Our review of 2017

Posted by Stephanie Kemp on 18 January 2018
Reflecting on our work and developments in the accounting and auditing profession during 2017, over the holiday season we prepared our annual newsletter/review.
Posted in: IASB AASB Amending standards Exposure draft Financial Reporting expert witness Audit Auditor IAASB NOCLAR IESBA KAM Estimates ethics  

NOCLAR effective 1 Jan 2018

Posted on 10 November 2017

Non-compliance with Laws and Regulations (NOCLAR) is coming into force in Australia from 1 January 2018, by way of amendments to APES 110, the Code of Ethics for Professional Accountants.  These changes mean that confidentiality is no longer a barrier to disclosing non-compliance to the appropriate authority and affect all accountants, both in practice and in commerce. 

The AUASB has also picked up these changes to the Code of Ethics and reflected them in amended auditing and assurance standards, issued in early June as a revised ASA 250 Consideration of Laws and Regulations in an Audit of a Financial Report and consequential amendments to a number of other standards* in ASA 2017-2 Amendments to Australian Auditing Standards.

The AUASB and APESB have made available their joint presentation on responding to NOCLAR via their websites and CAANZ has also published resources to assist members in coming to terms with the new requirements.


*ASQC 1, ASA 210, ASA 220, ASA 240, ASA 260, ASA 450 and ASA 500



Update: The Auditing Assurance and Ethics Handbook

Posted by Stephanie Kemp on 12 April 2017

CAANZ* have decided not to produce a 2018 edition of the Auditing Assurance and Ethics Handbook, but users can still access and download the standards and guidance individually via the AUASB's website for audit and assurance materials and the APESB's website for ethical materials.

*  Chartered Accountants Australia and New Zealand

For the lawyers who have asked us how they can get hold of copies of these books, the 2017 edition of the Auditing Assurance and Ethics Handbook for Australia, edited by Stephanie Kemp, is available from John Wiley and the Co-op Bookshop, together with its companion volume the Financial Reporting Handbook.

The Auditing, Assurance and Ethics Handbook contains all the AUASB and APESB's standards and guidance statements on issue at 1 December 2016.

Posted in: AUASB Audit ethics  

Our review of 2016

Posted by Stephanie Kemp on 10 January 2017
Our review of financial reporting and auditing developments in 2016 and some thoughts on what might be in store in 2017 are in our newsletter, The Westworth Kemp Review of 2016.  Developments to look out for include the changes to auditing and ethical standards relating to non-compliance with laws and regulations ("NOCLAR").
Posted in: AASB Financial Reporting expert witness Audit IAASB auditor reporting international auditing standards NOCLAR  

A forensic accountant in Washington DC

Posted by Chris Westworth on 28 October 2016

Notes from a Conference - a forensic accountant on the prowl in Washington DC

Attending the International Bar Association's Conference in Washington was fascinating. Washington itself provided a wealth of cultural, artistic and historic sights and provided a real insight into a self-confident land of opportunity, the America that was able to create such monuments. Watching the first Clinton/Trump debate in a bar in New York just after the conference unfortunately showed a very different picture.

Networking at the conference was active and vigorous amongst lawyers and associated professions so business cards disappeared quickly. Cocktail parties were in embassies, private clubs, firms' offices, the International Monetary Fund headquarters building and various galleries and museums (most prefixed "Smithsonian").

Travel around DC on the Metro between conference venues and networking events was effective; cabs were less so, as various dignitaries, including our very own PM, were in town.

But there is far more to an IBA conference than the networking and the social whirl. As a non-lawyer (albeit with an antedeluvian law degree before becoming a chartered accountant) and so with no particular legal specialism there was a plethora of interesting sounding sessions I could have dipped into. With some regret I eschewed sessions dealing with social justice and the rule of law and focussed on more corporate topics where I was most likely meet useful contacts and pursue the networking opportunities that were a significant part of the reason for being there.

I found the Dispute Resolution show case "Effective advocacy for all modes of dispute resolution" particularly interesting. This used a case study to compare the difference in the approaches taken in litigation, arbitration and mediation.  As an experienced expert witness now also studying to be an arbitrator, I was able to listen to debate about areas with which I had some familiarity from a different stand point.

