from auditors • Survey of US investors. Concept release expected by late June 201139 What influences audit quality? • IAASB paper assesses the audit and invites comment39 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
  4. 4. EditorialBreaking the mouldWhen the history books are written, will 2011 be remembered old to the new. So as the debate about the relevance and futurefor systems change? At so many levels the world is in a state direction of reporting and audit strengthens, perhaps now is theof flux; numerous political systems are going through radical time to reflect on what these mechanisms could be. Ill-informedchallenge, as are economic systems in many nation states. regulation is unlikely to be the answer; what’s needed is newThe fall-out of the credit crunch still reverberates around the ideas and innovation tested in the market place.world reshaping the banking system and bringing the reportingand auditing systems into the spotlight. So what is the answer? What is it that those responsible for the system can do to nudge it into a better space and avoidThere is a multi-layered agenda for change, but critically all with ‘revolution’? For those worrying about the reporting and auditthe common theme of ‘systems change’. At the heart of all these agenda, the answer may lie with an idea being developedchallenges is a common recognition that systems change is not by the Financial Reporting Council in the UK. It’s a ‘reportingeasy but is essential if society is to evolve and be re-invigorated. lab’ – a place where market-oriented innovation can take place under the watchful eye of the regulator, a safe haven whereOne of the most significant barriers to change is the existing companies, investors and auditors can come together to addresssystem itself, as a research study featured in this issue of World the shortcomings of reporting, challenge established thinking,Watch highlights (page 21). In most systems, the institutional find practical solutions and act to reshape the reporting modelstructures created for good purpose in the past become and make it relevant for the 21st century.impediments to change, as do the behaviours and norms displayedby all the key participants in the system. Some are conflicted Breaking the mould of an established system is never easy.against change for good reason – why would you necessarily While those responsible for reporting and audit might feelsupport an agenda that threatens your position and livelihood? challenged, it’s worth a thought for those faced with the unenviable task of constitutional change. Let’s hope when weOn reflection, it is not surprising that systems become outdated and look back on 2011 it’s seen as a watershed of change for all thestressed. Dependent on historic structures, rules and regulations, right reasons.they are always going to lag behind the speed of innovation andchange in society. Technological innovation and the advance David Phillips, John Hitchins,of social networking have only made this problem more acute. senior corporate global chief accountant reporting partner PwCWhat everyone faced with systems change hankers after are PwCmechanisms that facilitate some form of transition from theContact usPwC has a strong and effective network of people worldwide who can advise on the developments and the implications ofregulations. If you would like to discuss any of the issues raised in this publication, please contact your local office, the peoplenamed in specific articles or the editor.To subscribe to World Watch magazine (usually published twice a year) or to contribute articles, please email sarah.grey@uk.pwc.comwww.pwc.com/worldwatch www.corporatereporting.com World Watch team Editors: Sarah Grey and Nicole Wilson upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is Consulting editors: John Hitchins, David Phillips, Peter Holgate, given as to the accuracy or completeness of the information contained in this Simon Friend, Alan McGill and Diana Hillier publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone Contributors: Paul Robertson, Jacqueline Cancro Sidoti, else acting, or refraining to act, in reliance on the information contained in this Jacomien Van den Hurk, Wendy Reed, Joanna publication or for any decision based on it. Malvern, Alison Thomas, Bethany Tucker, Graham Gilmour, and PwC staff © 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership PwC firms provide industry-focused assurance, tax and advisory services to in the United Kingdom), which is a member firm of PricewaterhouseCoopers enhance value for their clients. More than 163,000 people in 151 countries in International Limited, each member firm of which is a separate legal entity. firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for Design & Media – The Studio 20692 (05/11) more information. This publication has been prepared for general guidance on matters of 100% Printed on 100% recycled stock interest only, and does not constitute professional advice. You should not act4 PwC
