Institute News

Transcription

Institute News

No94MARCH2009
The Journal of the Institute
of Certified Public Accountants
of Cyprus
www.icpac.org.cy
March 2009 - No. 94
ISSN 1450-2380
Editor
Ninos Hadjirousos, FCA
Deputy Editor
T. Anastasiades, B.Sc., M.A. (Econ.)
Editorial & Institute Offices
11 µyron Avenue, CY-1096 Nicosia
P.O.Box 24935
1355 Nicosia - Cyprus
Tel. 22870030
Telefax 22766360
E-mail: info@icpac.org.cy
URL:http/www.icpac.org.cy
Accountancy Cyprus is published quarterly
by the Institute of Certified Public Accountants
of Cyprus and is sent free to all members of
the Institute as well as to a large number of
other persons, companies, and organizations.
The Institute can accept no responsibility for
the accuracy of contributed statements or
articles appearing in this publication, and any
views or opinions expressed are not
necessarity endorsed by the Institute, its
Council or by the Editors
The Institute Council
President:
Vice President:
Secretary:
Treasurer:
Panikos Tsiailis, FCCA
Panicos Charalambous, FCCA
Theodoros Parperis, BSc (Econ), ACA
* Kyriakos Iordanou, FCCA, MBA, ACIM, CIA
* Denotes member not in practice
Members
Michael Antoniades, BA(Hons), ACA
Christis Christoforou, BA(Econ.), FCA, MBIM
Demetris Demetriou, FCCA
Ninos Hadjirousos, FCA
* Demetris Halios, BSc (Acc), CPA
* Christodoulos Papas, BA (Hons), MBA, FCCA
* Marios Skandalis, FCCA, FIFC, CFC, CFE
Nicos Syrimis, FCA
Contents
Institute News ............................................................................................................................................................
2
Professional Briefing .................................................. ............................................................................................... 17
The Czech - Cyprus Economic Relations, the Czech Economy and the Czech EU Presidency................................. 29
The International Financial Turmoil and the Economy................................................................................................ 36
Audit challenges in the current volatile economic environment................ .................................................................. 43
The International Economic Crisis leads to the Revival of protectionism................ .................................................... 45
The Management of Monetary Policy ......................................................................................................................... 46
The Bail-out of Banks Internationally .......................................................................................................................... 48
Global Labour mobility still key to business growth plans, finds KPMG International Survey ..................................... 51
Financial Crisis - the response from the European Commission ................................................................................ 53
Central Bank Strategies and the free market.............................................................................................................. 57
Reward Strategy: A barrier or an enabler in managing the economic downturn......................................................... 58
The Excel Wizard ....................................................................................................................................................... 59
Discussion Project on Presentation of financial statements ....................................................................................... 64
Passports for Cash?..................................................................................................................................................... 71
Going concern: More Popular than ever......................................................................................................................... 72
Foreign Employment in Cyprus .................................................................................................................................. 74
“The Audit Monitoring Visit: - Important Considerations”............................................................................................ 78
Are Cyprus group loss relief provisions compatible with European Community Law? - Part 2................................... 80
The Public Sector recognizes the invaluable contribution of its accountants.............................................................. 85
Topgrading: Process used by top companies to hire, coach and keep the best talent................................................ 86
The Public Sector recognizes the invaluable contribution of its accountants.............................................................. 85
Selling Property by Auction......... ............................................................................................................................... 88
Become a Risk Intelligent Enterprise.......................................................................................................................... 91
The Profession of the Statutory Auditors in Bulgaria.................................................................................................. 94
Economic Bulletin......... .............................................................................................................................................. 102
Audit File Review......... .............................................................................................................................................. 106
Board Processes and the Quality of Board Decision making......... ............................................................................. 109
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COUNCIL’S ACTIVITIES
During the 1st quarter of 2009
During the first quarter of 2009 the Council of the Institute
met three times and considered matters of interest to
ICPAC and to the profession at large. Other activities
included the following:
On 15 January 2009 Mr. Christos Kyriakides, Senior
Officer of the Institute, attended a meeting of the
Consultative Committee for the Prevention of Money
Laundering and Terrorist Financing, held at MOKAS.
On 22 January 2009 Ms Lina Lemessiou, Senior Officer of
the Institute, attended a meeting of the FEE Capital Market
Sub - Group in Brussels.
On 4 February 2009 Mr. Ninos Hadjirousos, Council
Member, attended a Council meeting of the Mediterranean
Federation of Accountants in Athens.
1. The Committee is currently examining a proposal
included in the 8th Directive in relation to predecessor
auditors providing access to information to successor
auditors.
2. The Committee is currently examining a number of
other issues in relation to the application of the IFAC Code
of Ethics by the members of ICPAC including the
preparation of Frequently Asked Questions on Ethical
dilemmas faced by members.
Polyvios Polyviou
Chairman
PUBLIC RELATIONS COMMITTEE
During the first quarter of 2009, the Public Relations
Committee held three formal meetings and organised the
following activities:
On 4 March 2009 Mr. Ninos Hadjroussos, Council
Member, participated as a speaker on the accounting
profession at the Careers Education Fair of the Grammar
School in Limassol.
On 8 March 2009 Mr. Theodoros Philippou, General
Manager of the Institute, attended a meeting of the FEE
Council in Brussels.
COMMITTEES’ ACTIVITIES
During 1st Quarter of 2009
ETHICS & INSTITUTIONS COMMITTEE
During the first quarter of 2009 the Ethics and Institutions
Committee met three times. Added to these meetings were
other informal meeting between various sub-committee
members. The main activities of the Committee during this
period were as follows:
2
Members of the Public Relations Committee visited
Archbishop Makarios III Hospital and made an official
delivery of the equipment.
On 8 January 2009 and 12 February 2009, the Committee
organised monthly gatherings inviting all members of
ICPAC at Finbarr’s pub. The attendance was lower than
expected due to the fact that the timing of the gatherings
coincided with the busy period for the majority of the
members.
ACCOUNTANCY CYPRUS ñ VOLUME 94 ñ MARCH 2009
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On 5 February 2009, the Committee organised a Quiz
night at Blinkers pub. A large numbers of members and
friends participated in the event and the evening was
considered successful since it gave the attendees the
opportunity to compete and enjoy a variety of finger food
and drinks.
At the end of February 2009, the Committee circulated an
invitation to all members informing them that a blood
donation group (code ™∂§∫ G-4) had been registered. All
members of ICPAC may donate blood anytime during the
year at the premises of the Old General Hospital. The
registration of the blood donation group is an integral part
of ICPAC’s social responsibility programme.
On 18 March 2009, the Committee organised a Chinese
dinner at China Spice restaurant. The evening had a high
participation and was considered successful by the people
attended since it gave them the opportunity to meet with
other members of ICPAC and friends and enjoy a large
variety of Chinese food.
The Institute donated a sanction machine to Archbishop
Makarios III Hospital which maybe used during the
delivery of newborns.
Panos Prodromides
Chairman
STOCK EXCHANGE AND CAPITAL MARKETS
COMMITTEE
During the first quarter of 2009, the Committee met three
times. Added to these meetings, were other meetings
between various sub-committees’ members.
The main activities of the Committee during the period
above were as follows:
1. Meeting with the Chairman and Officials of the Cyprus
Stock Exchange and discussion of issues of common
interest and recent developments:
a. Latest strategic developments
b. Semi-Regulated Market
c. Market-maker and market liquidity
d. Derivative financial instruments and stock lending
e. Mutual funds - introduction in Cyprus
2. Follow up on work in progress with regards to the
following issues:
a. Reviewed the Discussion Papers of the European
Commission on amendments of the European
Prospectus Directive 2003/71/EC.
b. Proposed framework on ‘Semi-Regulated Market’
issued by the Cyprus Stock Exchange.
c. Reviewed proposed amendments to the Stock
Exchange Law covering Over-the-Counter
transactions, CSE fees, taxes on transactions,
trading rules etc.
3. Review and submission of comments to the Cyprus
Securities and Exchange Commission on the following
Consultation Papers:
a. CP2008-15 regarding amendments to the Cyprus
Securities and Exchange Commission Law.
b. CP2009-02 regarding the issue of Directive DI1162005-05 amending the Market Abuse Law.
c. CP2009-03 regarding the issue of Directive DI1902007-04 amending the Transparency Law.
4. Carried out maintenance and updated the Committee’s
material on the Institute’s website.
Demetris Taxitaris
Chairman
LARNACA - FAMAGUSTA CO-ORDINATING
COMMITTEE
During the period from the committee carried out the
following activities:
1. A Christmas Dinner- Dance in co-operation with the
staff of the District Department of Inland Revenue in
Larnaca has taken place in Sun Hall Hotel in Larnaca
on 9 January 2009 and it was successful. Mr George
Poufos the Director of Inland Revenue of Cyprus
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participated at the event as guest of honor and shared
his thoughts with the participants.
2. In co-operation with the Education Committee of the
Institute arranged for a Seminar with subject
“Completion of Income Tax Returns” to take place in
Larnaca on 9 April 2009.
members will be in a position to raise queries and matters
for discussion. Under certain circumstances, issues could
be directed to a regulator for further guidance.
3. Sent invitations to all the members of the region to
meet regularly on the last Friday of each month for a
drink. First meeting on 27 March 2009.
EU MATTERS COMMITTEE
Tasos Michael
Chairman
Christos Skapoullis
Chairman
The EU Matters Committee of ICPAC has carried out the
following actions in accordance with its terms of
reference:
ñ
ACCOUNTING STANDARDS COMMITTEE
During the first quarter of 2009, the Accounting Standards
Committee had three formal meetings and a number of
sub-committee meetings during which the following
actions were taken:
ñ
ñ
1. The Committee following examination of the
accounting, reporting and relevant legal aspects issued
Circular No. 40 “Accounting treatment for investments
in jointly controlled entities and associates on the basis
of the exemptions in Section 142(1)(d) to (f) of the
Cyprus Companies Law, Cap. 113.
2. The Committee concluded its examination of the
proper format in the case of financial statements of
individuals with earnings in excess of CY£40.000.
3. The Committee issued Technical Circular No. 41
“Disclosure of Standards and Interpretations issued by
the International Accounting Standards Board but not
yet effective”.
Continuous follow up on the developments in the EU
affecting the accounting profession through research
from various sources such as the EU website, the
european business and accounting press etc
Meeting with the Planning Bureau of Cyprus
regarding the organisation of a seminar on the audit of
projects funded by the structural funds.
Investigation of the possibility of accessing EU funds,
through available EU programs, for the benefit of
ICPAC and its members, with the assistance of an
external counsel. All the committees of ICPAC have
been requested to provide their views and proposals
on this matter.
ñ
Preparation of article on the effect of the global
financial crisis on bank interest rates in ECB and CBC
and action proposed by the European Commission
ñ
Continuous update of the website of ICPAC
Stelios Anastasiou
Chairman
Maria A. Papacosta
Chairwoman
CORPORATE GOVERNANCE AND INTERNAL
AUDIT COMMITTEE
During this period the committee’s efforts were focused in
establishing communication channels with stakeholders.
During February meetings were held with the Cyprus
Stock Exchange (in cooperation with the corresponding
Committee) and the Central Bank of Cyprus. Moreover, it
has been decided to establish an internet link between
ICPAC’s members and the committee through which the
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LIMASSOL-PAPHOS COORDINATION
COMMITTEE.
During the period from 1 January 2009 to 31 March 2009
the Limassol-Paphos coordination committee has carried
out the following activities:
1. On the 23 of January the committee coordinated a
seminar on “Planing and preparation for a VAT
purposes audit”. The seminar was held at the Ajax hotel
in Limassol.
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before in the audits to be
performed in the current
year. In addition the
Committee prepared a list
of the relevant ISAs and
IFRSs that should be
covered and
communicated such to the
Education Committee. The
seminar is scheduled to
take place during April or
May 2009 and will focus
on practical issues and
possible day to day matters
that auditors may face in
the current economic
environment.
Mr. Orphanides delivers his speech
2. On the 28 January the committee organized a dinner
with speech on the subject”Global financial turmoil
and the economy”. The Guest of honor and speaker was
Mr. Athanasios Orphanides, Governor of the Central
Bank of Cyprus. The event was attended by more than
230 members and guests and has also received
attention from electronic mass media.
3. A subcommittee was formed to liaise with the Public
Relations committee in order to organize the Annual
Dinner dance of ICPAC.
The subcommittee has already taken various actions for
the preparation of the event which will take place on 8 May
2009 at Saint Rafael Hotel in Limassol.
2. The Committee considered the provisions of the
revised legislation “Law Providing for Transparency
Requirements in Relation to Information about Issuers
whose Securities are Admitted on a Regulated Market”
(109/(I)/2007) and concluded that there were no audit
related issues which required any further consideration
by the Committee.
3. The Committee continued its monitoring of the EU’s
endorsement of new or revised IFRSs and IFRICs as
well as of IAASB’s Clarity Project The IAASB has just
completed its Clarity Project and the Committee will
examine its results in future meetings.
Panos Papadopoulos
Chairman
Charalambos Efstratiou
Chairman
PUBLIC SECTOR COMMITTEE
AUDITING STANDARDS COMMITTEE
During the first quarter of 2008, the Auditing Standards
Committee held 3 meetings during which:
1. The Committee decided that it would be useful to
recommend to the Education Committee the
organisation of a seminar on “Auditing in the current
economic environment” to provide to members in
practice further guidance on the relevant issues and
matters that need to be considered much more than
The activities of the Public Sector Committee were as
follows:
1. Publication of the conclusions of the seminar
concerning the “Application of the Principles of Public
Governance in the Cyprus Public Sector” organised by
the Committee in November 2008.
2. Meeting of representatives of the Committee with the
Director of the Department of Public Administration
and Personnel to discuss the conclusions of the
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aforementioned seminar and the way forward for the
preparation and enforcement of a Public Governance
Code in Cyprus.