As an expert, once in the box, it is very important to me that counsel is fully knowledgeable about not only the matter but my material and likely examination questions. I may well have to agree with the other side's counsel's propositions in cross examination because the hypothesis put to me is true, even if the extended direction of his or her reasoning does not accord with my views. To know that I can rely on questions in reply to tease out my position avoids the temptation to argue with the cross examiner. Whilst recognising that a claim may hang as much or more on arguments of nexus and loss, expert evidence given with no hint of partiality must be important.

"Governance during the corporate crisis", again built around a case study, resonated with a number of current instances of financial misstatement and I was able to contribute some insights to the discussion from my experiences as a non-executive director.

As an accountant and sometimes director, my experience of corporate governance issues was different from that of the lawyers.  In my experience, in practice, a board and management will often take action in response to a matter before all the legal safeguards can be put in place.  There is a necessary first step of ascertaining the matter and its nature and maintaining confidentiality. In doing so boards and management need to be very alert to a range of responsibilities from ensuring that staff's rights are met to ensuring that there is prompt market disclosure when it is needed. Only once those very preliminary steps are taken will it be possible to know whether in house counsel can carry the matter or independence and skill sets requires the appointment of external lawyers. This may cause some loss of privilege but often speed of disclosure is essential and if external counsel are being used some preliminary facts are essential to that briefing.

I was fascinated to compare my accountant/expert witness response to each of the case studies with that taken by the lawyers.  I eagerly anticipate learning more at the Sydney Conference next year.
Posted in: Governance expert witness dispute resolution Litigation Support  

Enhancing trust in our institutions

Posted by Stephanie Kemp on 5 October 2016

Increasing trust in business dealings

At the International Bar Association conference in Washington DC, we heard Christine Lagarde, Managing Director of the International Monetary Fund (IMF), give the Opening Ceremony address.  She made observations on the need for trust and integrity in government and business that are just as relevant to accountants and auditors as they are to lawyers, if not more so.  This week's parliamentary enquiry into the Big 4 banks reinforces the relevance of her words.  Auditors and accountants have a window into public and private sector business dealings which brings with it certain responsibilities.

Overall the impact of globalisation has been to increase the wealth of developing countries and the people living in them.  However while inequality between countries has fallen in recent times, inequality within countries has risen, with the rich becoming richer and the poor becoming poorer.  Middle income earners in developed economies in particular have seen their share of total income shrink and are losing trust in the institutions that are in charge.  This lack of trust in governments and financial institutions is leading to populist politics (think Pauline Hanson) of the sort that in the UK led to Brexit.

A key factor fuelling this lack of trust is corrupt or unethical behaviour in these institutions, whether actual or perceived.  Regardless of whether it is well founded, the perception of corruption is corrosive to society and fuels populist politics.  It is therefore an area that the IMF is focussing on.  Its target areas are corruption in the public sector and unethical behaviour in the private sector.

Corruption in the public sector has a detrimental effect on society in many ways and disproportionately on the poor. 

  • It weakens fiscal capacity.  If the mega-rich appear not to need to pay tax, the rest of the population is less inclined to pay their share as well.  There is therefore less tax revenue to pay for publicly funded programs.
  • It discourages investment.  It perpetuates inefficiency and uncertainty and acts as an additional, but unpredictable, tax on investment.
  • It entrenches poverty and inequality as there is less money for welfare and social services.  Mme Lagarde quotes child mortality statistics: "By some estimates, child mortality rates are one third higher in countries with high corruption, and infant mortality rates are almost twice as high".

The IMF is seeking to address these issues by strengthening the rule of law and encouraging fiscal transparency and effective anti-money-laundering practices.
Unethical behaviour in the private sector is as harmful as corruption in the public sector.  For every public sector official who takes a bribe, there is a private sector operative who pays it.  Less obviously, but just as corrosively, the high risk behaviour engaged in by financial institutions prior to the 2007 financial crisis, in pursuit of profit and personal gain, destabilised whole economies and led to widespread suffering after the collapse.