  5. 5. Corporate Reporting OpinionBetter merger and acquisitiondisclosures, pleaseInvestors tell us that they need companies to explain their transactions more clearly. Alison Thomasshares 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 theGiven 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 athe 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 ofrelating to them. But we continually hear frustration for investors. Some of the As with acquisitions, investors want toconcerns about the quality of disclosures acquired assets will have a finite life know the enterprise value realised onfor 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 assesscited by investment professionals as charge. However, investors may consider management’s stewardship of the assetsoffering opportunities to improve the other intangibles to be goodwill, they have been entrusted with, and toeffectiveness of disclosure in this critical notwithstanding management’s have sufficient historical data to be ablearea of reporting. classification as separate assets with to forecast the future. limited lives. In such cases, investors mayWhen talking to investors about reporting, wish to reverse amortisation charges. Stewardship: Investors wish to holdtwo themes come through time and management to account for its running ofagain: first, the desire to understand In order to decide whether an amortisation the entire business. Financial reportingif management are spending capital charge makes ‘economic sense’ or not, standards distinguish between continuingwisely; second, the need to have the investors would like to see greater detail and discontinued operations; management’sbase of data to forecast with confidence. about the nature of the identified narrative often concentrates only on theThese themes dominate our discussions intangible assets. continuing operations. Managementwith investors when talking about both could better meet user needs byM&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 knowFinancial reporting standards do require more about the strategy underpinning Forecasting the future: Currentmanagement to report on the cash cost an entity’s acquisition. They would like accounting standards require managementof an acquisition, but important detail to know the rationale behind any to present quarterly comparative data onlyabout 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 byvalue of an acquisition – that is, thetransaction’s effective net value. And investment professionals, who wish to Investors quickly lose visibility of update their forecasts for the residualinvestors 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 ofpension liabilities assumed unless segment in its own right, it is absorbedthe 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. IfSome of this information might be management thinks it important enough Alison Thomas is a PwC directorprovided 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.cominvestors we spoke to were concerned investors, even if separate disclosure is for more Investor viewsbecause such information is unaudited. not required by the standards.As investors need to assess and then World Watch Issue 2 – 2011 5
  6. 6. Corporate Reporting OpinionA critical system at riskCorporate reporting is at a ‘tipping point’, David Phillips argues. It is time to take action and makesure that our reporting system does not failMuch has been written in recent be counter-productive. What is needed Questions to answerdecades about the shortcomings of the is a structured and properly sponsored For the architects of our market-basedcorporate reporting model. Since the global programme to critically analyse system, here are perhaps the four mostindustrial revolution, this model has the case for change. It could take two important questions that needbeen predominantly focused on the years to properly assess the case and make considered answers.output of business activity, measured recommendations, but the implicationsin financial terms. Despite the world of this agenda are of such significance 1. What is the objective of corporatebeing transformed in so many ways to long-term system stability that it can reporting, and is global convergenceover 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 objectivesbeing recognised, it appears that the The work of the IIRC and its call for of corporate reporting differ aroundsystem has been constrained by its change has recently been supported and the world and are in a constant statehistoric roots and become incapable informed by a ground-breaking research of flux. Creating a path to the futureof meaningful evolution. study undertaken by Tomorrow’s requires these questions to be Company, PwC and CIMA. Uniquely, answered in the knowledge that it’sAs each economic crisis passes and as each the study – Tomorrow’s corporate easier to get global agreement onnew social challenge emerges, the system’s reporting – has looked at the whole issues at the outset of change ratherinability to evolve and change becomes a reporting system (people, organisations, than after a period of rapid domesticgrowing 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 isbeing used by business, reported those considering the IIRC’s proposals, rare for any single organisation to haveperformance based on profitability the study provides some important oversight of the whole reporting systemwill present a flawed view – business insights on how structure, behaviours in a particular territory. For some, thisdecisions will be sub-optimal, capital and incentives are critical ingredients fragmentation creates a weakness inwill be misallocated and society will for any plan to effect system change. the system and is one reason why thehave little ability to respond logically The report highlights the rigidity of the development of a more holistic reportingand 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 showsThe case for change all the hallmarks of its original architects 3. Is the current reporting systemThe 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 constructInternational Integrated Reporting auditors and standard setters – that, of today’s reporting system and theCommittee (IIRC) publishes its long- while sufficient for the 19th century, established role and behaviours of theawaited discussion paper on integrated have now become barriers to change. key players, the more one recognisesreporting. This discussion paper will why there has been little innovationbe open to consultation, and later in A roadmap for change and change.the year the IIRC will be engaging Looking to the