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  • 1. Syed Masoud Ali Naqvi Senior Partner KPMG Taseer Hadi & Co. Karachi 4-5 April 2008 GLOBAL INTEGRATION FROM THE REGIONAL PERSPECTIVE SAFA Conference 2008, Lahore VALUE CREATION BY PROFESSIONAL ACCOUNTANTS THEME: SUB THEME: ACCOUNTING PROFESSION AND PRACTICES
  • 2. ACCOUNTING PROFESSION AND PRACTICES
    • Introduction
    • Development of Accounting Profession
    • Globalization of Economy and its impact on the Accounting Profession
    • Current state of Accounting Profession
    • Challenges
    • IFAC Global Survey
    • Changing role
    • Enhancing skills
    • Value creation
    • Conclusions
  • 3.
    • INTRODUCTION
    ACCOUNTING PROFESSION AND PRACTICES
  • 4.
    • DEVELOPMENT OF ACCOUNTING PROFESSION
    ACCOUNTING PROFESSION AND PRACTICES
  • 5. DEVELOPMENT OF ACCOUNTING PROFESSION
    • Oldest surviving Accounting record dates from 1130 to 1830 AD - Great roll of Exchequers
    • Profession started in the fourteenth century
    • Double entry bookkeeping developed in fourteenth century in Italy
    • Picolli system of Accounting in 1494
    • In 1856 – Institute of Chartered Accountants of Scotland was founded
  • 6. DEVELOPMENT OF ACCOUNTING PROFESSION
    • In 1880 the Institute of Chartered Accountants of England & Wales was founded
    • First National Accounting Society in U.S. was found in 1887 which was a predecessor to the AICPA
    • Number of companies and cross border investments increased in 1900s and the Audit function was born
    • Until 1980s the core business of Professional Accountants was Auditing
  • 7. DEVELOPMENT OF ACCOUNTING PROFESSION
    • Around 1980s – with the advent of global economy the demand for new services started increasing
    • The pressure to provide non-audit services with relatively higher margins changed the value of Professionalism based on ambition and commercial considerations
    • The new approach started impairing the basic attitude of independence and integrity
  • 8.
    • GLOBALIZATION OF ECONOMY AND ITS IMPACT ON THE ACCOUNTING PROFESSION
    ACCOUNTING PROFESSION AND PRACTICES
  • 9. GLOBALIZATION OF ECONOMY AND ITS IMPACT ON THE ACCOUNTING PROFESSION
    • Investment is virtually becoming global with no concept of National or Regional boundaries
    • Accounts are to be prepared in compliance with standards and regulations of different countries
    • Convergence of Accounting and Auditing Standards to ensure global common language
    • Global Standards
    • Global Regulations
    • Global alignment with business
    • Global Profession
  • 10. GLOBALIZATION OF ECONOMY AND ITS IMPACT ON THE ACCOUNTING PROFESSION
    • Development of Capital market
    • Demand for new services
    • Commercialism created tension with professionalism
    • Audit as a commodity
    • Financial information and the system of corporate governance designed to protect investors was manipulated for private gains
    • Liquidity and integrity of capital market rests on Trust and confidence
  • 11. GLOBALIZATION OF ECONOMY AND ITS IMPACT ON THE ACCOUNTING PROFESSION
    • Ethics
    • Quality of Education and training
    • Professional competency and continuous Professional Development
    • Audit function’s role in detection for financial frauds and anti-money laundering
    • Globalization focus on enhancing standard of
    • Global collaboration among Regulators
    • Global effort of collaboration amongst the Professional bodies around the world
  • 12.