3. Meeting of representatives of the Committee with the
Director of the Department of Public Administration
and Personnel to discuss various issues concerning
qualified accountants employed in the wider public
sector. Issues raised included:
ñ The requirement, in positions requiring qualified
accountants in the public sector, for applicants to be
members of ICPAC,
ñ The diversity in salary scales between government
Departments/
accountants,
Services
employing
qualified
ñ The quantification of post-qualification experience of
Public Sector Committee.
9. Scheduled meetings with officials of the Government:
(i) On the 19 March 2009 representatives of the
Committee arranged a meeting with the
Commissioner of the Internal Audit Service Mr.
Lakis Demetriou and discussion of issues of
common interest with special attention to issues
concerning qualified accountants employed in the
wider public sector and public governance.
(ii) On the 20 March 2009 representatives of the
Committee arranged a meeting with the Auditor
General Mrs. Chrystalla Georgadji and discussion
of issues of common interest with special attention
to issues concerning qualified accountants
employed in the wider public sector and public
governance.
qualified accountants and,
ñ The separation of job descriptions/ recruitment process
of qualified accountants and university graduates in
government Departments/ Services employing a
significant number of qualified accountants.
4. Review of a Discussion Paper on “Accountability and
Governance in the Public Sector” issued by the
Federation of European Accountants (FEE) for the
purpose of providing comments and a description of
Public Governance in Cyprus.
5. Responses to FEE Public Sector Committee
questionnaires on the subjects of “Financial Crisis and
the Public Sector” and “Public Debt and Cash
Management”.
6. Update of the Institute’s website with material
concerning the Committee’s activities.
(iii) On the 26 March 2009 representatives of the
Committee arranged a meeting with the Chairman
of the Cyprus Securities and Exchange
Commission and discussion of issues of common
interest with special attention to issues
concerning qualified accountants employed in the
wider public sector and public governance.
(iv) On the 27 March 2009 representatives of the
Committee arranged a meeting with the
Permanent Secretary of the Ministry of Finance
and discussion of issues of common interest with
special attention to issues concerning qualified
accountants employed in the wider public sector
and public governance.
Rea Georgiou
Chairwoman
VAT COMMITTEE
7. Update of the record with the personal data of the
ICPAC members who are employed in the public
sector.
8. On the 3 March 2009 Mrs Rea Georgiou represented
the Institute at a meeting of the FEE (Federation of
European Accountants) Public Sector Committee in
Brussels. Mrs. Georgiou is the vice chair of the FEE
8
The VAT Committee (Committee) of the Institute of
Certified Public Accountants of Cyprus (ICPAC) has
undertaken significant tasks during the quarter from
December 2008 to February 2009. With the participation
of all members of the Committee, a number of meetings
were held with certain VAT officers to discuss and resolve
a number of important VAT issues.
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More precisely, during the first quarter the Committee
worked on the following issues:
1. Tax Tribunal & expansion of its duties: ICPAC’s subcommittee, responsible for the expansion of the current
duties and responsibilities of the Tax Tribunal (∂ÊÔÚÈ·Îﬁ ™˘Ì‚Ô‡ÏÈÔ), developed an action plan which it
believes will speed up the process. The proposed plan
prepared by the sub-committee provides suggestion for
the preparation and presentation of a study on the role
and activities of the Cyprus Tax Tribunal. The study
will cover the practices and laws followed in other EU
countries and the benefits arising form the use of such
tribunals. During each presentation members of the
media and political parties will be invited to attend. The
Committee will proceed with the materialization of the
above action plan following the approval of the Central
Committee of ICPAC.
2. VAT status of holding Companies: During a scheduled
monthly meeting with the VAT officers, the recently
developed practice of certain VAT district offices
proceeding with the de-registration from the VAT
Register of a number of International Business Entities
(IBE’s) was discussed. More precisely, officers from a
particular VAT district Office have been recently deregistering IBE’s on the grounds of not maintaining a
fully fledged office within the Republic or for not
disclosing any income in their quarterly VAT returns.
The initial position of the officers in the Department of
European matters and VAT treatment in Nicosia’
central offices is that de-registration for any of the
above reasons is not justified and a very thorough
examination of the facts of each case must be made
before rushing to de-register IBE’s. The concept of
management and control was discussed and all agreed
that this issue should not be ignored in determining
whether an IBE is entitled to register for Cyprus VAT
purposes.
scope of Cyprus VAT and the registered person has
an establishment elsewhere and these supplies are
included in a VAT return submitted by that
establishment, there is no need to include the
services in a VAT return submitted by the Cyprus
registered person.
(b) Where the services are not supplied from another
establishment, the outside the scope supplies must
be included in the Cyprus VAT return.
(c) One of the problems the VAT Office is faced with,
are VAT returns which do not show any amounts in
any of the boxes of the VAT return submitted except
in box 4 which is interpreted as asking for the
refund of input VAT without showing any output. It
suggested that at least a symbolic amount of outside
the scope income is included in the VAT return
where input VAT is claimed.
4. Special scheme for broadcasting services and private
yachts: The participating VAT officers advised of the
VAT Office’s decision to include the scheme under the
reduced VAT rate of 5%. The relevant bill has been
submitted to the Council of Ministers pending their
approval.
In an attempt to attract the registration of private yachts in
Cyprus, the Committee undertook to assist the VAT office
in preparing a proposal to the Council of Ministers.
5. Absorption of European Funds: The Central
Committee of ICPAC took the initiative to further
investigate the possibility of absorbing European
Economic Funds through various EU Programs, with
the ultimate intention to meet the direct needs of
ICPAC. A suggestion letter was prepared by the
Committee and communicated to the ISPAC committee
for their consideration.
3. Transactions falling outside the scope of the Cyprus
VAT Legislation: Due to the fact that there is great
confusion as to whether such transactions should be
included in the quarterly VAT return forms, the subcommittee asked for clarifications on the issue. The
VAT Office’s position can be summarized as follows:
6. VAT refund claim procedure: During the meeting held
with VAT officers on 30/01/2009, it was clarified that
VAT refund claims are usually refunded to all entities
without any significant delays. The VAT Office’s target
is to make refunds within a week from the completion
of a VAT inspection
(a) Where the supply of goods or services is outside the
To expedite the refund process the VAT Office is also
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working on the electronic submission of Form 4B.
implications contained in Circular 127 from the date
the circular was circulated (17 February 2009) and
not retrospectively. The VAT office has undertaken to
examine the suggestion and come back to the subcommittee.
The VAT office has undertaken to examine the suggestion
and come back to the sub-committee.
7.
Meetings with VAT Officers:
(7a) Analysis of VAT Circular 127: On 06/02/2009 the
VAT Office published Circular 127 on implications
arising from the non timely application of the reverse
charge procedure. The VAT Office’s position, as
expressed in the Circular, has raised serious concerns
by the members of the Committee especially on its
impact towards International Business Entities.
During a meeting held with the VAT office on 3
March 2009, it was suggested to apply the
(7b) The 18 month rule in the construction industry:
During a meeting held on 5 March 2009, the
Committee has decided to make the following
suggestions to the VAT Office regarding the
application of the above rule:
-
To differentiate between related and non-related
persons;
-
Where the persons are related the 18 Month rule
applies;
- Where the persons are not
related, if the dispute is
referred to court or an
arbitrator the 18 month tax
point is transferred to the
time a decision is reached.
The
VAT
office
has
undertaken to examine the
suggestion and come back to
the sub-committee.
8. Analysis of Court Cases:
During the Committee’s
regular meetings various
decisions of the Cyprus High
Court and the European Court
of Justice on various VAT
issues were presented and
analyzed by the relevant subcommittee.
Charis Charalambous
Chairman
EDUCATION
COMMITTEE ACITIVITIES
During the first quarter of
A photograph from the seminar on planning for VAT investigation
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2.
Completing
Inland
Revenue Tax forms and
explaining
rules
and
regulations for deduction of
PAYE
The seminar was held on 26
March 2009 in Nicosia. This
seminar was held in
collaboration
with
the
Taxation committee. The
purpose of the seminar was to
present to the participants
the completion of Inland
Revenue tax forms I.R.1 and
I.R. 4t and explain the rules
and regulations for the
deduction of PAYE. The
seminar was presented by
Inland Revenue officials Ms
Revecca Menelaou and Mr.
Andreas Koulli. The seminar
was attended by 123
participants.
The above seminar will be
repeated on 2 April 2009 in
Limassol and 9 April 2009 in
Larnaca.
A photograph from the seminar on completing Inland Revenue Tax forms
2009, the Committee held three meetings.
The following seminars have been organized and presented
during this period.
1. Planning for Vat investigation
The seminar was held on 22 January 2009 in Nicosia and
was repeated on 23 January 2009 in Limassol. The seminar
was held in collaboration with the Vat committee. The
purpose of the seminar was to present to the participants
the preparation of books and records necessary for the
investigation by the Vat authorities. The presenters of the
seminar were Mr. Harrys Charalambous, Partner of
Indirect tax department of KPMG and Ms Florendia Teloni
director of Indirect tax department of PWC. The seminar in
Nicosia was attended by 80 participants, and in Limassol
by 82 participants.
The following seminars have
been organised to be presented for April 2009 and May
2009.
1. International Standard on Quality Control (ISQC)1
and IFAC Code of Ethics
The seminar will be held on 27 April 2009 in Nicosia and
28 April 2009 in Limassol. The seminar will be presented
by Mr. Costas Seraphim, Tutor at Cyprus college.
2. Impact of economic crisis in the Audit process
The seminar will be held in collaboration with the Auditing
Standards Committee on 11 May 2009 in Nicosia and 12
May 2009 in Limassol. The seminar will be presented by
Mr. Costas Seraphim.
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Several additional seminars are planned for the second
quarter of 2009 in Nicosia and Limassol, in accordance
with the Action Plan of the Education Committee, with the
view of continuing to provide the members of ICPAC with
relevant seminars for the purposes of Continuous
Professional Education (CPE) and to keep them abreast
with recent changes in national and international laws and
regulations as well as changes in the profession.
indirect effect of the financial crisis as all member
states are becoming increasingly sensitive when it
comes to expatriation of funds. As far as QIS4 is
concerned, it has been agreed that companies may
address the QIS4 exercise again using 2008 figures.
ñ FEE Correspondence: The committee regularly
receives and reviews a number of FEE publications and
will begin to post relevant articles on its webpage.
Maria Pastellopoulou
Chairwoman
Marios Anastasiou
Chairman
FINANCIAL SERVICES COMMITTEE
INFORMATION TECHNOLOGY AND BUSINESS
CONSULTING COMMITTEE
During the first quarter of 2009 the activities of the ICPAC
Financial Services Committee (FSC) mainly covered the
following:
Activities during the period January - March 2009
The activities for each of our three main areas or
responsibility were as follow:
ñ Risk Matters: Following the ongoing debate on the
liquidity position of the Cyprus Financial System, the
Committee reviewed in greater detail the issue of
securitisation. To that effect the committee requested a
meeting with the Governor of the Central Bank of
Cyprus and the Minister of Finance in order to have the
opportunity to express its views at an early stage and
affect the drafting of the relevant legislation.
ñ Deposit Protection Scheme: The committee discussed
in detail the main controversial issues
regarding the contributions made by banking institutions
towards the Deposit Protection Scheme and the request to
increase the fund from Cyí2mil to Euro 100mil. The main
issue of concern is the accounting treatment of the
contributions and its effect on banks’ profitability. To that
effect a meeting was held with Dr. Michalis Kammas
(Association of Cyprus Banks) which has eventually
resulted to a revised request from the Fund in such a way
that it was allowing the impact to be spread over 5 years.
This and other related issues are intended to be discussed
at the forthcoming meetings with the Governor of the
Central Bank of Cyprus and the Minister of Finance.
ñ Solvency II: The committee follows-up on the
developments in this area. The issue of Insurance
Group Support has been left out of the last proposed
Directive as there was disagreement between Member
States on the “residency” of the funds. This is an
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1. Web-Site and ICPAC IT Architecture Administration
The members of the Institutes’ Web Page subcommittee
have undergone a survey and have prepared a proposal for
the Web Administrator regarding the possibility to enhance
the web page and allow members to advertise for career
opportunities. In addition a proposal was also prepared to
enable the committee to advertise accounting and other
software on the website rather than issuing on an annual
basis our publication. That will allow the software vendors
to publicise to the members’ current and relevant
information.
Both proposals were sent to the website administrator and
their quotation has been received and is under
examination. The sub-committee is also facilitating with
the administrators to change the page editor as editing
problems were discovered during the update of the
webpage content.
In addition, following recent changes in EU guidance for
providers of services, the Institute is oblige to provide to
all European citizens the possibility to complete
applications through the web. Hence, the subcommittee
will also examine the necessary amendments require in the
webpage infrastructure so as to provide this facility.
The sub-committee has prepared a list with the necessary
requirements for the implementation of a Customer
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Relation Management Software that is to be acquired by
the Institute. The requirements were communicated
currently to two possible vendors that have presented their
software to the members of the sub-committee as well as
to members of the Institute employees that will use the
CRM facilities.
2. Technical Development
The members of the Technical Development subcommittee in conjunction with the Education Committee
have continued presenting the seminar “Excel for
Accountants”
In addition the members have presented their proposal for
a seminar regarding “ISA 315 - IT audit & controls
implementation”. Once the content of the seminar is
finalised it will be communicate to the Education
Committee to arrange for the possible presentation dates.
The members have also presented to the committee their
proposal to publish our annual software survey within the
Institutes webpage. That will give the members the option
to review the current software features on an up to date
basis rather than receiving the published information
through the annual survey.
3. Business Consulting
The members of the Business Consulting sub-committee
have prepared for publication an article on “How to
prepare a CV and how to prepare for an interview”.
Nic0las Shakallis
Chairman
Tax report.