The IMF is addressing these issues by supporting better regulation and encouraging better education of professionals.  They want to see a culture of values rather than compliance.  Ethical behaviour means "professionals who take pride in doing the right thing, even when no-one is watching."

Crucial to this is leadership from those at the top and good role models.  A shift in the definition of success from being a big $ bonus to behaving with professionalism and adding value to society is not easy to achieve, but interestingly the Dutch financial industry has this year introduced an Ethics Oath, similar to the Hippocratic Oath taken by doctors.

The issues that Mme Lagarde tackles in her speech resonate with recent consultations in our profession on how to ensure audit quality and the application of integrity and scepticism, but when she takes the argument to its social conclusions in terms of poverty and child mortality, ethical behaviour can be seen as a life or death issue.

I shall quote from her conclusion directly: "The task before us is clear. Enhancing integrity in public and private sector governance is critical in mending the trust divide we see in societies today. Only then can we have enough confidence in the very institutions that are essential for sustained and inclusive growth. Let me close by appealing to the wisdom of a founding father of modern day economics Adam Smith.

"To many of us, Adam Smith is perhaps best known for terms such as "self-interest", "laissez-faire" and the famous "invisible hand." Yet for Smith, the classical discipline of economics was always a branch of moral philosophy. Indeed, for him, the market would only work effectively if it was underpinned by trust: the baker that is featured in the Wealth of Nations would only be able to sell his goods if he or she was trusted".

Auditors and accountants also have a crucial role to play in maintaining and building trust in institutions, both public and private sector.  That role may require standing up for principles and saying No to a client.  Can we rise to the challenge?

The full text of the speech can be found at http://www.ibanet.org/Conferences/washington-oc-christinelagarde.aspx.

Posted in: Governance Auditor  

News from the July IFRS Conference

Posted on 19 July 2016

The IFRS Foundation Conference in Zurich reaffirmed the role of financial reporting as communication as well as compliance, a theme first articulated by IASB Chairman Hans Hoogervorst in his introductory remarks on the future of financial reporting.  The IASB's emphasis over the next five years will be on the presentation and grouping of information to make the financial report more effective as a means of communication.

This reassessment of focus is reflected first and foremost in the disclosure initiative project which seeks to reduce the amount of unnecessary detail in financial reports.  The disclosure initiative project encourages preparers to make bold decisions and reduce the amount of "boilerplate" material.  For example, now that IFRS have been in wide use for a decade and 83% of jurisdictions are using them, it is no longer necessary to restate the requirements of the accounting standards in an accounting policy; rather the focus should be on what is special about the accounting policies in a particular entity.  The draft guidance on materiality is a key part of the disclosure initiative as it helps preparers to understand the concept of materiality and apply it to the preparation of financial reports.  The IASB representatives stressed that materiality operates in the context of the financial report as a whole and not just in the context of the information disclosed under a particular accounting standards.  They are redrafting the disclosure sections of the standards to reflect this and make it clear that disclosures are only required where they are material to the accounts as a whole.

Other areas that the IASB is concentrating on at the moment include:
  • Financial Instruments with the Characteristics of Equity (also called FICE) and the distinction between debt and equity
  • Digital reporting, such as XBRL
  • The provision of non financial information and the use of non GAAP financial measurements
  • Strengthening implementation and post implementation support so that preparers are given as much help as possible to start off on the right foot.

There was general acknowledgement that financial reporting embraces more than the requirements of the accounting standards, with input from the Integrated Reporting Council as well as regulators. XBRL is about to become very important in Europe as the European securities regulators have announced that from 2020 all EU listed companies must file their financial information in the European equivalent of XBRL.  The IASB has realised that if they want to influence the quality of electronic as well as paper-based financial information, it is vital to enhance its IFRS XBRL Taxonomy and the IASB's Trustees have committed funding for this work.  On a survey of the conference, the general level of awareness of XBRL was surprisingly low, and the IASB and regulators have some work ahead of them over the next four years.