    • CURRENT STATE OF
    • ACCOUNTING PROFESSION
    ACCOUNTING PROFESSION AND PRACTICES
  • 13. CURRENT STATE OF ACCOUNTING PROFESSION – SAFA REGION
    • Profile of Accounting Profession in the Region
    149 933 4559 7859 32966 46539 70447 152608 TOTAL:                 ICAN         99 172 289 868 ICAB             512 3312 ICASL 5 12 30 75 293 415 642 4333 ICAP 144 921 4529 7784 32574 45952 69004 144095 ICAI 10 or More Partners 5 - 10 Partners 3 - 5 Partners 0 - 2 Partners Sole Proprietor Practicing Firms Practicing Members Total Members Accounting Body
  • 14. CURRENT STATE OF ACCOUNTING PROFESSION
    • Knowledgeable about accounting matters
    • An entrepreneur
    • A financial analyst
    • A global competitor
    • A skilled salesperson
    • A good communicator
    Accountants should be: Current Role of an Accountant
    • A good communicator
    • A capable negotiator
    • A public relations specialist
    • A general manager
    • A strategist
    • A team leader
  • 15. CURRENT STATE OF ACCOUNTING PROFESSION
    • Accountability
    • Corporate governance
    • Role of Audit Committees and independent non-executive directors
    • Sound internal financial control and transparency in financial reporting
    • Renewed emphasis on:
  • 16. CURRENT STATE OF ACCOUNTING PROFESSION
    • Standard of Ethics
    • Education and training
    • Life long professional competency
    • Audit and Assurance
    • Detection for financial fraud and money laundering
    • Renewed emphasis on:
  • 17.
    • CHALLENGES
    ACCOUNTING PROFESSION AND PRACTICES
  • 18. CHALLENGES
    • Business vs Profession – Financial scandals
    • Arthur Levitts in his 1998 speech, warned the Financial community:
    • To stop managing the figures and earning estimates - wishful thinking
    • Common sense business practices and faithful representation
    • Published accounts would no longer be trusted unless meaningful disclosure is provided to investors
    • Trust that is the bedrock of capital markets would be severely tested
  • 19. CHALLENGES
    • Public faith in the integrity of Audit profession was becoming increasingly tarnished
    • Integrity of information must take priority over a desire for cost efficiencies or competitive advantage in the audit process
    • Business vs Profession – Financial scandals
  • 20. CHALLENGES Major Scandals: Enron, Worldcom in US Ahold and Parmalet in Europe HIR Insurance in Australia Trust and confidence was undermined on which the liquidity and integrity of the capital markets is based Investors’ faith in integrity of the participants was badly shattered
  • 21. CHALLENGES
    • Regulators overreaction or Knee Jerk actions
    • Regulatory environment and oversight
    • Sarbenes Oxley Act
    • Review of Regulatory oversight by Regulators in Europe and other jurisdictions
    • Greater collaboration amongst the Regulators
    • Mandatory rotation and restriction on non-audit services
  • 22. ACCOUNTING PROFESSION AND PRACTICES
    • IFAC GLOBAL SURVEY
  • 23. ACCOUNTING PROFESSION AND PRACTICES
    • CHANGING ROLE
  • 24. CHANGING ROLE
    • Change of focus from regarding accounting as passive phenomenon to active involvement in Shaping, Moulding, Planning a role in the construction of setting in which it operates
    • Creating and enhancing value of organization by value creation for:
    A new approach
    • Shareholders
    • Manager & Customers
    • Customers
    • All Stakeholders
  • 25. CHANGING ROLE
    • Ezzamel & Bourn describe Role at Strategic level as:
    A new approach
    • Accounting’s contribution lies in its abilities to perform three functions
    • To shape the perceptions of decision makers in relation to (strategic) issues at hand
    • To provide early warning to screening our irrelevant information to reduce perceived time pressure and surprise
    • To buffer the impact and cope effectively with crises by shifting priorities and perceptions that rely on information it provides
  • 26. CHANGING ROLE A new approach
    • The value-creating, potential of accounting at the strategic level would help:
    • To develop system to provide a learning mechanism that generates ideas
    • To enable decision makers to improve their surveillance capabilities or their working environment