We are discussing with the Inland Revenue their request to
introduce a Tax Report which will be submitted together
with tax returns that are based on audited financial
statements.
ñ
Circular 2008/9 dated 28.7.2008 regarding defence
contribution on deemed distributions attributable to
adjustments on accounting profits after examination of the
accounts, books and records of a company.
ñ
We expect to meet with the Inland Revenue Department to
discuss our disagreement on certain issues dealt with in the
circular as per our letter to the Commissioner dated
31.10.2008.
2. European Court of Justice cases.
We have examined the Papillon ECJ case (C-418/07).
French legislation on group consolidation excluding lowertier subsidiaries indirectly owned through companies
resident in other Member States was found to be
incompatible with EC freedom of establishment. Our tax
legislation contains the same provision. To this intent we
have sent a letter to the Ministry of Finance suggesting an
appropriate amendment to the law.
We have examined the ECJ Persche case (C-318/07).
German rules on tax treatment of cross-border in-kind
donations were found to be incompatible with EC law.
Article 9(1)(f) of our Income Tax legislation provides for
similar restrictions. As such we are in the process of
preparing a letter to the Ministry of Finance suggesting an
appropriate amendment to the law.
3. Amendments to the Tax Legislation.
TAXATION COMMITTEE
The Taxation Committee pursued the following issues
during the first quarter of 2009:
1. Matters that are being discussed with the Inland
Revenue Department.
Arm’s length principles and transfer pricing.
We are discussing with the Inland Revenue Department
matters relating to arm length’s principles and transfer
pricing.
ñ
We are involved with the discussions relating to
amendments to the Tax Legislation. We have attended
meetings at the Ministry of Finance and have expressed
our opinion on matters that are being discussed.
4. Meeting with the President of the Tax Tribunal.
We met with the President of the Tax Tribunal and
expressed our views on specific issues relating to the
operations of the tribunal.
Pieris Markou
Chairman
15
Institute News
2747
Frixos Kyprianou
ACCA
2748
Maria Yiasoumi
ACCA
During the period January - March 2009 the following
persons have been accepted as new members of the
Institute:
2749
Stelios Ioannides
ACCA
2750
Andreas Michael
ACCA
2751
Stephani Padouva
ACA
2710
Andre Spastri
ACCA
2752
Zacharias Klerides
ACA
2711
Christina Kapodistria
ACCA
2753
Demetris Mili
ACA
2712
Nicolas Sofocleous
ACCA
2754
Loria Gregoriou
ACA
2713
Andreas Morias
ACCA
2755
Nicolaos Nicolaou
ACA
2714
Paris Savva
ACCA
2756
Eleonora Toumazi
ACA
2715
Haig Shaderevian
ACCA
2757
Agathi Lambrou
ACCA
2716
Yiannakis Christodoulou
ACCA
2758
Elena Kyriakou
ACCA
2717
Christakis Georgiou
ACCA
2759
Maria Yiallourou
ACCA
2718
Nicolas Christodoulou
ACCA
2760
Stella Kyriakou
ACCA
2719
Andreas Yiallouros
ACCA
2761
Tatiana Karanicola
ACCA
2720
Chrystalla Pontiki Papadopoulou
ACCA
2762
Chryso Mita
ACCA
2721
Athos Maliali
ACCA
2763
Areti Theodotou
ACCA
2722
Christos Daniel
ACCA
2764
Karolina Kousoulou
ACCA
2723
Yianna Stylianou
ACCA
2765
Oana Constantinou
ACCA
2724
Chrystalla Evripidou
ACCA
2766
Charalambos Aggelides
ACCA
2725
Vasilis Nicolaou
ACCA
2767
Stavros Hadjinicolaou
2726
Bryonis Kyperesi
ACCA
2768
John Diola
2727
Iosifina Toumazou
ACCA
2769
Savvas Savva
2728
Alina Drozdova Constantinou
ACCA
2670
Marianna Kyriakou
ACA
2729
Mariyianna Petrou
ACCA
2771
Andreas Pittakas
ACA
2730
George Pitzioli
ACCA
2772
Anna Constantinidou
ACCA
2731
Androula Solomou
ACCA
2773
Elli Mousarri
ACCA
2774
Panayiota Pambori
ACCA
2732
Tryfonas Kyriakou
ACCA
2775
Charalambos Chrysanthou
ACCA
2733
Maria Hadjistavrou
ACCA
2776
Ioanna Ioannou
ACCA
2734
Antigone Karamani
ACCA
2777
Christofora Phella Mourati
ACCA
2735
Ioanna Siaele
ACA
2778
Athanasia Antoni
ACCA
2736
Loizos Loizou
ACA
2779
Elena Kyriakou
ACCA
2737
Yiannis Kyriakou
ACA
2780
Michael Scott
2738
Andreas Trachonitis
ACA
2781
Socrates Anastasiou
Article 23
2739
Mark Klerides
ACA
2782
Loukia Nearchou
CPA-USA
2740
Charis Georgiou
ACA
2741
Pavlos Pattichi
CIMA
2742
Ranjeet Kumar Mahto
ACCA
2743
Maria Papadaki
ACCA
2744
Agis Agisilaou
ACCA
2745
Thekla Prodromou
ACCA
2746
Salomi Cosma
ACCA
NEW MEMBERS OF THE INSTITUTE
16
CPA-USA
ACA
CPA-USA
ACA Ireland
REREGISTRATION
1102
Marios Fieros
ACA
ASKED TO BE REMOVED FROM REGISTER
895
Vasilis Hadjievangelou
ACCA
Professional Briefing
KPMG TURNS KNOWLEDGE INTO VALUE WITH
KPMG ACADEMY
be announced every six months while specialized seminars
will be planned on demand.
At a press conference which took place on 2nd April,
KPMG announced the opening of KPMG Academy, a new
service of the organization in Cyprus.
Finally, Mr. Constantinos Kounnis, Manager of the
Academy, briefly outlined the programs which will be
delivered in the first sixth months of the year.
THE IFAC
OVERVIEW
SUSTAINABILITY
FRAMEWORK
The recognition governments and many organizations have
given to sustainability and sustainable developments are
changing business culture and society. The global
challenge is to ensure that organizations’ sustainable
development practices (a) reverse the previous erosion of
natural resources, and (b) improve their environmental,
social, and economic performance. This requires radical
changes in the way we do business and the way we live our
lives. Although many organizations aspire to being
responsible, few could claim to be truly sustainable.
From Left to Right:
Synthia Pavlou, Academy Administrator
Maria A. Papacosta Orphanides, Board Member
Andreas K. Christofides, Managing Director
Christos V. Vasiliou, Board Member and Head of Academy
Constantinos Kounnis, Academy Manager
Christos Makriyiannis, Academy Senior Consultant
KPMG Academy was created in the frame of the
organization’s wider strategy for social responsibility with
a goal to turn knowledge into value.
During the press conference, Mr. Andreas Christofides,
Managing Director of KPMG Limited, described the
KPMG Academy and its vision to combine the
professional and academic expertise in order to deliver
specialized training programs to companies and the
general public. Commenting on the world economic crisis
that may soon impact Cyprus, Mr. Christofides presented
the preventive actions and measures KPMG is taking in
order to substantially reduce possible adverse
consequences of the crisis. Effective staff training through
the KPMG Academy will enhance business productivity;
this being an important element for dealing with the
financial crisis. Finally, Mr. Christofides referred to the
recent “Exports Award 2007”, awarded to KPMG by the
Ministry of Commerce, Industry and Tourism in
collaboration with the Cyprus Chamber of Commerce and
Industry.
Furthermore, Mr. Christos Vasiliou, Board Member of
KPMG Limited and Head of the Academy presented the
core team members and talked about the strategy of the
Academy, the goals set and the various seminar categories
offered. As Mr. Vasiliou mentioned, the seminar topics will
This web-based tool targets professional accountants
working in commerce, industry, the public sector,
education, and the not-for-profit sector who the
International Federation of Accountants strongly believes
can influence the way organizations integrate
sustainability into their objectives, strategies, management,
and definitions of success. Professional accountants in all
types of organization have a significant role in:
ñ Challenging conventional assumptions of doing
ñ
ñ
ñ
ñ
business;
Redefining success;
Establishing appropriate performance targets;
Encouraging and rewarding the right behaviors; and
Ensuring that information flows to support decisions
and to monitor and report performance go beyond the
traditional ways of thinking about economic success.
Being sustainable requires an organization to take full
account of its impact on the planet and its people.
The role of professional accountants has therefore
expanded beyond that of preparers or assurers of financial
and sustainability reports. Professional accountants need to
adapt to a world in which sustainability is the key to longterm business performance, and need to understand how, in
their diverse roles in organizations, they play a significant
role. Sustainability has many connotations, depending on
an individual’s viewpoint. It means much more to
organizations than better reporting on environmental,
social, or economic performance. In clearly defining the
different facets of sustainability, the IFAC Sustainability
Framework can help professional accountants grasp all the
important aspects of sustainability that they may
encounter, directly or indirectly, and that will be important
17
to their organizations.
Sustainability has three important dimensions for all
organizations: (a) economic viability, (b) social
responsibility, and (c) environmental responsibility.
Although trade-offs can occur between these dimensions,
generally being socially responsible (towards employees,
communities,
and
other
stakeholders),
and
environmentally responsible, lead to enhanced trust, and,
therefore, makes good business sense. Social and
environmental responsibility cannot, however, stand in
isolation from economic viability. Profitability and growth
create jobs and wealth; organizations must therefore
continue to provide products and services that people want.
While pursuing a commercial imperative, organizations
must also deal with social and environmental issues as part
of ensuring that they generate added value for an
organization and its stakeholders.
Understanding the sustainability landscape is the first step
in being able to demonstrate how to use this greater
awareness to benefit their employers and the public
interest. Accountants’ professional background and
orientation equip them with the necessary qualities to
support their contribution - namely, wide business
understanding, numeracy and knowledge of measurement,
and objectivity and integrity. Applying these competences
to sustainability issues can help organizations to embrace
sustainable development and to incorporate it into strategic
planning and execution. This will allow organizations to
simultaneously deliver improved business performance
and to contribute to a better world.
USING THE FRAMEWORK
The IFAC Sustainability Framework consolidates all of the
important aspects of sustainability for organizations
wishing to deliver long-term sustainable value to their
stakeholders.
So many information sources cover various aspects of
sustainability and sustainable development that it has
created information overload. Accountants therefore find it
very difficult to get a coherent view of all the various
perspectives of this topic that organizations embracing
sustainable development must understand.
The Framework addresses four perspectives in bringing
together all the critical areas required to successfully
manage a sustainable organization. These perspectives are:
business strategy, internal management, financial
investors, and other stakeholders. Organizations that have
successfully embraced sustainable development to add
value to the organization and its stakeholders have usually
taken action from all four perspectives.
18
Different groups of professional accountants might have
more interest in specific areas of the Framework. For
example, professional accountants working at senior
management levels might be more focused on the business
strategy perspective, although all accountants should
understand that the success of all other activities depends
on action and performance at a strategic level. Professional
accountants working in performance management-related
roles (including planning, budgeting, performance
measurement, and roles such as business/financial analyst)
may direct their attention to the internal management
perspective, and those preparing business and financial
reports might find the investors’ and wider stakeholder
perspectives of most use.
The Framework provides many examples of good practice,
so that professional accountants can easily seek more
detailed information on areas of particular interest. These
are mostly hyperlinked and will be updated over time.
The four perspectives are summarized below:
Part A: Business strategy perspective - Taking a
strategic approach
The Framework emphasizes the importance of adopting a
strategic approach, so that sustainable development is a
part of strategic discussions, objectives, goals, and targets,
and is integrated with governance and accountability
arrangements and risk management. Ensuring that
sustainable development is featured at a strategic level,
supported by leadership and envisioning, is the only way to
ensure its integration into all parts of the operational plando-check-act management cycle. Only by taking a business
strategy approach can organizations make sustainable
development a part of doing business as opposed to an addon luxury that encourages rhetoric rather than sustainable
business models and practices.
Part B: Internal management perspective - Making it
happen
The internal management part of the Framework focuses
on all those areas covering performance and change
management that help an organization to deliver on its
strategy and specific sustainable development objectives
and targets. In many organizations, (a) enhancing
performance evaluation and measurement, (b) changing
behaviors, and (c) introducing sustainability and
environmental accounting as an extension of existing
accounting/information systems to accommodate
organizational plans for sustainable development, can be a
challenge for organizations, and can take time to achieve.
Therefore, this perspective also includes advice on how
organizations can achieve relatively simple quick wins to
improve energy efficiency and reduce waste, that can help
them improve environmental performance while reducing
their costs, all in a relatively short time frame.
Part C: Financial investors’ perspective - Telling the
story to investors
Organizations that are well developed in the internal
management perspective are usually in the best position to
deliver high-quality information about their sustainability
and corporate responsibility performance to investors. The
Framework offers advice on both incorporating
environmental and other sustainability issues into financial
statements in a way that supports an organization’s
stewardship role and enhanced reporting to investors in
financial reporting, including narrative reporting using
management commentary.
Part D: Other stakeholders’ perspective - Wider
transparency
The final perspective considers an evolving part of
sustainable development that builds on the development of
stakeholder relationships (covered in the business strategy
perspective) to improve transparency and non-financial
reporting against a broader set of expectations. Such
reporting commonly takes the form of separate
sustainability or corporate social responsibility reports that
may be based on de facto standards, such as those from the
Global Reporting Initiative. This perspective also includes
sustainability assurance, to help to improve credibility and
trust, and might be of interest to those professional
accountants in public practice.