Non GAAP measurements were the subject of some debate in the context of financial reporting as communication, with preparers eager to tell their story in the way that suited their business model but regulators cynically suggesting that most of the adjustments seemed to reduce expenses rather than revenue.  There was also a need expressed for agreed definitions of some common measures used in borrowing covenants, such as EBITDA.  It seems likely that the IASB will allow some additional disclosure while maintaining key line items in the primary financial statements.

There were detailed sessions on a number of new standards and current projects, including the new IFRS 15 on Revenue and IFRS 16 on Leases and the work being done following the post implementation review of IFRS 3 Business Combinations on goodwill and impairment.

The discussions on IFRS 15 Revenue provided interesting practical insights into the sometimes complex issues, identifying two areas in particular:
  • whether there are separable contracts when an entity delivers product and supplementary services; and
  • the identification of whether an intermediary is acting as a principal or agent.

The examples used were derived from two multinational companies where the core transactions (selling products with ancillary or support services through intermediaries) were the subject of different forms of contract in different jurisdictions. Not only were there complexities in the interpretation of the local contracts but there was the consequential issue of what level of accounting uniformity should be achieved in the group accounts where transactions were through different legal arrangements.

Most members of the audience were going to be late adopters but both speakers recommended that the analysis of the facts to determine the accounting should be undertaken soon in part because both speakers found that the act of doing the analysis provided them with interesting commercial insights.

IFRS 16 Leases, as expected, brings all leases onto the balance sheet apart from short term (<12 months) and low value leases.  The IASB is experimenting with a new approach to implementation, publishing guidance at an early stage, rather than waiting for differences in practice in different jurisdictions to emerge down the track.

The post implementation review of IFRS 3 has led to calls for the reintroduction of goodwill amortization due to perceived weaknesses in the impairment test approach.  There is strong resistance from investor community to amortization as it makes no sense in the P&L and they always reverse it out.  A variety of approaches to goodwill is being looked at including one that tries to quarantine the impairment test to the acquisition, by retaining the preacquisition "headroom" in the CGU when testing for impairment.  It remains to be seen how this will play out.

Posted in: IASB IFRS Leases Revenue Financial Reporting IFRS 16 IFRS 15 IFRS 3 disclosure XBRL Materiality  

Is measurement always a good idea?

Posted by Stephanie Kemp on 9 May 2016
Is measuring everything really such a good idea?
Reading a piece in the Guardian Australia on the planned relocation of the Powerhouse Museum to Parramatta (how many visitors, apart from true science nerds, are really going to take a 30 min train journey out to Parramatta, when visiting Sydney is all about the Harbour?) made me pause to reflect on the conundrum of the measurement of heritage assets in the public sector.
Conventional wisdom has it that accounts should be sector neutral (ie items should be treated the same regardless of whether they are in the accounts of a private sector business, a charity, or held by a government) and a value should be placed on all the assets that an entity controls.  An asset is understood as being the embodiment of the future economic benefits that it brings to the entity that owns it.
So far, so good.  In the case of a major heritage asset such as the Powerhouse Museum, the future economic benefits are hard to quantify: they include things like being a repository of knowledge about design in NSW, which gives it value as a research and educational resource and as a tourist attraction.  These attributes are well served by its current location. Public transport radiates out of central Sydney, making it accessible to families, tourists and students. Ultimo is accessible to all of Sydney's universities and the mueum's current site is huge, with massive storage for collections that are not on display.  Will these future economic benefits continue to the same extent when the institution is in Parramatta?
Where things go wrong in Sydney is that NSW public sector entities have to recognise all their physical non-current assets at fair value, based on the highest and best use for the asset .  The highest and best use is a use that is physically possible, legally permissible and financially feasible, which, if the building has not been listed, in central Sydney is often its value as an attractive development site with water views.  Governments see all the zeros on the development use valuation and get greedy.  Sadly there has been a reluctance in recent times to add properties to the State Heritage List to protect them for future generations one cynically wonders whether this is because the government wants to keep its options open.
There are three listed items in the vicinity of the Powerhouse, two pumping stations and Ultimo Post Office, but not the Powerhouse itself .  These other items were listed back in 1999, but somehow the Powerhouse was overlooked...
Two key attributes of a good financial report are relevance and reliability.  From the sorts of comments that are appearing in the press about the Powerhouse proposals, it is clear that there is a community expectation that a major heritage asset like a museum, gallery, or public garden is held in trust for future generations and merely managed by the current government on behalf of our descendants.  As such, a development valuation is not relevant and its existence merely tempts our politicians to see if they can turn the asset into cash.
Reliability of any valuation figure is of course entirely dependent on the quality of the assumptions that went into it - the financial press is full of accounting stories on the theme of inappropriate valuations.
So what is the answer?  The answer may be cast the sacred cow of sector neutrality into the flames and impose specific requirements on public sector heritage/community assets.  Possibilities might be to put such assets into government accounts at $1, with narrative notes to explain their value to the community, or to show them as if they are in a trust for future generations they could be valued, but it would be clear that the value was not available for realisation and use for general running expenses.  It is interesting to note that the international public sector standard IPSAS 17 Property, Plant and Equipment does not require the recognition of heritage assets that would otherwise fall under property, plant and equipment .
Posted in: AASB Financial Reporting heritage assets IPSAS 17 property, plant and equipment  