  • 27. CHANGING ROLE Change
    • Time
    • Instant communication and computation - speed
    • Space
    • Death of distance
    • Mass
    • Integrated Values are reducing mass
  • 28. CHANGING ROLE Change
    • Current Value to Organization
    • Ability to process transactions
    • Manipulate Data
    • Develop report based on historical data
    • New Role
    • Value added function
    • Develop new business intelligence and decision support tool set
    • Abnormal users
  • 29. CHANGING ROLE Change
    • Need
    • To re-engineer processes and conceptual framework
    • To enhance the effectiveness of the new tools
    • Change in tool sets
    • Quill to ball point pen
    • Ledger book to computers with data base and spread sheets
  • 30. CHANGING ROLE Change
    • New Tools
    • Artificial Intelligence based Decision Support System
    • Data Fishing
    • On-line Analytical Processing
    • Data warehousing
  • 31. CHANGING ROLE
  • 32. CHANGING ROLE
    • To realign their view towards a particular direction
    • To have the power to shift patterns or organizational visibility so that concerns of the external world can permeate and influence internal organizational affairs
    • To act as knowledge manager:
    Accounting can play a role in strategically changing Managerial Awareness
    • Knowledge is power
    • Communication systems are power systems
  • 33. VALUE CREATION ACM vs IEC Ratio Assets Commerce Market Tangible Physical National Intangible Electronic Global
  • 34. CHANGING ROLE
    • Perceived inefficiency
    • Negligence
    • At times collusion with management
    • Attest function is the hall mark of the profession despite change in demand by the shareholders in the nature and speed
    • Gap in appreciation of the role of auditors
    • Subject of close review and criticism for:
    • Attest Function
  • 35. CHANGING ROLE
    • Attest Function
    • Core issues for Audit functions
    • Poor judgment
    • Incompetence
    • Negligence
    • Business considerations taking precedence over Professional consideration
  • 36. CHANGING ROLE
    • Real concerns about the:
    • Adequacy of processes
    • Level of skills
    • Training and development
    • Quality of evidence
    • Vagueness in opinions including concerns about independence and objectivity
  • 37. CHANGING ROLE
    • Timeliness
    • Trustworthiness
    • Trajectory
    • The concerns about these Services were described by John Whitney as follows:
    • Timeliness – Traditional Accounting is a fuzzy approximation of distant past – Real time
    • Trustworthiness relates to failures of a number of companies following the receipt of “clean” opinions
  • 38. CHANGING ROLE
    • Assessment of willingness of people to accept these controls
    • Willingness is determined by the nature and number of controls
    • Man can defeat any system man can devise
    • Effectiveness of any control environment can not be assessed without:
  • 39. CHANGING ROLE
    • Transaction Services
    • Corporate Finance
    • Forensic Accounting
    • Corporate Recovery
    • Assurance based Advisory Services
    • Management Assurance Services
    • Knowledge Management
    Other Role of Practicing Members
    • Tax Advisory and Tax Compliance
    • IT Consulting
    • Business Process improvement
    • Supply chain management
    • HR Consulting
    • ISO Consulting and Certification
    • Web Assurance
  • 40. ACCOUNTING PROFESSION AND PRACTICES
    • ENHANCING SKILLS
  • 41. ENHANCING SKILLS
    • Influence
    • Facilitation Skills
    • Communication – openness, trust
    • Team building
    • Flexibility
    • Steadfastness
    • Emotional intelligence
  • 42. ENHANCING SKILLS
    • Gradual change in emphasis on general skills, cognitive and behavioral skills
    • Routine skills
    • Analytical and design skills
    • Appreciation skills
    • Personal skills
    • Interpersonal skills
  • 43. ENHANCING SKILLS
    • Core Skills and Cognitive Skills are agents for success
    • Excellent Performance is greatly dependent on Emotional Skills
    • Self awareness
    • Self regulation
    • Motivation
    • Empathy
    • Social Skills
