The issue of the extent to which directors need to be financially literate first discussed in the Centro civil penalty case in 2011 was revisited in the recent decision in ASIC v Godfrey, summarised in ASIC's media release.
Godfrey was the managing director of Banksia Securities, a mortgage lender based in rural Victoria, which failed in 2012. As the director responsible for recommending the appropriate impairment provision for bad and doubtful debts to the Board, the court found that he did not have a sufficient understanding of the requirements of the relevant accounting standard, AASB 139 Financial Instruments: Recognition and Measurement (AASB 139) as it applied to the the recognition and assessment of the impairment of mortgage investments made by Banksia.
Banksia's financial reports for the financial years ending 30 June 2011 and 30 June 2012, and its half-year financial report for the half year ending 31 December 2011 did not give a true and fair view because they did not comply with the relevant accounting standards, in that the provision was inadequate. Godfrey, as director responsible for making recommendations to the Board in respect of the impairment of loans and as a signatory to the accounts in 2012, had failed to take all reasonable steps to secure compliance by Banksia with AASB 139.
The court accepted that there was no dishonesty on his part, but the breach came about because he did not realise that Banksia's provisioning policy was inadequate and did not comply with AASB 139. Because of his role in ensuring that the company complied with the financial reporting provisions of Part 2M of the Corporations Act, especially in respect of the assessment of impaired loans, he needed to have a greater understanding of AASB 139 in order to discharge his duty as a director. The message seems to be that directors must take responsibility for the duties they have assumed and cannot necessarily rely on others such as management or the external auditors in discharging those responsibilities.
The full text of the judgement can be found here.
|Posted in:Governanceaccounting standardsimpairmentAASB 139Centrodirectors' dutiesASICFinancial Reporting|
|Posted in:IASBAASBAmending standardsExposure draftFinancial Reportingexpert witnessAuditAuditorIAASBNOCLARIESBAKAMEstimatesethics|
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
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:AASBFinancial Reportingexpert witnessAuditIAASBauditor reportinginternational auditing standardsNOCLAR|
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.
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:Governanceexpert witnessdispute resolutionLitigation Support|
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.
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.
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:
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:
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:IASBIFRSLeasesRevenueFinancial ReportingIFRS 16IFRS 15IFRS 3disclosureXBRLMateriality|
|Posted in:AASBFinancial Reportingheritage assetsIPSAS 17property, plant and equipment|
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 witnessdispute resolutionADRLitigation 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.
Westworth Kemp Consultants can provide support to businesses, professional practices and regulators seeking to implement systems designed to foster compliance
Independent advice on the interpretation of auditing (or assurance) and accounting (or financial reporting) standards can be hard to find.