IAASB PRACTICE ALERT HELPS AUDITORS
AND MANAGEMENT ASSESS IMPACT OF
CREDIT CRISIS ON GOING CONCERN
ASSUMPTIONS
(New York/January 20, 2009) - The unexpected severity,
speed and consequences of the credit crisis present unique
challenges for management and auditors in meeting their
responsibilities in assessing an entity’s ability to continue
as a going concern. To help auditors and management, as
well as those charged with governance, in addressing those
challenges, the staff of the International Auditing and
Assurance Standards Board (IAASB), an independent
standard-setting board under the auspices of the
International Federation of Accountants (IFAC), has
released a new practice alert entitled Audit Considerations
in Respect of Going Concern in the Current Economic
Environment. The alert was developed following
consultation with the IAASB and a review of similar
guidance issued by national standard setters.
Management, those charged with governance and auditors
alike must consider the effect of the credit crisis and
economic downturn on an entity’s ability to continue as a
going concern and whether these effects ought to be
described in the financial statements. The alert highlights
areas within International Standard on Auditing (ISA) 570,
Going Concern, as well as other ISAs, that are particularly
relevant in the current economic environment and provides
additional guidance for auditors in evaluating
management’s use of the going concern assumption. It also
raises awareness of issues surrounding liquidity and credit
risk that may create new uncertainties for entities or
exacerbate those already existing.
James Sylph, Executive Director, Professional Standards,
emphasizes, “While the alert notes that auditors are always
required to evaluate management’s use of the going
concern assumption, given current economic conditions,
the evaluation will take on even more importance and is
likely to be more complex. This is particularly the case
with regard to the availability of credit and the impact of
the current economic environment on budgets and
forecasts, factors which are likely to result in additional
disclosures in the current period’s financial statements. As
such, we believe this alert will be useful for auditors as
well as management of entities of all sizes in the current
audit season.”
This new alert is the second alert issued by staff of the
IAASB. The first, Challenges in Auditing Fair Value
Accounting Estimates in the Current Market Environment,
was issued in October 2008 to assist auditors in addressing
the challenges of auditing fair value accounting estimates,
and highlights areas within the ISAs that are particularly
relevant in the audit of fair value accounting estimates in
times of market uncertainty. Both alerts may be
downloaded free of charge from the IFAC website
(www.ifac.org). For more information on IFAC initiatives
with regard to the global financial crisis, please visit
http://www.ifac.org/financial-crisis/.
NEW IAASB CLARITY STANDARDS WILL HELP
STRENGTHEN AUDIT PRACTICE
Auditors worldwide will benefit from the recent
completion of the Clarity Project by the International
Auditing and Assurance Standards Board (IAASB), an
independent standard-setting board of the International
Federation of Accountants. All of the Board’s International
Standards on Auditing (ISAs) and its International
Standard on Quality Control (ISQC) have been reviewed
and redrafted in a new “clarified” style that makes the
standards easier to understand, translate, and implement.
These standards will also significantly advance the process
of global convergence and enhance the quality and
19
uniformity of practice in audits worldwide.
THE BENEFITS
The Clarity Project has introduced improvements that go
beyond enhancing the understandability of the standards.
The IAASB intends that the clarified ISAs will strengthen
practice in a number of areas, such as:
ñ Communication with those charged with governance;
ñ The gathering and evaluation of audit evidence in
relation to accounting estimates, including fair value
estimates;
auditor in the audit area addressed. One of the main goals
of the IAASB in redrafting its standards was to eliminate
any possible ambiguity about the requirements an auditor
needs to fulfill-as a result, the objectives in each ISA are
now supported by clearly stated requirements designed to
enhance consistency of practice. In all cases, requirements
are expressed by the phrase “the auditor shall.”
The clarified standards also have a new structure, in which
information is presented in separate sections: Introduction,
Objective, Definitions (as applicable), Requirements, and
Application and Other Explanatory Material. This
restructuring, in addition to the other drafting
enhancements,
improves
the
readability
and
understandability of the standards.
ñ The auditing of related party relationships and
transactions; and
ñ The use of the work of others, such as an auditor’s expert
or other auditors in the context of audits of group
financial statements.
EFFECTIVE DATE
The standards will come into effect for audits of financial
statements for periods beginning on or after December 15,
2009. All those with responsibilities relating to financial
statement audits should consider implementation issues as
soon as practicable and set in motions plans to update audit
methodologies and training programs in advance of the
effective date.
THE IMPROVEMENTS
The final set of clarified standards includes:
ñ One new ISA on communicating deficiencies in internal
control;
ñ 16 ISAs containing new and revised requirements;
ñ 19 ISAs that have been redrafted only to reflect the new
Clarity drafting style; and
ñ One ISQC redrafted to reflect the new Clarity drafting
style.
Auditors should look to ISA 200, Overall Objectives of the
Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing, for
assistance in understanding the purpose and scope of an
audit. This ISA sets out how the objectives, requirements,
and guidance in all ISAs are to be understood.
Each standard now clearly identifies the objective of the
20
Thirdly, specific groups of entities are addressed. Users
can now find considerations specific to small- and
medium-sized entities (SMEs) and public sector entities in
the standards themselves. These considerations are
highlighted in the Application and Other Explanatory
Material section of the ISAs.
NEW CLARITY CENTER
To help with the implementation of the new ISAs, IFAC
has
developed
an
IAASB
Clarity
Center
(http://web.ifac.org/clarity-center/index) that provides the
full set of final standards, showing in marked text changes
from the clarified standards that had been previously
issued, a history of the Clarity Project, and frequently
asked questions and answers. In addition, next month, the
IAASB plans to launch the first in a series of ISA modules
highlighting key changes in some of the more significantly
revised standards. The IAASB will also publish all of the
clarified standards in IFAC’s 2009 Handbook of
International Standards on Auditing and Quality Control in
April 2009.
NEW IFAC GUIDANCE FOCUSES ON THE
DEVELOPMENT AND TRAINING OF
ACCOUNTING TECHNICIANS
(New York/March 6, 2009) - An important means to build
capacity in the accountancy profession in developing
countries is through the development of accounting
technicians. As part of its strategy to develop the
accountancy profession worldwide, the International
Federation of Accountants’ (IFAC) Developing Nations
Committee has released a new good practice guide
entitled, The Education, Training and Development of
Accounting Technicians. The new guide is designed to
raise awareness of the role and value of accounting
technicians in both the public and private sectors.
The guide promotes the importance of having accounting
technician-level programs in both developed and
developing economies so that individuals have access to
education and training. The guide also encourages
professional accountancy organizations to support the
development of accounting technicians by offering
technician programs that lead to certification and
membership in the organization.
“In developing and emerging economies, individuals often
do not have the resources to qualify as professional
accountants, but there is a strong demand by governments
and organizations for skilled individuals to contribute to
the financial reporting and decision-making process. The
development of accounting technicians is important to
fulfilling this gap and setting a pathway for qualified
accounting technicians to develop further as professional
accountants,” states Ignatius Sehoole, chairman of the
Developing Nations Committee.
The guide can be downloaded free-of-charge from the
IFAC online bookstore (www.ifac.org/store). For more
information on IFAC’s work to support developing nations,
visit www.ifac.org/developingnations.
IFAC’S ACCOUNTING EDUCATION
STANDARDS BOARD PROPOSES NEW
FRAMEWORK TO ENHANCE CLARITY AND
RELEVANCY OF STANDARDS
(New York/January 27, 2009) - The International
Accounting Education Standards Board (IAESB), an
independent standard-setting board within the
International Federation of Accountants (IFAC), has
undertaken a new initiative to enhance the relevancy,
clarity and consistency of its standards as well as their
applicability to IFAC members and associates. It is
proposing a revised Framework for International
Education Standards, which sets out the concepts that
underlie the IAESB’s International Education Standards.
The proposed framework consists of two parts:
ñ
ñ
Part One explains the educational concepts of
competence, initial professional development,
continuing
professional
development,
and
measurement of the effectiveness of learning and
development, which will be used by the IAESB when
developing the IESs; and
Part Two describes the nature of the IESs as well as the
related IAESB pronouncements and IFAC member
body obligations.
The framework is targeted primarily to IFAC member
bodies that have direct or indirect responsibility for the
learning and development of their members and students.
It is, however, also relevant to a wide range of
stakeholders, including accounting faculties at universities,
employers of professional accountants, professional
accountants, prospective professional accountants, and
others interested in the work of the IAESB.
“Our objective with this framework is to improve the
understanding and application of the principles and
concepts that underlie the International Education
Standards,” states IAESB Chair Mark Allison. “The
framework will also enable the IAESB to deploy a more
efficient and effective standard-setting process and to
better demonstrate accountability for its decisions.”
HOW TO COMMENT
Comments on the exposure draft (ED) of the proposed
revised framework are requested by April 30, 2009. The
ED can be viewed by going to http://www.ifac.org/EDs.
Comments may be submitted by email to
edcomments@ifac.org. They can also be faxed to the
attention of the IAESB Technical Manager at +1 (212)
286-9570 or mailed to IFAC, 545 Fifth Avenue, 14th Floor,
New York, NY 10017, USA. All comments will be
considered a matter of public record and will ultimately be
posted on IFAC’s website.
NEW IFAC GUIDANCE ON CORPORATE
GOVERNANCE ADDRESSES RISKS AND
ORGANIZATIONAL ACCOUNTABILITY
(New York/February 10, 2009) - As part of its ongoing
commitment to support professional accountants in
business and their organizations in enhancing governance
and in improving organizational performance, the
Professional Accountants in Business (PAIB) Committee
of the International Federation of Accountants (IFAC) has
released a new International Good Practice Guidance
document entitled Evaluating and Improving Governance
in Organizations. The new guidance to professional
accountants in business includes a framework, a series of
fundamental principles, supporting guidance, and
references on how they can contribute to evaluating and
improving governance in organizations.
“This International Good Practice Guidance brings
together globally recognized and applicable good practice
principles on effective governance into an international
benchmark for the accountancy profession,” says IFAC
Chief Executive Ian Ball. “It will help PAIBs and their
organizations to further improve their governance
structures and processes - something critical to ensuring an
organizations viability and accountability.”
23
This guidance is designed to complement existing
governance codes, such as the OECD Principles of
Corporate Governance (2004), issued by the Organisation
for Economic Co-operation and Development (OECD), by
encouraging organizations to achieve a balance between
conformance with rules and regulations and driving
organizational performance. It also focuses on how to
create sustainable stakeholder value in the form of good
products or services, economic profitability, job security,
safety, or other social or economical responsibilities.
A separate document, Preface to IFAC’s International
Good Practice Guidance, sets out the scope, purpose, and
due process of the committee’s International Good Practice
Guidance series to which this guidance paper on
governance belongs.
Both Evaluating and Improving Governance in
Organizations and the Preface to IFAC’s International
Good Practice Guidance can be downloaded free-ofcharge from the PAIB section of the IFAC online bookstore
at http://www.ifac.org/store. The PAIB Committee
welcomes all feedback, which can be emailed to
paib@ifac.org.
Note related to Accounting Auditing and Relevant issues
By Tassos Anastasiades, Deputy Editor
IASB PROPOSES
P&L CHANGES
Banks will have to provide details of their profits and
losses from financial instruments under two measurement
systems, according to proposed accounting changes that
could come into effect for year - end accounts.
The proposals, from both the International Accounting
Standards Board and its US counterpart, would require
companies to disclose the profits and losses that would
have been reported if financial assets were valued at
current market process and as if they were reported at
“amortised cost” - a measurement that ignores market
volatility. The changes are part of a package of credit
crunch - related issues addressed by the accounting
rulemakers.
A number of bankers have complained that the
requirement to report the great majority of financial assets
at “fair” or market value has resulted in the industry
writing down the value of its holdings by hundreds of
billions, even though banks’ own expected losses on the
instruments are nowhere near as severe as market prices
imply.
SEC SET TO CRACK DOWN ON CREDIT RATING
AGENCIES
US securities regulators have moved to crack down on
conflicts of interest at credit rating agencies but delayed
taking action on other, more controversial proposals to
overhaul business practices. The new rules from the
Securities and Exchange Commission come as rating
agencies, which are paid by the issuers whose securities
24
they rate, face pressure from regulators around the globe.
The agencies have come under criticism over the role they
played leading up to financial crisis and for failing to act
quickly enough to warn investors about the risks of
investing in complex debt and mortgage - related products,
which have been at the heart of the crisis. Thus the five member SEC unanimously agreed to prohibit certain
activities at the companies, such as agency executives
providing both ratings and advice on how to structure
securities.
LIECHTENSTEIN LIFTS BANK SECRECY IN U.S.
DEAL
Offshore haven Liechtenstein has agreed a landmark deal
with the U.S. to drop bank secrecy in cases of tax evasion
and could make similar concessions in the European
Union, a diplomat from the Alpine nation said. Prince
Nikolaus, a member of Liechtenstein’s ruling royal family
who brokered the deal, told Reuters the tiny principality
had agreed a “significant” change to bank secrecy rules
that entitles the U.S. to bank account information when
probing a tax dodge. The prince said he was prepared to
grant similar concessions within the European Union but
wanted double - taxation agreements as well a
commitment by countries to deal leniently with citizens
that had hidden money from the taxman in Liechtenstein
Liechtenstein is together with Monaco and Andorra one of
three countries blacklisted by the Organisation for
Economic Cooperation and Development and was the
target of a German investigation last year into thousands of
citizens suspected of parking untaxed income in the
principality. The deal with the United States may pressure
its neighbour Switzerland into a similar agreement. This
would have implications for the offshore private wealth
management businesses of banks such as UBS and Credit
Suisse.
TIME TO RETHINK OUR MODEL FOR
CORPORATE REPORTING
The experience of the credit crunch has brought into stark
focus the issue of systemic risk and how, if at all, it can be
identified and avoided. But in the current efforts to make
improvements, we risk not seeing the wood for the trees and, in fact, looking at the wrong forest altogether, Mr
David Phillips, senior corporate reporting partner at PwC
said. So far, work about systemic risk has centred on the
banking industry, but regulators and other should also take
a close look at corporate reporting.