future, the researchgovernments on the need for reform to sets out a road map for change. It is 4. What are the implications for thethe current reporting model. This occurs this that sits comfortably alongside the structure and governance ofat a time when global agreement on progressive agenda encapsulated in the established institutions that arealmost any issue is difficult to achieve. concept of integrated reporting and central to the design and operationsBut 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 forwhich society is totally dependent for addressed by those who oversee the organisations such as theits future wealth and well-being. reporting agenda, particularly its International Accounting Standards health, relevance and ability to explain Board (IASB), the Global ReportingWhile the IIRC will make the case for business performance in a world that Initiative (GRI) and the Carbonchange, 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. 7. The answer to these questions and others This provides a real opportunity – a The FRC’s work is also supported byraised in the road map are important and chance to bring all these elements of the another branch of the UK governmentcannot be taken lightly. As a minimum, reporting jigsaw together, to recognise (The Department of Business Innovationwe need a programme of structured the value that emerges from a more and Skills) who are consideringdiscussion and dialogue, ideally integrated model and the dangers that what actions can be taken to enablecommissioned by the G-20, to consider lurk in perpetuating a model that is ‘siloed’ companies and their boards to createthe 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 couldRealistically, the world has no more than in isolation, the synergistic value of an provoke the positive behaviouralfive 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 torole in the operations of the world And finally, we need to think through influence content, and whereeconomy and help facilitate the shift in how change can occur so that our compliance information, whileperformance measurement that is vital reporting system can evolve. How can provided, is not allowed to clutterin 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 needEncouragingly, 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 thethe world suggests that there is a regulatory mode? Perhaps there are some For all the reasons set out above, itgrowing realisation that reporting needs clues in the thinking currently doing the appears that we may be at a ‘tippingto change. For the most part, the focus rounds in the UK. Here, two particular point’ in the future of corporateis on selected elements of the reporting developments are worthy of note. reporting. For those with overallmodel, such as fair value and insights leadership responsibility, for theinto the judgements and assumptions Time to innovate economic system and its longer-termthat 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 theother aspects of integrated reporting is recognise that reporting has become ability of the system to adapt to therising too – for example, there is more too voluminous and cluttered by economic and social needs of thisfocus on the business model and risk information that is not assisting user century must be started, and shoulddisclosures, resource usage and emissions, understanding. It has come up with a culminate in recommendations beinggovernance and remuneration, as those radical idea of introducing ‘reporting made to the G-20. If we leave thisresponsible 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. 8. Governance OpinionAre you confident about yourresponse to a crisis?A poor response to a crisis can wipe huge sums off stock valuations, argue Martin Caddick andPaul Robertson. But a focused response that impresses stakeholders can have the opposite effectHigh-impact risk is now firmly on the Board members appreciate the need simulation exercises involving specificboardroom 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 developingcan do to corporate and management in appropriate ways in the event that team capability; however, they don’treputations. 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 learningtransport interruptions, natural in that capability, rather than simply experience of a real-time exercise.disasters, machinery failures and assuming it exists and will provesensitive data leaks – to name a few adequate. This trend complements the Real-time exercises are effectiveexamples – grab media headlines. growing stakeholder interest – among learning experiences because they run governments, regulators, standard concurrently with participants’ normalThe 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 anthan ever. The public has expectations is mounting appreciation of the need to environment where participants are freedof how an organisation should respond, sustain profitability for the long term, from normal distractions, the real-timebased on media coverage of past events. in ways that support the communities exercise creates additional demandsBusiness 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, butsituation. A poor performance, which critical, requirement for such sustainable The real-time exercise can also involveincludes inadequate communication business activity. large numbers of people from differentwith key stakeholders, can wipe huge departments, such as HR, IT, the supplysums off corporate stock valuations. Building capability chain and finance, and potentiallyOn the other hand, a focused, swift several subsidiaries and locations. Effective crisis management dependsresponse that impresses stakeholders This enables a far more complex crisis on the board and the crisis managementwith management’s capability can scenario to be developed, one that team (CMT) having the capability theyactually increase corporate value – combines multiple strands requiring need to respond effectively. Leadingbeyond the level it would have reached responses from numerous parts of the organisations are increasingly lookinghad no crisis occurred. Employee business. This creates a more realistic for ways to develop that capability, andloyalty can also be strengthened and situation for decision makers – a series turning to real-time exercises as theretention rates dramatically improved of challenging events that occur over most effective mechanism. Suchby demonstrating a high degree of several days or weeks and that gradually exercises represent a step up from theemployer 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. 