    According to Sociologists, a Person’s success results from: 20% I.Q. + 80% E.Q. I. Q. – Intelligence Quotient – A measure of an individual’s ability to learn, understand and reason E. Q. – Emotional Quotient – Which measures the ability to relate to others, to understand oneself and usefully direct one’s emotions
  • 44. ACCOUNTING PROFESSION AND PRACTICES
    • VALUE CREATION
  • 45. VALUE CREATION
    • Raise standards in Ethics
    • Raise quality of Education and Training
    • Continue emphasis on enhancing professional competency and CPD
    • Plan for Skills development for expanding role
    • Focus training on detection for financial fraud and money laundering
    • Global and Regional contribution
  • 46. VALUE CREATION
    • Focus on enhancing corporate ethics for the entire Financial Reporting chain
    • Strengthen Quality Control and independent oversight
    • National Accounting bodies can not continue to act in isolation and have to collaborate to provide leadership to the profession
    • Global and Regional contribution
  • 47. VALUE CREATION
    • Audit plays a valuable role in governance and financial reporting
    • A strong business led Accounting Profession is important for market confidence
    • The profession is publicly accountable and our role as Auditors is to underpin confidence
    • The Value of Audit
  • 48. VALUE CREATION
    • Make professional judgment on the integrity of information;
    • that delivers accurate reporting and governance
    • that enables people to make financial decisions based on the highest technical and ethical standards
    • that on which basis a society depends for effective operations
    • that meet people’s needs and aspirations
    • The Value of Audit
    “ Well performed audits will continue to play a valuable role in governance and in financial reporting “.
  • 49. VALUE CREATION
    • Standardize the intake eligibility, curriculum and Training Regulations – Convergence of Learning and Professional Development
    • Encourage integration of Firms either to merge or enter into network Firm relationships to enable the Firms to provide the high quality depths and breadths of services required by the market place
    • Value creation by Structural Reforms
  • 50. VALUE CREATION
    • Continue focus on Ethics and Independence
    • Develop a proactive role in shaping and developing the Regulatory response and changes
    • Play an active role in global standards setting bodies
    • Ensure that we can continue to attract high quality people
    • Value creation by Structural Reforms
  • 51. VALUE CREATION
    • Calculative and visibility elements combined can be a potent weapon for value creation
    • Being able to convert idea into value, accounting can be used as instrument of organizational governance and control
    • At operational levels many activities can be brought into calculative spheres
  • 52. VALUE CREATION
    • New organizational interdependencies can be created and couplings between accounting and other spheres or organization can be forged
    • These initiatives can put accounting and information systems it creates, to be used as active participants and important instruments to articulate actions and create value for the organization
  • 53. VALUE CREATION
    • At strategic level accounting’s contribution lies in its ability to perform three functions for decision makers
    • Shape perception in relation to strategic issues at hand
    • Provide early warning by screening out irrelevant information to reduce perceived time pressure and surprises
    • Buffer impact and cope effectively with crises by shifting priorities and perceptions that rely on information it provides
  • 54. VALUE CREATION
    • Accounting can also act as change agent
    • It has power to shift patterns of organization visibility so that concerns of the external world can permeate and influence internal organizational affairs
    • It must provide not only internal data but also provide information concerning organization’s market and competitors
  • 55. VALUE CREATION
    • Change in mindset
    • Build culture of continuous improvement and value creation
    • Mastering new role require more than learning new skills, it entails
    • Embrace analysis and value addition in its orientation