The challenges of systemic risk do not end with the
banking system. You can add a growing list of other
significant risks that reflect the increased complexity and
interdependencies of the global economy. There are the
issues of energy, water and food security that in turn are all
linked in one way or another to economic growth, climate
change, population growth and the complexity of modern
day supply chains stretched to their operational limits.
Corporate reporting is capable of proving a better
understanding of the ecosystem in which a business
operates. It can help readers develop an understanding of
the dynamics of a company’s business model and exactly
how it is exposed to any weaknesses in its own ecosystem.
This will require a fundamental rethink of today’s
reporting model. Today, we have a model that is dominated
by financial information that is increasingly complex and
which, by its nature, has a tendency to drag the reader
down into the trees.
IFRS SET TO TURN POLITICAL AS SEC
UNFOLDS ITS ROADMAP
Given the importance of the US, the views of the nominee
for Securities and Exchange Commission chairman Ms
Mary Schapiro on accounting topics are about more than
simply which accounting system US companies should
use.
US influence is such that the SEC’s viewpoint is likely to
shape a great deal of the debate about all sorts of changes
to accounting rules over the coming years, including
international ones.
Ms Schapiro was asked her opinion on switching to IFRS
at her nomination hearing by Senator Jack Reed. She said
she would “proceed with great caution” and wouldn’t be
bound by the roadmap. She also raised the cost of
switching rules, for which she said she had seen estimates
of $30m per US company.
EXECUTIVES ARRESTED IN JAPANESE PROBE
INTO ALLEGED $2.5BN FRAUD
Japanese police have arrested the 75-year-old head of a
bedding company and 21 others suspected of operating an
alleged $2.5bn Ponzi scheme that sucked in tens of
thousands of people and could be Japan’s largest ever such
fraud.
Kazutsugi Nami and other executives of L&G, which made
bedding and healthcare products, are suspected by
authorities of running a pyramid scheme that promised
investors annual returns of 36 per cent in interest and to
double their capital after three years.
UK COMPANIES WARNED AGAINST
PROFLIGATE EXECUTIVE PAY-OUTS
UK boards must avoid the appearance of rewarding failure
when approving executive compensation plans this year,
lest they spark a political and regulatory backlash that
could doom pay for performance, investor groups warned.
INDIAN WATCHDOG TO QUIZ SATYAM
CHAIRMAN
India’s financial markets regulator will for the first time be
allowed to question B. Ramalinga Raju, the former
chairman of Satyam Computer Services, as part of a probe
into India’s biggest corporate scandal. The Supreme Court
ruling as seen as a breakthrough in the investigation into
the alleged $1bn fraud, dubbed India’s Enron, said people
close to Sebi. Mr Raju and his brother are under arrest in
Hyderabad, the southern India city in which Satyam is
based. Both men will be interrogated by Sunil Kumar,
Sebi’s chief investigator, and his six-member team.
India police have accused two auditors working for an
Indian unit of PwC of colluding with the former chairman
of Satyam Computer Services to “window dress” the
outsourcing group’s accounts.
PWC CHIEF IN INDIA AS POLICE STEP UP
PROBE
The global head of PwC has rushed to Mumbai after police
detained two of the firm’s auditors over the scandal at
Satyam Computer Services. Sam DiPiazza, chief executive
officer of PwC, arrived in Mumbai as the firm’s India arm
suspended the auditors, S. Gopalakrishnan and Srinivas
Talluri, while police investigate the $1bn-plus fraud,
25
India’s worst corporate scandals.
“They will undertake no activities on behalf of Price
Waterhouse and have been advised to co-operate fully with
the ongoing inquiries regarding Satyam”, Price
Waterhouse, the Indian arm of the global group, stated.
INDIAN REGULATORS SHAKE UP SHARE
RULES IN WAKE OF SATYAM SCANDAL
Contrrolling shareholders in Indian companies will be
forced to reveal borrowings made against their own shares
under reforms launched by regulators that could provide
more transparency about how India’s most powerful
business families control their empires. The move by the
Securities and Exchange Board of India to make it
mandatory for the controlling shareholders of companies
to disclose when they pledge shares as collateral to lenders
is the biggest capital reform since the Satyam scandal
erupted.
ACCOUNTANTS GO INTO SHOCK AT ‘INDIA’S
ENRON’
There is an irony in the fact that the Big Four accounting
firms have been eagerly touting the growth potential of
India, only to face the risk that the Satyam scandal will
expose the weaknesses in their plans. They are also
wincing at the media shorthand for the scandal - “India’s
Enron” - which recalls the total collapse of their
accounting rival Arthur Andresen after the US energy
group’s fraud was revealed in 2001.
With investigations into the Satyam case only just
beginning, it is too soon to gauge the scandal’s full impact
on the accounting world. But the firms are watching the
situation extremely closely as the structure of their
industry, and its activities in one of the most promising
markets, come under scrutiny.
the help of seven senior industry figures. The
recommendations were requested by Jose Manuel Barroso,
European Commission president, following the financial
crisis. They will focus on issues of banking supervision,
but the official brief encompasses “European supervisory
arrangements covering all financial sectors”.
IASB WARNS ON CAPITAL RESERVE PLANS
Regulators are widely expected to develop some form of
so-called “dynamic provisioning” by forcing banks to save
funds in the good times to help them through the bad. But
accountants have warned that how this is done could
seriously affect the transparency of banks’ accounts.
Sir David Tweedie, head of the International Accounting
Standards Board, has called for the new reserves to be set
aside after profits are reported, rather than beforehand by
creating reserves against specific assets - such as loans
which could potentially incur losses - on the balance sheet,
which would reduce profits.
LOOK FOR ONSHORE, NOT OFFSHORE
SCAPEGOATS
As Avinash Persaud, chairman of Intelligence Capital
Limited, emeritus professor of Gresham College and a
member of the UN High Level Taskforce on International
Financial Reform, stated that political leaders in the US,
Germany, France, the UK and elsewhere have once more
threatened to close down offshore financial centres. These
centres have been presented as the drug dealers of modern
finance and pushes of instability. Yet the origins of this
crisis are in a failure of regulatory philosophy in the US,
Europe and elsewhere. It would have occurred were there
no offshore financial centres. The attack on offshore
centres is a politically seductive distraction from the thorny
task of making regulation better in large developed
countries and will end up being a discriminatory attack on
small developing countries with little voice.
EU REGULATOR CALLS FOR ENHANCED ROLE
Key areas within European securities markets should be
overseen by a single authority, according to one of the
European Union’s senior financial regulators. Eddy
Wymeersch, head of the Committee of European securities
regulators stated that, while a two-tier system of central
regulation and local supervision was appropriate in many
areas, there should be more flexibility to handle some
matters at EU level.
His comments came ahead of the eagerly awaited
publication in Brussels of recommendations on how to
reform Europe’s fragmented system of financial
supervision. These have been drawn up by Jacques de
Larosiere, a former head of the French central bank, with
26
One of the first institutions to fail in this crisis was
Northern Rock, a very British bank where supervisors
appeared to overlook the niggling detail that funding longterm mortgages of more than 100 per cent of the value of
homes in a mature boom, with short-term deposits and
money market funds, is highly risky. A German savings
institution, IKB, was next. Regulators did nothing about
the exponential growth of mortgage-related financial
derivatives, not because they were hidden in offshore
financial centres - they had the discretionary powers to
raise bank capital charges for any additional risks they
perceived - but because they thought that this was an
example of safe financial innovation that was banking the
under-banked and diversifying risk.
Interview with the Czech Ambassador
The Czech - Cyprus Economic Relations, the
Czech Economy and the Czech EU Presidency
Interview with H.E. the Ambassador of the Czech Republic, Mr. Jan Bondy
Europe’s success in the 21st century is flexibility, ability to react quickly and rationally
Interview to Ninos Hadjiroussos, Editor and Tassos Anastasiades,
Deputy Editor of the Accountancy Cyprus Journal
In an interview we had with
the Ambassador of the Czech
Republic we have been
informed that after both
countries became members
of the EU the volume of
trade has increased by one
third and that there is a
strong cooperation with a
rising trend in the field of
investments. “The Czech
Republic conditions for
Mr. Jan Bondy
H.E. the Ambassador of the business are sound and safe,
making the country very
Czech Republic
attractive in terms of
investment despite the gradual rise in wages. The Czech
Republic has been able to remain in the centre of attention
of investors from all over the world for a long time because
of its stable and fair conditions, highly-skilled workforce
and low prices”, stated Mr. Bondy. With regard to the main
priorities of the Czech Presidency Mr. Bondy stated that
the precondition for Europe’s success in the 21st century is
flexibility, ability to react quickly and rationally. The
Czech EU Presidency therefore comes with the vision of
Europe without barriers - Europe making full use of its
economic, human as well as cultural potential. Mr. Bondy
stated that stabilisation of financial markets is important
for our future prosperity and the work that has started will
be continued. The most important tasks of the Czech
Presidency is to deal with the economic recession, to
pursue efforts to tackle climate change and to secure
adequate energy resources for the European Union.
With regard to the question about any plans by major
countries of EU to help other countries which face fiscal
problems Mr. Bondy referred to a statement made by
Commissioner Joaquin Almunia that “if crisis emerges in
one euro zone country there is a solution before visiting the
International Monetary Fund. Do not fear for this moment
- Europe is equipped intellectually, politically and
economically to face this crisis scenario. And for the rest
of European Union I do not hesitate to say that the EU and
its Member States are in a stand by position for the
partners who might need their help in the future”.
As far as protectionism in the European Union Mr. Bondy
stated that members States are well aware that breaking the
rules of fair competition may, in the long run, do more
economic as well as political harm than the crisis itself.
Therefore protectionist measures must be strictly rejected
as they only worsen the situation. “Adherence to the rules
of the internal market and fair competition is our only
alternative”, stated Mr. Bondy.
Regarding the prospects for the ratification of the Lisbon
Treaty Mr. Bondy believes that by the end of the year it
will be ratified by all EU 27 members.
Responding to our question about the G20 summit meeting
in London Mr. Bondy stated that our financial markets and
economies have grown increasingly interconnected. This
is why the only possible way forward is to ensure global
coordination in designing policy responses to the difficult
economic situation.
The interview with Mr. Bondy follows:
Q1: Mr. Ambassador we would like to start our
interview by asking you to give us a broad outline of the
economic relations between the Czech Republic and
Cyprus
29
The economic relations between our two countries are
traditionally good and there are no problematic issues,
which could hamper their further developments. The total
volume of bilateral trade amounted to 46, 6 mil. EUR in
2008, from which 30, 6 mil. EUR were exports of Czech
products to Cyprus. Although we do not belong to the main
trade partners of Cyprus, I am pleased to say that after both
countries became the members of the European Union the
volume of trade has increased by one third. We can see
quite strong cooperation with the rising trend in the field of
investments. For the period 1 - 3Q 2008, the value of
Cypriot direct investments in the Czech Republic reached
313,2 mil. EUR and Czech direct investments in Cyprus
amounted to 56,3 mil. EUR. We can also see rising figures
in the field of tourism. From the Czech part about 20 000
tourists visit your country yearly. During the last summer
season, there were 10 Czech Airlines direct flights from
Prague to Larnaca per week and it seems that Cypriote
have discovered the attraction of the Czech Republic
recently. Number of Cypriot tourists to our country
reached 15 276 person last year (+58,3 % y/y).
Nevertheless, enough good results are still under the
potential of our economies. There is plenty of space to
intensify our relations.
Q2: What are the economic conditions now prevailing
in the Czech Republic?
The Czech Republic was one of the economically most
advanced parts of Europe at the beginning of the last
century. In the past, the Czech Republic relied primarily on
heavy industry, especially metallurgy and mechanical
engineering. Today, the automotive industry and related
sectors, the rubber making, power and consumer goods
industries, and some traditional areas of production, such
as glassmaking, primarily buoy the economy. In terms of
availability and offer of services, the Czech Republic has
caught up with EU standards.
Generally, conditions for business are sound and safe,
making the country very attractive in terms of investment
despite the gradual rise in wages. The Czech Republic has
been able to remain in the centre of attention of investors
from all over the world for a long time because of its stable
and fair conditions, highly-skilled workforce and low
prices.
favourable macroeconomic situation. Economic growth,
slowing down naturally due to cyclical effect, was despite
extremely appreciated exchange rate pulled by foreign
trade contribution. Acceleration of inflation was of
temporary character, similarly as in neighbouring
countries. Functioning of labour market has improved
recently. Current account deficit has showed very
sustainable values in international comparisons and
foreign exchange debt of economic entities has not been
significant. Fiscal and monetary policies have been quite
adequate. In the light of subsequent events, the only
substantial shortcoming can be seen in too high
commodity specialization of exports in some machinery
products, especially in cars and their accessories. In the
fourth quarter of 2008 crisis symptoms from external
environment started influencing the Czech economy.
However, according to a preliminary estimate, real GDP in
4 Q 2008 increased by 1,0 % in y/y comparison and for the
whole year 2008 grew by 3,5 %. With regard to openness
of the economy and due to uncertainties in external
environment, the forecast for this year is burdened with
high uncertainty. Although the annual trade balance for
2008 reached a surplus of CZK 69,4 billion, the data for
December showed declining trend. Unfavourable external
development should reflect in the Czech economy through
following channels:
FOREIGN TRADE
Euro area’s economy has been in recession since the
second quarter of 2008 and probably will stay in it over
2009. Also growth of other our important trade partners
(Slovakia and Poland) has been slowing. Trade with other
EU Member States is crucial for the Czech economy not
only in terms of volume, but also because it rectifies the
rather inauspicious balance in trade with other countries.
Whereas in the early 1990s raw materials and semiprocessed products were of key importance, today the core
export consists in mechanical engineering products.
Machinery and vehicles now account for nearly 55% of
exports, a rise by 25% as compared with the mid-1990s.
Instead of finished products, principal imports today are
primary raw materials that cannot be sourced in the Czech
Republic (such as crude oil). Lower demand for some
export products will thus reflect in cut in contribution of
foreign trade with goods and services to GDP growth .