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. 10. Some triggers will be obvious, such as Communication channels – when tofire, floods or terrorist events. More escalate information, how and to whom Five questions every boardchallenging are the triggers that arise – also need to be established. These should askincrementally. For example, the supply should encompass how to passchain may have normal fluctuations information both up and down the 1. How capable is the business ofsuch 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 gainan increase in quality failures or supply planning is to save time when a crisis confidence in the organisation’sstoppages move outside normal tolerance occurs. By identifying key personnel and response?levels and into a crisis situation? Similar establishing communications andscenarios can arise in all areas of response frameworks beforehand, the 3. How does our crisis managementbusiness operations: in finance (foreign crisis response can get underway more strategy tie in to our organisation’sexchange losses or cash flow shortages), quickly and effectively. risk appetite?personnel (staff sickness or resignations), 4. What are the triggers that wouldmanufacturing (machinery breakdowns) Organisational maturity initiate a crisis managementor 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 forThe challenge for any organisation is to of crisis management capability. This developing and sustaining crisisunderstand the business implications of begins with the achievement of core management capability?all such events – in particular, the points compliance – creating a robust crisisat which they should remain issues for management framework and plan –functional and operational teams to through to the development ofhandle, when they should be brought comprehensive capability, and Five tips for ensuringto the attention of senior management, ultimately the building of confidence – successful crisisand when a formal crisis management so that boards have sound reasons toresponse should be initiated. Once a management believe that their organisation has theformal response is launched, senior 1. Identify triggers: events or right teams, systems and processes inmanagement 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 itsstrategic decisions to safeguard the crisis management response. Achieving this greater maturity dependsbusiness going forward, while operations on the development of a programme of 2. Define, train and support yourteams 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 escalationCrisis management planning also channels of communication are organisations now realise, it also dependscovers the identification of response understood and that they work. on the completion of comprehensiveteams. The CMT itself will generally real-time exercises. These build capability 4. Create subordinate workingconsist 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 ondirectors of key business functions (forexample finance, HR, IT, communications) different issues – conducting an The ultimate proof of the benefits of investigation, assessing ongoingas 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 crisisof another team drawn from across 5. Practise, practise, practise: the does actually occur and the companythe business and consisting of senior extent and complexity of must respond. Only then can the trueindividuals, such as the director of exercises and rehearsals should value of planning, real-time exercisessecurity, 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 ofinformation requests and implement confidence required in its crisis Dr Paul Robertson is the crisisits strategic decisions. Additional management capability. management leader in the UK andsubordinate teams may also be required, Martin Caddick is the businessdepending 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. 11. Financial Reporting OpinionIASB changes regimeAs 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 helmThe phrase ‘regime change’ is generally on it in different timescales. Not framework. This, after all, is said to beused in the context of countries seeing surprisingly, as the end of the Tweedie the foundation on which all standardsthe need to replace a local despot, regime approaches, the two boards are are built. If we believe that, then weusually someone who has been in place some way apart. should believe that it is something tofor 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 downgradesstandard 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 revenuethe end of Sir David Tweedie’s 10 recognition and lease accounting. Yet Other options for the future workyears as chairman of the International even here, where the objective was joint programme include: post-implementationAccounting 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 emissionsMacintosh 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 widerDavid 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 commentaryIASB took over from the