    • Be consultative business partner and advisor; a participant and leader in decision making
    • Be strategically-oriented and focus on performance enhancement
    • Finance Function in new millennium will
  • 56. VALUE CREATION
    • business process analysis
    • business process redesign and improvement
    • value profiling
    • strategic cost analysis
    • capacity analysis
    • advanced cost management techniques
    • benchmarking
    • activity profiling
    • value-chain analysis
    • What must be known to those who seek to participate in the Cycle of Learning
  • 57. VALUE CREATION
    • What must be known to those who seek to participate in the Cycle of Learning
    • bottleneck and flow management
    • change management
    • competitive analysis
    • information system design
    • integrated performance measurement
    • cost analysis and the development of cost tables
    • operational process analysis and redesign
    • target and life-cycling costing
  • 58. ACCOUNTING PROFESSION AND PRACTICES
    • CONCLUSIONS
  • 59. CONCLUSIONS
    • Accountancy Profession still has a great potential and it has shown tremendous amount of resilience to sail through severe crises
    • The dynamism of the profession is its major strength
    • The global convergence of the Accounting, Reporting and Auditing Standards is creating a global common language
  • 60. CONCLUSIONS
    • For the Value Creation, the collaboration on a Global basis in general and on a Regional basis in particular is a key pre-requisite. Such an effort has to be directed to ensure:
    • High Quality Education
    • Robust Curriculum
    • Enhanced Skills development
    • Structured and participative Rigorous Training process
    • Independent and transparent Quality Control process
    • Independent Disciplinary process
  • 61. CONCLUSIONS
    • Proactive process of Institutional response to demands for services
    • Publicity plan to narrow perception gap
    • Move towards international qualification
    • Concentrate to resolve liability issues – Bannerman case, Western Star case – re-disclaimer to third parties
  • 62. CONCLUSIONS
    • SAARC Region:
    • To fully exploit the demographic advantage, plans are required to:
    • Attract best talent
    • Converge Curriculum and Training process
    • Develop Post Qualification Specialization streams
    • Focus on management and multi-function skill sets
    • Concentrate on developing enhanced skills sets including ‘Emotional Intelligence’
  • 63. CONCLUSIONS The dynamic value creation capability and potential of the Profession which has the core values of integrity and ethics as its strong roots would ensure that it continues to remain a leading and premier profession in the twenty first century. We as Accountants are enjoying unique privileges, including monopoly in certain respects, provided that we maintain our commitment to Quality, Transparency, Ethics and Integrity.
  • 64. CONCLUSIONS Our biggest ‘Asset’ has been the ‘Trust’ and ‘Confidence’ reposed in us by the society at large and our mission is not only to preserve this ‘Asset’ but continue to enhance its fair value for all stake holders in particular and public at large in general.
  • 65.
    • Thank you
  • 66. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2005 KPMG Taseer Hadi & Co., the Pakistan member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in Pakistan. The KPMG logo and name are trademarks of KPMG International. Presenter’s contact details SYED MASOUD ALI NAQVI KPMG Taseer Hadi & Co. +92 (21) 568 5847 [email_address] www.kpmg.com.pk
  • 67. Some Regulatory regimes follow the diction that Regulators need not to explain. Julius Ceasar – Scene where Decius implores Ceasar atleast to explain why he will not come to the Senate. “Most mighty Ceasar, let me know some cause / lest I be laughed at when I tell them so, Ceasar replied “The cause is my will: I will not come / that is enough to satisfy the Senate”.
  • 68. “ Public expectations matter. If there is an expectation gap the problem is not that the outsiders don’t understand what professionals do, so the expectation gap is an invitation to improve your education so that outsiders simply understand better ”.