CONFIDENCE IN THE ECONOMY
Before global financial and economic problems worsened
in September 2008, the Czech Republic had enjoyed
30
Fall in confidence and concerns of economic entities,
supported by imbalanced approach of some media, will
obviously have psychological effect of more prudent
microeconomic decisions. From macroeconomic point of
view, it will lead to slowdown in growth of domestic
demand, mainly for investments. Contribution of domestic
final demand to GDP growth could significantly fall in
2009.
FINANCIAL INTERMEDIATION
Despite unfavourable external development and gradual
cooling of domestic economy, the Czech banking sector
remains in good shape. Banks are sufficiently capitalized
and profitable. Their exposure toward _toxic” assets is
negligible and quality of credit portfolio is good. Banks
have not granted credits in foreign exchange to a higher
extent.
There is tension on inter-bank money market since
October. It stems from surveys of average daily moneymarket turnovers that banks are not willing in fact to lend
one another larger volumes of money for a period longer
than one week. Surplus of liquidity is still characteristic for
the Czech banking.
Q3: The Czech Republic is now presiding over the
European Union. What are the main priorities of its
Presidency?
Czechs believe strongly, that be it long or short term
challenges, the precondition for Europe’s success in the
21st century is flexibility and ability to react quickly and
rationally. Our capacity to do so is limited most due to
internal barriers. The Czech EU Presidency therefore
comes with a vision of Europe without barriers - Europe
making full use of its economic, human as well as cultural
potential.
Three main priorities fall under our motto (3E_s):
Economy
The stress we put on economy is logical. Stabilisation of
financial markets is important for our future prosperity and
we continue the work that has already started. Dealing with
the economic recession that comes as a side effect of the
financial crisis belongs to our important tasks.
the world in the efforts to tackle climate change. If this is
to succeed in times when scarcity of energy sources and
increased demand for energy lend suppliers unprecedented
political influence, energy must belong to EU_s priorities.
Our Presidency is coming up with some new contributions
and tools for increasing the European energy security.
Energy infrastructure stands high among our priorities.
The 2nd Strategic Energy Review is an opportunity to
address more carefully the question of interconnections of
grids, which are the Achilles_ heel of the European energy
market. It also is an opportunity to provide for an analysis
of the future EU27 demand and supplies.
The January gas crisis has underlined the importance of
diversification. The Czech Presidency would like to
organize a Southern Corridor summit in Brussels with
number of transit or supplying countries from the Caspian
region and try to reach progress in the Nabucco project.
Europe in the world
Europe is a global player, with global responsibilities,
which go hand in hand with it. Foreign policy priorities of
the Czech Presidency will have both an Eastern dimension
(directed towards our neighbours and towards Russia) and
a Western one (addressing the United States and the new
administration). Within the enlargement agenda, we would
like to put the emphasis on Western Balkans.
Q4: Are there any plans for a summit meeting of the
European Union to decide the taking of anti-recession
measures?
The crisis and the anti-recession measures are the main
topics discussed on all international, European and
national forums. In the EU, the Member States are in the
phase of implementation of the European recovery plan
that was approved at the December European Council. An
extraordinary informal summit took place in Brussels on
1March that took stock of where we are now and how to
proceed onwards. Different systemic aspects were
discussed and necessity of recovery of confidence vibrated
during the meeting. Certainly, a set of recommendations
will be submitted for approval to the Spring European
Council. However, I do not think fit to release them now.
Energy
Q5: Are there any plans by major countries of the EU
to help other countries which face fiscal problems?
Energy is the fuel of economy. EU has an ambition to lead
The whole world is suffering the effects of the crisis and
31
future.
Q6: What are the comments of the
Czech Presidency concerning plans by
France and Spain to bail out their car
industries?
even the major countries of the EU have both hands full of
looking for the proper way to cross the river. I have to
mention the high principle for difficult times at the
European level - the solidarity. I think there is a concrete
evidence of application of this principle that has helped
those most in need:
ñ balance of payments support for Hungary and Latvia
worth almost m10 billion, reflecting Member States’
strong resolve to contain the effects of the crisis among
fellow EU members;
ñ frontloading of cohesion and structural funds releasing
m11 billion - m7 billion of which for the new Member
States.
ñ a significant expansion in the European Investment
Bank’s activities, with an extra m15 billion per annum
available in 2009 and 2010 - an increase of 30% above
average lending. Convergence lending will increase by
m2.5 billion per annum, with particular emphasis on
the new Member States.
In addition, let me to remind Commissioner’s Joaquin
Almunia words few days ago: If crisis emerges in one euro
zone country, there is a solution before visiting the
International Monetary Fund. Do not fear for this moment
- Europe is equipped intellectually, politically and
economically to face this crisis scenario, but by definition
these kinds of things should not be explained in public.
And for the rest of European Union I do not hesitate to say
that the EU and its Member States are in a stand by
position for the partners who might need their help in the
32
The current crisis has dealt the car
industry a particularly hard blow. There
are quite many European countries
where the automotive industry plays the
role of the leading industrial sector with
multiplicative effects on related sectors
and great impact on employment. Of
course, Governments of those countries
are obliged to do their best to rescue the
sector and the jobs. According to
Commission data, the European car
industry has a yearly turnover of 780 billion euro and
creates about 12 million jobs, both directly and indirectly.
So, it is worth the efforts. However, short-term measures to
help car manufacturers must not jeopardise the long-term
prospects of the industry as a whole. Even at a time of
crisis, we can only undertake steps that are coordinated and
well thought out and at the same time are not in
contradiction with the rules of the game. Therefore,
coordinated support for the car industry is one of the Czech
Presidency priority topics nowadays. The debate on the
stimuli for the car industry has been in progress at different
European levels. It was discussed within the informal
Summit on 1 March in Brussels, conclusions of
Competitiveness Council were adopted and we will
continue at the Spring European Council.
Q7: Is there any danger of protectionism arising in the
European Union?
Protectionist measures must be strictly rejected as they
only worsen the situation. Adherence to the rules of the
internal market and fair competition is our only alternative.
This message should be defended not only within the EU
but also in the conversations with our international
partners. This also was why the Presidency called an
Informal meeting of Heads of State and Governments on 1
March.
The meeting addressed the steps taken by the individual
EU Member States within the scope of implementation of
the Recovery Plan and has shown that at a time of growing
pressure the Member States have resisted to adopt
protectionist measures as a tool to shield their national
economies from the impacts of the financial crisis.
Member States are well aware that breaking the rules of
fair competition may, in the long run, do more economic as
well as political harm than the crisis itself.
Q8: To what extent the Czech Presidency has helped to
bring about a solution to the Russian - Ukrainian gas
dispute?
Russian - Ukrainian gas dispute was culminating at the
very beginning of our Presidency. First it looked like that
two business players, using the low winter temperature as
a negotiating tool, needed few days to solve their
commercial dispute.. Of course, the immediate EU
position presented by the Presidency was that all existing
commitments to supply and transit the gas to the EU must
be honoured. We wished to trust fully the reliability of our
gas suppliers, however, the Presidency together with the
Commission was monitoring situation very closely and it
grew evident very soon that the situation would ask for
political intervention. Substantial cuts of gas supplies
followed by full stop of deliveries were applied. So, we
had no choice but to act. Firstly, a fact -finding mission, led
by the Czech Minister of Industry and Trade, to Ukraine
and Russia collected the information on current situation
from both parts in two days talks (5 - 6 January) and
reported on it to the EU Member States on an informal
General Affairs Council. Secondly, as the two parties to the
dispute did not find a prompt way to restore regular gas
supplies to the EU we considered to organize top level
meetings of EU representatives with both Russian and
Ukrainian counterparts. A European delegation led by
Prime Minister Topol_nek negotiated finally the
ressumption of gas supplies with the highest
representatives of Ukraine and Russia within a shuttle
diplomacy between two capitals.
Thirdly, an extraordinary session of the Energy Council
took place in Brussels on 12 January to inform partners
about the outcome of the meetings and evaluate the
situation of gas supplies in the Member States concerned.
The Council agreed, inter alia, on the necessity to develop
and strengthen medium and long-term measures to
reinforce the energy security of the EU. These measures
should be based on five priority axes - transparency of gas
flows, demand and storage, solidarity arrangements,
strengthening interconnections between Member States
and further diversification of transport routes and sources.
The unanimous EU position was very important
negotiating tool during the gas crisis.
Q9: What are the prospects for the ratification of the
Lisbon Treaty?
I believe that by the end of this year the Lisbon Treaty will
be ratified by all EU 27. In the Czech Republic, the Treaty
is in the middle of the ratification procedure. It was
approved by The Chamber of Representatives (Lower
House of the Parliament) on 18 February and now it has
been submitted for vote to the Senate (Upper House of the
Parliament). The ratification procedure will be finalized by
the signature of the President of the Czech Republic.
Regarding the prospective referendum in Ireland, I hope
that the conclusions of the December European Council
are satisfactory enough for the Irish people and they will
vote in favour of the Treaty.
Q10: Are you aware of the main issues which will be
discussed at the G20 summit meeting in London in
April and what are the expectations of the Czech
Presidency?
Our financial markets and economies have grown
increasingly interconnected. This is why the only possible
way forward is to ensure global coordination in designing
policy responses to the difficult economic situation. This is
not to say that Europe must wait for an international
consensus before we act. On the contrary, we have seen
that Europe is leading in many areas but the challenge is to
ensure that any solutions we find will keep Europe open
and will not segment global markets.
The G20 represents the best platform for conversation. At
the first meeting in November 2008, the G20 Heads of
state agreed an ambitious action plan for measures to be
taken both in the short and medium term to improve
international financial regulation. The preparatory work
for the next meeting - planned for April 2 this year is
underway. Four expert working groups have been
established. Among others, the groups work on developing
new regulation and supervision of the global financial
services market. The Czech Presidency will strive for the
agreement on the common position of the EU countries for
G20 negotiations at all possible levels. European Council
meeting on 19 March will be key in finalizing the EU
position. It is already clear that increasing transparency,
extending the scope of regulation to actors which have so
far not been regulated, enhancing the soundness of the
financial system via new prudential rules and accounting
standards, as well as improving the compensation schemes
in financial institutions will be the themes around which
we will be able to rally
35
The Financial crisis and Monetary policy
The International Financial Turmoil
and the Economy
Speech by Athanasios Orphanides, Governor of the Central Bank of Cyprus, at a dinner
of the Institute of Certified Public Accountants of Cyprus
materialise with a financial disturbance and a
worsening real economy reinforcing each
other in a downward spiral for a time.
Today the world is facing such an
extraordinary disturbance of the international
financial system. How bad is it? We need
to go back many decades—-to the 1930s—to identify a disturbance to the international
financial system of a similar magnitude.
Over the past several months, we have
experienced the collapse of major
international financial institutions and a
systemic breakdown of key financial markets
Athanasios Orphanides, Governor of the Central Bank of Cyprus
which have led to a severe and synchronised
It is a great pleasure for me to be here this evening
economic downturn in the world’s advanced economies.
and I would like to thank the Limassol-Paphos Coordinating Committee of the Institute of Certified Public
How did it happen? Briefly, the trigger for the turmoil is
Accountants for the kind invitation. I will use this
associated with the end of the most recent housing cycle
opportunity to share with you some thoughts on the
and the related rise in defaults on subprime mortgages
international financial tur-moil, its mounting global impact
in the United States. The cause of the crisis, however,
on the real economy and the concomitant policy response,
must be traced to an accumulation of imbalances in the
particularly from a central bank perspective. In this
world economy that built up over a number a years and
context, I will also review the outlook for the Cyprus
gaps in the regulatory framework that permitted excessive
economy. I note that the views I express are my own
risk taking by a number of systemically important
and do not necessarily reflect the views of my colleagues
financial institutions around the world.
on the Governing Council of the European Central Bank.
The financial system is the heart of the modern capitalist
economy. When it functions properly, it efficiently
allocates scarce financial resources to the most
productive use, allowing a seamless transfer of funds
from lenders to borrowers through banking institutions,
capital and money markets. If this key role is disrupted,
the real economy may suffer. Depending on the magnitude
of the disruption, the implications for the real economy
could be dire, especially if policy measures do not succeed
in isolating and correcting the problem sufficiently
quickly. In that case, a negative feedback loop may
36
In the years leading to the outbreak of the financial
turmoil in August 2007, consumers, firms and investors,
especially in the United States and Europe, were
encouraged by a benign macroeconomic environment of
low interest rates, low inflation and sustained economic
growth to expect continued prosperity. More specifically,
the success of economic policies during this period to
dampen significantly macroeconomic fluctuations as well
as the low cost of borrowing contributed to an
underestimation of the risk and its under pricing by
economic agents. This in turn resulted in excessive risk
taking and a proliferation of complex financial
instruments. Prices of real estate and other assets as well as
leverage rose significantly. Regulators did not sufficiently
appreciate the accumulating dangers to the financial
system and were not fully aware of their seriousness.
When house prices started to fall in the United States
and subprime-mortgage-related defaults increased by
more than was expected, it became evident that the risk in
securities related to subprime mortgages was mispriced.
This raised questions about valuations of complex
securities that contained elements backed by subprime
mortgages and about possible
solvency problems of
banking institutions holding these securities. From the
subprime-related market segment, tensions spilled over to
other markets, including the money markets in the US and
in Europe. Following the outbreak of the turmoil in August
2007, tensions remained elevated for over a year only
to become vastly worse following the failure of the
American investment bank Lehman Brothers in
September 2008. Money markets essentially froze in
September - October 2008 due to a collapse in confidence
that made banks unwilling to engage in unsecured
transactions with each other. These developments also
hastened the deleveraging process that was already
under way and prompted an abrupt tightening of credit
conditions and a sharp deterioration in the global
economy during the fourth quarter of 2008 that appears
to be continuing in 2009. It drastically changed the
outlook for inflation, reversing the upward pressure
exhibited during the first half of 2008, but also vastly
raised the uncertainty about the outlook for the economy
worldwide.