International (See news article, page 30). and reporting of risk, strategy andAccounting Standards Committee (IASC), corporate social responsibility.which had a part-time committee and So in practice, rather than inherit a cleansmaller staff. The IASB has had a position where a number of major projects The US questionfull-time board and has been a serious are finished, Messrs Hoogervorst and Underlying all these decisions aboutplayer with comparable resources to the Macintosh will have to spend the first agenda priorities is the question ofUS 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 inpart 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 notIn many respects, the IASB has had a permit or require IFRS. Yet it is far fromvery 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 behave adopted IFRS, with more at various their strategy. Indeed, a consultation on SEC interpretations of IFRS – whichstages 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 thatsubjects, some in isolation but most in What should be the priority areas? might be difficult or take a long time toconjunction with the FASB. These achieve. So it is possible that US GAAPinclude 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 questionsThe 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 GAAPinherited from the IASC in 2001, have finalising the updated conceptual technical leader at PwC in Japan.been largely retained, with only a smallpart replaced, by the first element ofIFRS 9; and that only in 2010. Financialinstrument accounting has been one of “There is something to be said for athe areas where the IASB and the FASBhave sought to work together. Yet this pause for reflection, to catch breath,has been an unsatisfactory process, withthe boards not increasing the chance of to allow implementation”a common outcome by addressing theproject in different ways, coming upwith different proposals and consulting World Watch Issue 2 – 2011 11
  12. 12. Financial Reporting OpinionEffecting change in a fast-movingenvironmentThe need for high-quality accounting standards is paramount, but is the current standard setting processeffective? 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 processMuch has been written on change incremental changes, for example to considerably. Of course, a standardmanagement. Often it seems to be a taxation, to encourage, or ‘nudge’, setter would want to be aware of thematter of changing hearts and minds, behaviour in a particular direction. likely effects (costs, benefits, micro- andof involving people through discussion macro-economic effects) of a proposedand consultation. A government or other How do changes to financial reporting standard; indeed the IASB’s frameworkbenevolent rule-maker has an idea, fit into this? The need to reform envisages that it should take intoseeks 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 thenew 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, forwarm 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 industryThere is a more jaundiced version, along ambitious targets and quite short changing or contracting as a result ofthe following lines. The authority in deadlines. This seems to be not far from the costs of the activity being betterquestion has an idea that it wishes to a wartime basis, although the boards understood. Most accountants wouldimpose. It has decided in its wisdom seem to have taken longer than the say that it is not a reason to abandon thethat the change in question is necessary, G-20 envisaged to meet the deadlines idea if it would improve accounting andeither to improve a process or to resolve and yet still to be in business. transparency at a reasonable costa problem. It has to go through the relative to the benefits. Indeed it isprocess of consultation, which it views In more normal times, the development positively a good thing to understandas a necessary evil, so that it can be seen and reform of accounting standards the costs and risks associated with, forto 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 ruleviews. 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 settinghad 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 seein a more brutal manner; in wartime, for what people think, because I’m far from The EFRAG paper is out for commentexample, 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.org12 PwC
  13. 13. Assurance OpinionInternal audit can shineThe boardroom focus is now on growth and the future. But is internal audit responding to thechanging risk environment? John Feely explains why internal auditors should keep paceAfter several years of extreme financial oversight to advising on a wide range the migration from financial risks touncertainty, 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 managementofficers. Those who anticipate how assesses and recognises internal audit’s Leading CAEs consider the auditbusiness 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 outsidenew customers and partners, expect necessary for success are: effective of scheduled meetings. Establishingto 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 auditinternal auditors should be taking a chair; and the capacity to engage is well-positioned to see across thesimilar approach by preparing for a best internal and external partners. If the entire enterprise, it has the perspectivesupporting actor role. And as companies internal audit department isn’t involved and the objectivity to help the auditfocus outward, internal auditors would in significant initiatives, why not? Is it committee understand significantbe 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 potentialstakeholders on the need for support in hasn’t earned a place at the table? conflict between active relationshipnon-traditional areas. building and maintaining