  • 69. IFAC GLOBAL SURVEY – CORPORATE GOVERNANCE
    • POSITIVES
    Corporate governance has improved and the balance between costs and benefits has become better
    • Increased awareness that good governance counts
    • New codes and standards
    • Improved board structure
    • Improved risk management and internal control
    • Increased disclosure and transparency
  • 70. IFAC GLOBAL SURVEY – CORPORATE GOVERNANCE AREAS OF CONCERN
    • Governance in name but not in spirit
    • Development of a checklist mentality
    • Overregulation
    • Personal risk and liability for directors and management
  • 71. IFAC GLOBAL SURVEY – CORPORATE GOVERNANCE
    • FURTHER IMPROVEMENTS
    • Continue to focus on behavioural and cultural aspects of governance
    • Review existing rules
    • Further improve quality of directors
    • Better relate remuneration to performance
    • Expand view from compliance governance to business governance
  • 72. IFAC GLOBAL SURVEY – FINANCIAL REPORTING PROCESS
    • POSITIVES
    • Convergence to a single set of global financial reporting standards
    • Improvements to regulations and oversight
    • Board of directors/management taking ownership of financial reporting
    • Improved internal control over financial reporting systems
    • Improved technology for preparing financial reports
    The financial reporting process has improved and the balance between costs and benefits is about the same
  • 73. IFAC GLOBAL SURVEY – FINANCIAL REPORTING PROCESS
    • AREAS OF CONCERN
    • Transition to International Financial Reporting Standards (IFRS)
    • Complying/reconciling accounts to different financial reporting standards
    • Complexity of financial reporting standards
    • Liability restricting process
  • 74. IFAC GLOBAL SURVEY – FINANCIAL REPORTING PROCESS FURTHER IMPROVEMENTS
    • Continue convergence to one set of financial reporting standards
    • Simplify and clarify financial reporting standards – more principles and fewer rules
    • Ensure that boards of directors pay attention to the quality of financial reports
    • Provide additional education and training for preparers
  • 75. IFAC GLOBAL SURVEY – AUDIT OF FINANCIAL REPORTS
    • POSITIVES
    • Improved auditing standards and processes
    • Increased awareness, commitment and competence of auditors and audit committees
    • More risk-focused audits
    • Greater auditor independence
    • Improved quality review and auditor oversight
    The audit of financial reports has improved and the balance between costs and benefits is about the same
  • 76. IFAC GLOBAL SURVEY – AUDIT OF FINANCIAL REPORTS
    • AREAS OF CONCERN
    • Reduced scope for professional judgment
    • Overregulation
    • Liability fear leading to boilerplate audits and lack of innovation
    • Limited auditor’s communication with external stakeholders
    • Limited choice of audit firms
    • Increased audit cost relative to perceived benefits
  • 77. IFAC GLOBAL SURVEY – AUDIT OF FINANCIAL REPORTS
    • FURTHER IMPROVEMENTS
    • Continue to focus on independence, objectivity and integrity
    • Converge to one set of global, principles-based auditing standards over time
    • Ensure consistent use of audit standards and safeguarding of quality within audit firms
    • Improve auditor’s communication, both internally and externally
    • Consider limited/proportional liability for auditors
    • Remove barriers that limit choice of auditor
  • 78. IFAC GLOBAL SURVEY – USEFULNESS OF FINANCIAL REPORTS The relevance and reliability of financial reports have improved, but the understandability of financial reports has not improved. Respondents preferred annual reports to real time or monthly information, found analyst presentation useful, and would like to have more business-driven information. The survey also showed mixed results about the usefulness of XBRL. In addition, paper financial reports remain useful.
  • 79. IFAC GLOBAL SURVEY – USEFULNESS OF FINANCIAL REPORTS
    • POSITIVES
    • Better financial information due to improved standards, regulation and oversight
    • More disclosure and comparability in financial reports
    • Improved reliability
    • Increased emphasis on narrative reporting
    • Easier access to financial information
  • 80. IFAC GLOBAL SURVEY – USEFULNESS OF FINANCIAL REPORTS
    • AREAS OF CONCERN
    • Reduced usefulness due to complexity
    • Focus by companies on compliance instead of essence of the business
    • Regulatory disclosure overload
    • Use of fair value
    • Difficult and often changing financial reporting standards
    • Lack of forward looking information
  • 81. IFAC GLOBAL SURVEY – USEFULNESS OF FINANCIAL REPORTS
    • FURTHER IMPROVEMENTS
    • Improve communication within the financial reporting supply chain
    • Include more business-driven information in financial reports
    • Better align internal and external reporting
    • Improve user’s access to electronic data, for examples, XBRL
    • Encourage short-form reporting focusing on the material issues