The policy response to the turmoil in September 2008 was
also massive, reflecting the magnitude of the problem.
Governments and central banks took a multitude of
measures in a concerted fashion with a view to
alleviating the impact of the financial crisis on the real
economy, restoring confidence and the efficient
functioning of financial markets. These included
coordinated liquidity provision operations and interest
rate reductions by major central banks, measures to
enhance the liquidity in the banking system and
government programs to buy toxic assets, recapitalise
financial institutions and set up deposit protection
schemes. At the same time, regulatory and supervisory
frameworks have been scrutinised so as to identify how
they may be strengthened.
Against this background, it is of particular interest to focus
on the way central banks have reacted to the crisis since the
collapse of Lehman Brothers. In addition to operations
designed to alleviate worsening liquidity problems, and in
light of the deterioration in the real economy and
dampening of inflation pressures, all major central banks
in the industrialised world have reduced their policy rates.
In an unprecedented coordinated interest rate move on 8
October, six major central banks, including the ECB,
reduced their policy rates by as much as 50 basis points.
With a continued deterioration in the financial system and
a related worsening of the real economy and dampening
of inflation pressures, policy rates around the world
were subsequently reduced even more drastically to
record low levels. On December 11, the Swiss National
Bank lowered its three-month Libor target range all the
way down to 0.0-1.0% and on December 16 2008 the
Federal Reserve reduced its target further, to a range of 0
to 25 basis points for the target federal funds rate.
Likewise, the Bank of England reduced its rate by a total
of 31/2 percentage points in only four months to 11/2%
in January 2009, its lowest ever level.
Against
diminishing inflationary pressures and downward
prospects for the euro area, the ECB substantially reduced
the main refinancing rate to 2% in January 2009, matching
the lowest rate ever. I note that the Bank of Japan, which
had maintained very low rates for a decade, also reduced
the target for its policy interest rate from 0,5% to 0,3% at
the end of October 2008 and further reduced it to 0,1% in
December 2008.
Since short-term nominal interest rates cannot be reduced
below zero, the fact that policy rates set by some central
banks, such as the Bank of Japan, the Federal Reserve and
the Swiss National Bank are already extremely close to
zero, and that policy rates of other central banks, including
the ECB and the Bank of England, are at historical lows,
has rekindled interest in questions regarding possible
complications for monetary policy operating at very low
interest rates. It is sometimes stated, for instance, that
monetary policy becomes ineffective once the short-term
interest rate gets close to zero, in the sense that monetary
policy cannot be eased any further, even though the
central bank may wish to do so. As I have stated before,
this idea of such policy ineffectiveness is a fallacy. I
should add that the fallacy that monetary policy is
ineffective when short-term interest rates are close to zero
is dangerous because it may promote inaction. A central
37
bank that has already reduced its policy rate to zero could
be incorrectly advised to stop pursuing expansionary
measures because these are thought to be ineffective. And
a central bank with a policy rate that is positive but rather
low, might be incorrectly advised to “save its ammunition”
so that it may still be in a position to ease policy later on.
One flaw in the policy ineffectiveness argument and
related policy advice is that it focuses too narrowly on the
short-term nominal interest rate as the instrument for
monetary policy. While this focus is convenient and
appropriate under normal circumstances - that is when
rates are not close to zero - it is insufficient for describing
changes in the stance of monetary policy when short-term
interest rates touch zero. Under such circumstances,
attention should shift to the quantity of money and
reserves, the size of a central bank’s balance sheet, and
interest rates at longer maturities that do not touch zero.
Ultimately, a money issuing central bank does not face
limitations in increasing the quantity of money by
expanding its balance sheet and can continue to do so even
if short-term interest rates cannot be reduced further, for
example when the overnight interest rate equals zero. By
doing so, a central bank can have a positive effect on
nominal asset prices and influence longer-term interest
rates even if the overnight rate is unaffected. That said, it
should be recognised that conducting and communicating
additional monetary policy easing is far more challenging
when it is not accompanied by a reduction in the policy
rate. Because the historical experience with the conduct
of monetary policy at very low rates is very limited,
calibrating the correct size of a non-conventional policy
easing conducted through expanding a central bank’s
balance sheet is far
harder than the equivalent
determination of how much to reduce the short-term
interest rate under ordinary circumstances.
Precisely because of these challenges, it may be desirable
for central banks to take forceful and pre-emptive interest
rate action aiming to minimise the probability that they
may later find themselves in a situation where they will
be forced to resort to unconventional policy easing.
Perhaps paradoxically, the greater the concern about
conducting monetary policy with zero interest rates, the
more aggressive should be the interest rate cuts that are
pursued beforehand in response to adverse economic
shocks that threaten to bring inflation significantly below
38
the central bank’s price stability objective.
With interest rates at or very close to the zero bound,
central banks inevitably have to deploy beyond the key
interest rate some other facilities, in their operational
frameworks. These measures essentially constituted
quantitative expansion in that they all make use of the asset
side of the central banks’ balance sheet. A multitude of
tools have been used to that end which comprise the
provision of liquidity, the purchase of commercial paper,
asset-backed securities and bonds. The mounting
importance of the use of these operations, especially
after the intensification of the crisis in September October 2008, can be illuminated with a cursory look at
the evolution of the balance sheets of some major central
banks. For the Federal Reserve, the size of the balance
sheet more than doubled between July and December
2008. This expansion includes numerous credit easing
measures but also bail-outs as well as some of the
government measures already taken. This also holds for
the total assets in Bank of England’s balance sheet. The
Eurosystem’s total assets also increased by around 40%
between July and December 2008. It is interesting to note
however, that the expansion of the Eurosystem’s balance
sheet did not require any legislative or related efforts,
reflecting the flexibility inherent in its framework. In the
case of the Bank of England and the Federal Reserve,
some of the measures taken needed to be approved or
coordinated by the respective ministries of finance before
they were applied.
Focusing briefly on the Federal Reserve, its policy toolkit
now can be thought of as having three sets of tools. The
first set, involves the provision of short-term liquidity to
sound financial institutions through the creation of new
facilities for auctioning credit and making primary
securities dealers, as well as banks, eligible to borrow
at the Fed’s discount window. The Federal Reserve’s
second set of policy tools involves the provision of
liquidity directly to borrowers and investors in key credit
markets. An example is the introduction of facilities to
purchase highly rated commercial paper at a term of three
months and to provide backup liquidity for money
market mutual funds. In addition, the Federal Reserve
and the Treasury jointly announced a facility that will
lend against AAA-rated asset-backed securities
collateralised by student loans, auto loans, credit card
loans, and loans guaranteed by the Small Business
Administration. The Federal Reserve’s third set of policy
tools for supporting the functioning of credit markets
involves the purchase of longer-term securities for the
Fed’s portfolio.
Comparable tools that can facilitate further policy easing,
as needed, are also part of the Bank of England’s toolkit.
The Bank of England is prepared to purchase a range of
financial assets in order to expand the amount of reserves
held by commercial banks and to increase the availability
of credit to companies. Further, as was announced earlier
this month, the Bank will be authorised by the Treasury
to purchase high quality private sector assets. This
should encourage the banking system to expand the
supply of broad money by lending to the private sector and
also help companies to raise finance from capital
markets. The Bank of England will also use asset
purchases for monetary policy purposes should the
Monetary Policy Committee conclude that this would be a
useful additional tool for meeting the inflation target.
The Bank of Japan, which about a decade ago was the
first central bank in modern times to embark on
quantitative easing, has also introduced additional tools. A
new operation has been announced through which
financial institutions can borrow low-interest funds
from the Bank against corporate debt.
The ECB has also stepped up its efforts to ensure access
to central bank liquidity by solvent banks. To that end, the
ECB adopted new measures in its monetary policy
implementation framework. Among others, it proceeded
with the enlargement of the basis of eligible collateral for
the conduct of its main refinancing operations.
Further, it proceeded with the provision of liquidity in
dollars and Swiss francs, in cooperation with the US
Federal Reserve Bank and the Swiss National Bank,
respectively. It also increased the number and duration of
longer-term refinancing operations. By adopting a
fixed-rate tender procedure with full allotment in all
refinancing operations the ECB essentially made available
unlimited liquidity to banks for up to six months, upon
presentation of appropriate collateral.
These measures have contributed towards averting a
devastating collapse of the financial system, both in the
euro area and internationally. However, despite their
benign impact on the functioning of financial markets, the
global economic outlook has continued to deteriorate in
the past few months. As new data were coming in, all
international organisations revised their forecasts for the
next couple of years. The European Commission in its
interim forecasts, released on 19 January 2009,
anticipates a broad-based economic downturn during
2009, with forecast GDP growth at -1,9% for the euro
area, -1,6% for the USA, -2,4% for Japan and -2,8% for
the UK. This represents a substantial downward revision
from the Commission’s earlier projection that was
released in November of last year. The corresponding
European Commission forecasts for 2009 GDP growth
released just three months ago were considerably more
optimistic, specifically, by 2% for the euro area, by 1.1%
for the USA, by 2 percent for Japan and by 1.8 percent for
the UK.
Inescapably, Cyprus could not be exempted from such
an across the board deterioration of the economic outlook.
According to the Commission Cyprus GDP growth for
2009 is expected to average just 1,1%, compared to the
2,9% forecast presented in the autumn.
Our economy could not of course remain unaffected from
the global economic downswing I described above.
However, we cannot overlook the fact that any negative
repercussions will be substantially milder as a result of our
accession to the euro area and the adoption of the euro
which acts as a shield against an exchange rate crisis. In
addition, the stability of the single currency has been a
significant factor in preserving the attractiveness of our
banking system for foreign deposits in Cyprus. The biggest
risk factor facing the banking system has been avoided and
so far no serious problems have been experienced. To sum
up, the euro adoption in combination with the banking
supervision by the Central Bank and the conservative
lending policies of the commercial banks have contributed
to the shield against the crisis. Of course, the fact that the
UK, one of our major trading partners is one of the
countries most affected by the financial crisis continues to
be a source of concern. We will have to wait and see
whether the expected decline in UK tourist arrivals and
British purchases of houses will be as bad as is anticipated.
In any event, our economy is doing relatively better than
most other economies in the European Union.
While our economy compares well with other economies
in the euro area, it must be recognized that it is slowing
39
down. The construction and tourism industries are facing a
downturn and overall consumer confidence has fallen.
More important, the degree of uncertainty regarding the
outlook of the global economy is so substantial at the
moment that the country should be prepared with an
emergency recovery plan in case a worst case growth
scenario materializes owing to a worse than expected
deterioration in the euro area, the UK, and the economies
of out other major trading partners.
It is essential to plan in advance of the need to implement
measures that might be deemed appropriate for limiting the
repercussions of the crisis in Cyprus. In light of the well
known lags associated with the implementation of
government initiatives, it is imperative that the preparatory
work needed to implement specific and carefully planned
measures is done well in advance. As always, attention
should be given to those development projects from which
our economy would derive a higher value added and a
larger productivity gain. The issue of productivity is
extremely important in the current situation of slowing
foreign demand, increased competition and tougher
borrowing conditions as a reduction in competitiveness can
undermine the performance of Cypriot enterprises
compete overseas. The increase in productivity that our
economy has achieved so far, even if it continues to be
above the corresponding increase in the euro area, is not
sufficient to eliminate the differences in labour costs that
still prevail.
Productivity boosting measures, such as the adoption of
innovations and new technologies, should constitute a high
priority for the business world and the government. Further
progress can also be achieved with more simplified
administrative procedures dealing with businesses and a
reduction of bureaucracy.
some in the euro area, I continue to believe that it remains
healthy and strong. Nevertheless, the international turmoil
has inevitably affected the lending conditions in Cyprus.
As in many other countries, deposit and lending interest
rates have increased considerably, along with the interbank
rate Euribor, which constitutes a reference rate for lending
and deposit rates. However, these interest rates increases
are gradually being reversed, as can already be seen from
the continuing decrease in Euribor interest rates. The
drastic and decisive action taken by the ECB and other
central banks, has contributed decisively to this process of
normalisation.
Our government could also contribute to the enhancement
of credit availability in the private sector by taking
measures similar to those that have already been
implemented in a number of other euro area countries in
line with the Common European Action Plan agreed to by
the EU and national authorities in October. Such measures
could include the issuance of special government bonds
which could be lent to banks, which in turn, would use
them as collateral to access cheap funding from the
Eurosystem, as well as the provision of government
guarantees to banks wishing to access the international
capital markets through bond issuance. The
implementation of such measures may facilitate credit at
lower cost. Because such measures have already been
implemented in other euro area countries including
Greece, it may be particularly important for our
government to consider them also in order to promote a
level playing field between local and foreign banks and
thus avoiding putting our banks in a competitive
disadvantage.
Whatever expansionary measures may be contemplated,
they should also be targeted and temporary, with an
expiration date. It would be undesirable to risk a long-term
deterioration in the country’s public finances, in an effort
to provide a temporary boost to consumption. Undoing the
hard-earned gains of fiscal consolidation of the past several
years would be ill advised and would undermine public
confidence in the sustainability of public finances.
I would like to conclude with an observation and a wish.
The observation is that we live in interesting times. Since
last September, in particular, we are experiencing a
financial crisis, the magnitude of which we hope not to
experience again in our life time. The policy response was
swift and massive. The measures taken so far appear to
have succeeded in averting the worst that could have
otherwise materialised. Unfortunately the financial crisis
has spilled over to the real economy and, compared to
2008, 2009 is set to be a difficult year. I wish that it proves
to be less interesting.
With regard to our banking sector, and contrary to the
problems appearing in several other countries including
Note the above speech was given to the Limassol - Paphos
coordinating committee on 28 January 2009
40
Auditing in the present economic crisis
Audit challenges
in the current volatile economic
environment
The recent events in the
financial markets continue to
cause economic uncertainty
and considerable volatility in
the global capital markets.