Technology and dispute resolution

Posted by Stephanie Kemp on 29 April 2016

The future of dispute resolution - technology

Our appreciation of current issues in the dispute resolution world was deepened when we attended the Singapore 2016 Global Pound Conference Shaping the Future of Dispute Resolution and Improving Access to Justice.  The more we learn about contemporary dispute resolution, the better we understand how our role as consulting (dirty) or independent (clean) expert fits into the process as a whole and the better we can assist our clients.

The use of technology during the conference transformed it from being the traditional series of lectures supported by PowerPoint presentations to being more like a seminar that reflected the issues relevant to the audience.  In each session, participants were posed a series of questions to discuss with their neighbours and submitted group answers via a website.  The answers to questions then formed the agenda for a wide-ranging discussion between a panel of about eight experts on the stage.

Technology was also centre stage for a presentation on online dispute resolution.  How can disputes between people be settled online?  An interactive website model has been pioneered in the United States to settle low value cross border disputes arising out of internet commerce such as Amazon, PayPal and EBay (see for example http://resolutioncentre.ebay.com.au).  The buyer and seller enter the essentials of their dispute into the website and, while human mediators supervise the site, over 90% of disputes are settled by parties using the software alone without the need for any intervention by the mediators.  Online dispute resolution is cheap, can take place in numerous languages and takes the anger and emotion out of the dispute by making parties settle down with their computer and simply answer a series of questions, rather than facing each other.  It works because the means of resolving the dispute suits the users it uses the Internet like the original transaction, or in other words "fits the forum to the fuss".

Because of its potential to diffuse emotion, the techniques are now being extended out of low value commercial disputes into more challenging and tense areas such as family law, an initiative that is already in use in the Netherlands.

Science was also applied to dispute resolution in a session on how the brain works.  There is a lot more to this than sitting everyone around a round table and watching body language!

We learned that there are three parts to the brain, a primitive part that is dedicated to survival, the limbic system that registers emotions and the neocortex that deals with higher order thinking.  Working across these regions are three "operating systems", emotional, social and cognitive.  How these operating systems act on the regions determines our behaviour.

As a result of an exercise looking at silhouettes of eyes, we learned that we are programmed to register danger and fear much more quickly and accurately than emotions like happiness that do not pose a threat to us.  Our first impressions are formed in the amygdala and respond to our perception of dominance and trustworthiness in a new face.  Before we know it, we are registering where the new person fits in the social hierarchy and whether they are friend or foe.  Feelings of friendship and empathy cause particular regions of the brain to fire.  The suffering of a friend arouses empathy and acts on the brain in a different way from witnessing the suffering of someone who means nothing to us.  With all this happening in milliseconds at the beginning of a meeting or negotiation, it is important to be aware of what is going on and to try to create empathy "we are all in this together".