auditor Our survey did indicate that internal objectivity and independence. OurInternal audit leaders can help their auditors’ interactions with companyaudit committees and management belief is that meaningful and sustainable leaders are broadening. While the relationships are built on trust. Forunderstand the dynamic and complex highest level of interaction remains withrisk environment and make it easier to internal auditors, that trust is built traditional finance and accounting through transparent and candidadapt to a rapidly changing world. leaders, the survey also found aThose who succeed in this endeavour dialogue with stakeholders, and sharing considerable level of contact with a point of view that is not only fact basedwill add tremendous value; those who companies’ operations leaders such as but also reflects an understanding ofdo 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 ofInternal 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 continueprofession study examines how internalaudit is responding to this changing risk CAEs contact with people outside audit committee meetingsenvironment. The need to grow businessesin emerging markets, staying competitive CFO 80% 12% 5%by adopting innovative technologies Controller 75% 15% 6% 4%and responding to a rapidly changingregulatory 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, emergingtechnologies 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 NeverScripting internal audit Source: PwCAs internal audit organisations striveto transition from financial controls World Watch Issue 2 – 2011 13
  14. 14. Governance NewsUSTurning up the heat onexecutive compensationThe 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 compensationarrangements. Although some of the requirements are effective now, clarification on many of theimplementation issues is still awaited.A topic that has received extensive focusin the ‘Wall Street versus Main Street’debate has been the relationship betweenexecutive compensation and the company’sfinancial performance, and the vastdiscrepancies between CEO pay levelsand those of rank-and-file employees.CEO pay ratioDodd-Frank directs the SEC to adoptrules requiring companies to disclosethe relationship between executivecompensation actually paid and thecompany’s financial performance, aswell as internal pay equity or the annual basis. To overcome this, many The independence of compensationso-called ‘CEO pay ratio’, to compare the companies will need to set up new consultants, legal counsel and othertotal annual compensation of the CEO administrative systems and controls. advisors to the company will also beto the median total annual compensation In recognition of these likely assessed. This will be based on factors suchof all employees. There are significant implementation difficulties, the SEC as whether the adviser provides otherquestions and challenges associated has asked for comments in advance services to the company, fees received aswith these disclosures, particularly of issuing proposed rules. a percentage of the adviser’s total revenue,for large multinational corporations. policies the adviser has implemented toAt issue are both the census of ‘all Independent compensation prevent conflicts of interest, any business oremployees’ and the definition of total committees personal relationships between the adviserannual compensation. The SEC has and members of the company, and whether Dodd-Frank’s provisions will requiretentatively scheduled proposed the adviser holds stocks in the company. companies to ensure independence ofrulemaking for the second half of 2011. compensation committee members as Disclosure on compensation committee well as their advisers. The Act requiresThe implementation of the CEO pay independence is required in proxy the SEC to direct national securitiesratio disclosure is likely to be difficult statements for annual shareholder exchanges to prohibit listing of anyand complex, particularly for large meetings occurring on or after 21 July 2011. company that does not have anmultinational corporations. Total annual independent compensation committee.compensation, as defined in the act, Dodd-Frank requires the SEC to performwould include all components of a study of the use of compensation In determining independence, securitiesemployee income, including stock consultants, and the effects of their use, exchanges are instructed to considercompensation, deferred compensation with a report to Congress by 21 July 2012. relevant factors including any consulting,arrangements, pension and other advisory or other compensatory feespost-retirement benefits alongside salary For more information on the paid to the director by the company, andand other elements. Few companies requirements of the Dodd-Frank Act, whether the director is otherwisemaintain 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.com14 PwC
  15. 15. SURVEYWhat makes investors trust management? Governance – NewsA survey of investors and analystsreveals that although trust in Usefulness of capital market communicationsmanagement is now lower than Income statementbefore the credit crisis, the majoritystill trust CEOs and CFOs. Balance sheet Cash flow statementThe global analyst and investor surveywas conducted in late 2010 by PwC and Segmental informationthe Rotterdam School of Management, Notes to financial staementsErasmus University. As part of the Management discussion and analysisresearch, 1,400 sell-side and buy-sideanalysts and portfolio managers worldwide Earnings press releasewere asked for their opinion on the level Earnings conference callof trust they place in the CEO/CFO,what traits make them trustworthy, One-on-onesand 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 & RSMImpact of behaviourThe research looked at how the CEO’s Reliability