The cognitive operating system transcends this and enables us to step back from a situation and act rationally rather than purely on instinct.  However, the brain tires quickly and with it cognitive ability, but we often do not realize it.  Some fascinating research on judges assessing parole cases revealed that rulings in favour of the prisoner were much more likely first thing in the morning or after a meal break!  The judges benefitted from short breaks and food in their ability to assess each case on its merits rather than follow the status quo.  Again, this is useful information when embarking on a long or emotionally tense negotiation.

By the end of the session on neuroscience, the opportunities for online dispute resolution, which takes away some of the human unpredictability, appeared to be enormous.

Posted in: expert witness dispute resolution ADR Litigation Support  

The future of dispute resolution - globalisation

Posted by Stephanie Kemp on 12 April 2016

Our appreciation of current issues in the dispute resolution world was deepened when we attended the Singapore 2016 Global Pound Conference Shaping the Future of Dispute Resolution and Improving Access to Justice. The more we learn about contemporary dispute resolution, the better we understand how our role as consulting (dirty) or independent (clean) expert fits into the process as a whole and the better we can assist our clients.

The opening address by Sundaresh Menon, Chief Justice of Singapore on the impact of globalization on dispute resolution set the tone for the two days of the conference. Menon looked at globalization in terms of three major socio-economic shifts that are taking place:

  • The open movement of capital and labour, leading to an increase in cross border trade and as a consequence cross border disputes
  • A move towards cross cultural convergence as legal systems built for transactions within nations are forced to converge with one another and reduce the costs of compliance for an increasing level of international trade and commerce
  • An increase in parties seeking access to justice through non-traditional means by agreement such as arbitration, mediation or a combination of the two, giving them a flatter structure, using a facilitator rather than a judge, and greater self-determination.

Legal systems have to respond to these pressures and can do so in three main ways:

  • Countries need to equip their legal systems with a range of options including Alternative Dispute Resolution avenues - the courts may not be the best answer for all cases. He suggested the A in ADR should stand for appropriate dispute resolution rather than alternative different disputes call for different approaches. At the same time, there should be greater specialization on the bench and recognition that some subject matter may require an expert amicus curiae to assist the judge with the technical aspects of the subject matter.
  • There needs to be increased communication between stakeholders so that jurisdictions learn from each other and adopt the best features of other systems. Conventions on the enforcement of judgements and collaboration and knowledge sharing between courts in different countries will help in building a system where there is less incentive to forum shop and judgments and agreements are enforced.
  • In spite of culture clashes and different approaches to ethics, the way forward involves drawing on a global talent pool and allowing practitioners to work outside their home jurisdiction.

Perhaps not surprisingly, Menon finished by emphasizing the qualities of Singapore as a forum for international dispute resolution. In addition to its well-known Singapore International Arbitration Centre, it now also boasts the Singapore International Mediation Centre and is pioneering a process where mediation and arbitration are combined. The most recent addition to Singapore's dispute resolution menu is the Singapore International Commercial Court, of which Menon appeared to be very proud. He sees this as an alternative to international arbitration, with parties agreeing to be bound by its jurisdiction at the outset. The proof of the pudding will be in the eating, however.  So far the SICC has only heard a couple of cases.

Posted in: expert witness dispute resolution ADR Litigation Support  
< Previous | 1 | 2 | 3 | 4 | 5 | Next >

Current NEWS

Our review of 2017

Jan 18 2018
Reflecting on our work and developments in the ...

NOCLAR effective 1 Jan 2018

Nov 10 2017
Non-compliance with Laws and Regulations (NO...

Update: The Auditing Assurance and Ethics Handbook

Apr 12 2017
CAANZ* have decided not to produce a 2018 ed...

Litigation Support

Chris and Stephanie act as consultants and experts (“clean” and “dirty” experts) in the context of dispute resolution on a variety of financial reporting and audit issues.

Read more>>


Westworth Kemp Consultants can provide support to businesses, professional practices and regulators seeking to implement systems designed to foster compliance

read more>>


Independent advice on the interpretation of auditing (or assurance) and accounting (or financial reporting) standards can be hard to find.

read more>>

© Copyright Westworth Kemp Consultants 2012.
Website design and development by Snap (St Leonards)