of capital market communicationsand CFO’s behaviour can win or loseinvestor trust. It identified frequently Income statementchanging accounting policies as the Balance sheetway most trust is lost, with providinginaccurate information a close second. Cash flow statementInvestors and analysts are concerned Segmental informationthat companies opportunisticallychange accounting policies – a worrying Notes to financial staementsconcern given the large number of Management discussion and analysisnew accounting standards that the Earnings press releaseInternational Accounting StandardsBoard and the US Financial Accounting Earnings conference callStandards Board are proposing to One-on-onesintroduce. Companies that are unableto 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 10perceptions and the loss of investor trust. Source: PwC & RSMNot surprisingly, investors lose trustwith CEOs who behave offensively. peers. This reinforces what CEOs and Reliability of communicationsThis includes those who complain CFOs say they see in practice. Although investors rate face-to-faceabout shareholders, refuse to answer meetings above all other capitalquestions and belittle analysts or Usefulness of information market communications, the tangibleinvestors. However, trust can be gained Investors and analysts were asked to communication they value most is thethrough 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 reliabilityInvestors said reporting good performance While most components of the financial of all publicly disclosed informationprompted the biggest gain in trust, with statements score between seven and higher. The fact that a trustworthyother good news gaining equal trust as eight (on a score of one to ten), the auditor has thoroughly examined thematerial good news. However, material management discussion and analysis business seems to enhance the perceivedbad news results in a much larger loss of (MD&A) scores significantly lower (see reliability of all public disclosures bytrust 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 reportingcan 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 atThe 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=6417982than earnings that develop less investors say they get more usefulpredictably; and trust is reduced by information from one-on-one meetingshaving more volatile earnings than with management. World Watch Issue 2 – 2011 15
  16. 16. WHISTLEBLOWINGThe importance of speaking upLegislation around the world is upping said senior management was very or fostering an open culture. There isthe 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 milestonesarrangements. However, in many more support from senior management as a framework to help organisationsentities, more support from senior would be advantageous. develop an effective, tailoredmanagement would be ‘advantageous’. whistleblowing programme. As the paper notes, organisations mustA PwC paper, Striking a balance: be guided by jurisdictional requirementsWhistleblowing arrangements as part when developing whistleblowing The five milestonesof a speak up strategy, highlights the arrangements. They should not 1. Gain top-level commitmentimportance of an open ‘speak up’ underestimate the impact of the Briberyculture, where individuals feel able to Act in the UK and the Dodd-Frank Act in 2. Develop a whistleblowing policyraise any business or ethical concerns the US, for example. European data 3. Design whistleblowingthey may have. Its content draws on an protection and other laws also bring reporting mechanismsonline survey among members of the constraints, as well as raising the bar inPwC Fraud Academy and a roundtable terms of regulators’ and other 4. Embed a whistleblowingdiscussion with clients, as well as PwC stakeholders’ expectations. programmeexperience in general. 5. Monitor, evaluate and report on Against this background, the paper the whistleblowing arrangementsThe findings show that more can be encourages organisations to establishdone to establish open cultures. arrangements that reflect theirAlthough 80% of survey respondents individual make-up and approach to www.fraudacademy.pwc.co.ukCOSOBoard risk reporting hasroom for improvementA study of the risk oversight processes types of risk reports that the board mightapplied by boards of directors found receive on a periodic basis to inform itsinconsistency in the frequency and type risk oversight. Respondents were askedof risk reports that the board is asked to to identify how frequently each isreview. 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 boardsrisk reports less than once a year. received at least once a year are: • High-level summary of the top risksThe survey was commissioned by the for the enterprise as a whole and itsCommittee of Sponsoring Organisations operating units (71%)of the Treadway Commission (COSO). Itasked over 200 directors to assess the • Periodic overview of management’scurrent and desired future state of risk methodologies used to assess, in capabilities for managing key risksoversight applied by the boards on which prioritise and measure risk (65%) and the status of initiatives to addressthey 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 providediligently and achieving a high level of According to the majority of respondents, more regular reporting to the boardeffectiveness, 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 alland 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 improvedThe survey, Board risk oversight – A have an impact on the organisation; a risk-reporting process and increasedprogress 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 keyoversight responsibilities, identified nine risks; and a summary of significant gaps www.coso.org16 PwC

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