These economic and market
conditions are contributing
to enormous challenges for
entities in all industry
sectors. In turn, they also
provide particular challenges
to all involved with the
By Gabriel Onisiforou,
Partner Ernst & Young
annual reports and financial
Member of the Auditing
statements, including preStandards Committee of
parers, members of the board
ICPAC
of directors, members of the
audit committees, external
auditors, regulators, inve-stors, lenders etc.
Under the Companies Law, the board of directors is
responsible for the preparation and for the true and fair
presentation of the financial statements in accordance with
International Financial Reporting Standards (IFRSs); the
auditor is responsible for issuing an opinion thereon.
As auditors, we surely cannot take a “business as usual”
approach to auditing during this economic environment.
These difficult market conditions warrant additional
attention to:
goodwill valuations, financial assets valuation,
inventories NRV, bad debts, pension fund obligations
etc), including market transactions, cash flow
projections, yield curves, credit / liquidity spreads,
discount factors, expected return on assets etc
ñ evaluating the going concern assumption
ñ evaluating the sufficiency and accuracy of the
disclosures contained in the financial statements as
well as assessing the consistency of information
provided outside the financial statements but within the
annual reports (e.g. directors’ report).
It is not the purpose of this article to outline the
International Standards on Auditing, Assurance and Ethic
Pronouncements, and the International Financial
Reporting Standards, but to highlight certain areas of these
standards that may be more relevant in these economic
conditions.
ñ [ISA
315, Understanding the Entity and Its
Environment and Assessing the Risks of Material
Misstatement] The auditor should maintain an attitude
of professional scepticism and should consider the
risks of material misstatements in the financial
statements due to fraud
ñ [ISA 330, The Auditor’s Procedures in Response to
assets, fair value measurements of assets, adequacy of
liabilities and provisions, measurement of revenue and
expenditure etc
Assessed Risks]
The auditor should design and
perform further audit procedures whose nature, timing
and extent are responsive to the assessed risks of
material misstatements.
ñ auditing judgments and estimates, e.g. valuation
ñ [ISA 500, Audit Evidence] The auditor should obtain
models, methods and assumptions used in fair value
and other measurements (e.g. PPE, intangibles and
sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit
opinion
ñ auditing accounts, e.g., realisability / impairment of
43
Auditing in the present economic crisis
ñ [ISA 540, Audit Accounting Estimates and Related
ñ [ISA701, Modifications to the Independent Auditor’s
Disclosures] The auditor should obtain sufficient
appropriate audit evidence regarding accounting
estimates and related disclosures. The auditor should
determine the need to use the work of an expert.
Report] The auditor’s report, if appropriate, should be
modified with regards to highlighting a going concern
problem or a significant other uncertainty. It should
also be modified in cases of limitation on scope and
disagreements with management
ñ [ISA 545, Auditing Fair Value Measurements and
Disclosures] The auditor should obtain sufficient
appropriate audit evidence that fair value
measurements and disclosures are in accordance with
IFRS and consistently applied by the entity. The
auditor should determine the need to use the work of an
expert.
ñ [ISA260, Communication of Audit Matters with those
charged with Governance] The auditor should
communicate audit matters of governance interest
arising from the audit of financial statements with those
charged with governance of an entity.
ñ [ISA720, Other Information in Documents Containing
ñ [ISA620, Using the Work of an Expert] When using the
work performed by an expert, the auditor should obtain
sufficient appropriate audit evidence that such work is
adequate for the purposes of the audit
Audited Financial Statements] The auditor should read
the other information to identify material
inconsistencies with the audited financial statements
ñ [Cyprus Companies Law] The Directors’ report should
ñ [ISA 230, Audit Documentation] Audit documentation
shall contain a sufficient and appropriate record of the
basis of for the auditor’s report and should provide
evidence that the audit was performed in accordance
with ISAs and applicable legal and regulatory
requirements
contain a fair review of the development and
performance of the entity’s business and of its
position, together with a description of the principal
risks and uncertainties that it faces. It must also contain
an assessment of the entity’s likely future development.
ñ [IFRS 7, Financial Instruments: Disclosures] Financial
ñ [ISA 560, Subsequent Events] The auditor should
consider the effect of subsequent events on the
financial statements and on the auditor’s report
risks and sensitivity analysis, including qualitative
disclosures
ñ [IAS 1, Presentation of Financial Statements] Capital
ñ [ISA 570, Going Concern] When planning and
performing audit procedures and in evaluating the
results, thereof, the auditor should consider the
appropriateness of management’s use of the going
concern assumption in the preparation of the financial
statements
maintenance
ñ [IAS 1, Presentation of Financial Statements] Going
concern assumption
ñ [IAS 1, Presentation of Financial Statements] Sources
of estimation, uncertainties/judgements
ñ [ISA580 Management Representations] The auditor
should obtain appropriate representations from
management
ñ [IAS 10, Events after the Balance Sheet Date]
ñ [IAS 24, Related Party Disclosures]
ñ [ISA700, The Independent Auditor’s Report] The
auditor’s report should contain a clear expression of the
auditor’s opinion on the financial statements
ñ [IAS 36, Impairment of Assets]
ñ [IAS 37, Provisions, Contingent Liabilities]
44
The Economic Crisis and Protectionism
The International Economic Crisis leads
to the Revival of protectionism
Economic nationalism and
the revival of protectionism
as
for
example
the
instigation for jobs and
capital to remain in the local
market makes the economic
crisis a political crisis also,
which may to lead to the
deepening of the economic
crisis. If an end is not put to
this national economic
protectionism the effects on
By Angelos Gregoriades,
the international economy
Partner KPMG
will be very dire. For
example the fact that in the
economic stimulus of $787 billion for the bail-out of the
American economy there is a provision for the purchase of
American products will lead to reprisals from other
countries. Also if more expensive American components
and raw materials are used the result will be that the final
product, as for example motor cars, will be more expensive
and thus sales will be reduced. The provision in the
package to bail-out the American economy “buy
American” has been criticized by Japan as a violation of
the rules of the World Trade Organization (WTO). In
parallel the European Union has warned with the taking of
possible economic measures against the USA if it proceeds
with the implementation of this provision.
In certain countries of the EU when the politicians approve
capital to be given to local banks they demand that these
funds should be used for loans to local industries and local
consumers. A similar request has come from our
politicians for any increased liquidity which the banks may
have, that is that they should not use this money for their
subsidiaries abroad. Financial protectionism exist to a
greater extent in the Eastern and South Europe where there
is suspicion that the banks could export funds to their
subsidiaries abroad. The governor of the Central Bank of
Greece, Mr. Georgios Provopoulos, has warned Greek
banks not to use part of the help they will get for the
amount of $28 billion to transfer funds to their subsidiaries
in the Balkan countries. However the prime minister of
Britain, Mr. Gordon Brown, has stated that the greatest
danger, after the events of the last three months, is that the
countries may enter into a financial isolationism. The
World Trade Organisation (WTO) has warned member
governments that financial bailout packages confined to
domestic banks may discriminate unfairly against foreign
competitors, squeezing their access to credit markets and
deposits. Where foreign banks compete in the same
markets as domestic institutions, excluding them from
bailouts could distort competition and trade. European
leaders have been accused of “bribing multinationals” and
stealing jobs from neighbouring countries as they use
taxpayers’ money to support businesses affected by the
economic turmoil.
However so far no commercial protectionism has been
observed except in the case of Russia which is not a
member of WTO because this Organisation and the rules
of the European Union limit the possibility for import
duties to be raised. The world leaders have recently warned
against protectionism as the economies of Russia to the EU
and Asia are trying to protect their industries from the slow
- down of the world economy. However protectionism may
actually delay the revival of the world economy.
In the recent meeting of G7, that is the seven riches
countries of the West, in Rome it was decided to take
measures for the stabilization of financial markets, the
decrease of interests rates and the taking of fiscal measures
to boost demand. They also reiterated their opposition to
the national protectionism and asked for the taking of
measures for the early completion of the Doha Round to
further liberalize of international trade. They also
emphasized the need for the taking of measures for access
of emerging, economies to financial facilities.
The French government has decided to support the French
motorcar industry with an amount of m6 billion provided
they take measures to maintain jobs in France. This
decision by the French President has been criticized by the
Czech Republic and Slovakia since he asked the motor
company, Peugeot - Citroen to close their factories in these
countries, although finally he did not insist on this view. In
45
The Economic Crisis and Protectionism
parallel Spain also has decided to offer financial assistance
amounting to m4 billion for the Spanish motorcar industry
while the Minister of Commerce, Industry and Tourism,
Mr. Miguel Sebastian has inaugurated the slogan “Buy
Spanish products”. It may be advisable that a similar
slogan may also be introduced in Cyprus with regard to
tourism, i.e. “Have your holidays in Cyprus”, so that the
decrease of the tourist inflow to Cyprus may be offset by
internal tourism. As the prime Minister of the Czech
Republic Mr. Mirec Topolanek, who now presides the EU
has stated protectionism and economic nationalism in the
EU will damage both the European Internal Market and the
Eurozone.
In Britain there were strikes against the employment of
foreign workers. But Mr. John Monks leader of the
Confederation of Trade Unions of the EU has supported
the free movement of the labour force in the European
Union. Also Lord Mandelson, the Secretary of Britain for
businesses, has stated that protectionism will deepen the
international economic crisis. This statement by Lord
Mandelson is supported by the bad example of the 1930’s
when the decision of the USA, which the Governments of
Europe and elsewhere followed, to introduce protectionist
measures extended the extent and deepened of the world
economic crisis. In Cyprus if we don’t use workers from
the European Union and from third countries many
activities can not be effectively pursued, for example
agricultural.
Monetary policy
The Management of Monetary Policy
The objective of monetary
policy is the control of the
economy so as to avoid both
inflationary pressures and
recession. The main tool of
monetary policy is the
interest rate. In cases of
danger
of
inflationary
pressures the interest rates
increase so that demand for
bank loans is reduced and
thus
investment
and
By Tassos Anastasiades,
consumption expenditure.
Deputy Editor
On the other hand if there is
a danger of recession the
interest rates are reduced as it happens today in all
countries. Another tool which is used in monetary policy
is the monitoring of monetary expansion. It is noted that
money supply, which includes the currency in circulation
and bank deposits, should not increase by more than the
growth rate of the national income in monetary terms plus
the inflation rate.
It may be noted that the Bank of England and the European
Central Bank (ECB) have targets for the inflation rates, the
46
Federal Reserve does not have such a target but it is
considering to introduce one. The Bank of England has a
target of an inflation rate of 2% with 1% above or below
which means that the bank of England is concerned also
about the drop in the inflation rate below 2%, so as to take
measures to face a potential recession. On the other hand
the target of the ECB is for an inflation rate of 2% or below
which means that it is not concerned if the prices fall below
2% when there will be a danger of recession and deflation.
Economists believe that it will be beneficial if also the
Federal Reserve adopts an inflation target after the end of
the present financial crisis.
Monetary policy can be more effective if its management
is in the hands of the Central Bank. During the 1970’s
monetary policy, in most countries, was managed by
governments and thus monetary policy was not effective.
This is because if elections were expected and even when
there were inflationary pressures the government could
reduce the interest rates and increase the money supply to
satisfy more investors and consumers. The bad result,
however, would come after 15 - 18 months. In the mean
time the government is elected because it satisfied many
electors. Thus one country after another has made the
Central Bank independent as it is the European Central
Monetary policy
Bank and actually all the Centrals Banks of the 27
members of the European Union.
Unfortunately in the USA the Central Bank, that is the
Federal Reserve, did not face the situation satisfactorily
after 2002 when the American Economy recovered from
the recession of 2000. For some reasons, perhaps because
there were big imports from China with cheap consumer
goods, the inflation rate, as measured by the Consumer
Price Index, was low and thus the Federal Reserve did not
increase the interest rates. It proceeded with gradual
decreases of the interest rate from 6.5% in 2000 to 1% in
June 2003. But asset prices (shares and immovable
property) were increasing and thus interest rates should
have increased. There was also enough liquidity because
China and Japan with big current account surpluses were
buying government securities in America, something
which increased liquidity. Thus the banks had enough
liquidity to lend and at low interest rates. So high bank
credit expansion led to the significant increase of asset
prices. In parallel the American Banks were offering credit
to persons who wanted to buy houses an amount higher
than 100% of the value of the property while in the case of
Cyprus they are offering a loan not more than 70 - 80 % of
the value of the asset. Also they were not careful to
ascertain that the borrower could repay the loan in contrast
to our banks which make sure that the borrower is in a
position to repay the loan.
In our case we could avoid the high increase in asset prices
if we had an independent monetary policy and thus we
could increase the interest rates and avoid the high
expansion of bank credit, higher than 30% on an annual
bassis, in relation to 15% which is justified by the growth
rate of our economy and the inflation rate.
Now in America with almost zero interest rate, monetary
policy is not effective and the Federal Reserve is using
unconventional methods to avoid the deepening of
recession and thus avoid the increase of unemployment.
The Federal Reserve is buying both government and
corporate securities to increase the money supply so that
the banks will have enough liquidity to expand credit thus
leading to the increase in consumption and investment
demand. The Federal Reserve is using the experience of
the Central Bank of Japan which used unconventional
methods at the beginning of the 1990’s when it adopted the
method of increasing the liquidity of the banks so that bank
credit is increased and avoid deflation. The Bank of
England is now considering following the unconventional
methods that the Central Banks of Japan and America are
using especially when interest rates become zero. It is
noted that the basic of interest rate of the Bank of England
is 0.5%, of the ECB 1.5% and of the Federal Reserve is 0
- 25%.
In the mean time the ECB has decided that it can buy
government securities something which has also been
recommended by the Governor of Central bank of Cyprus
Mr. Athanasios Orphanides. For example Mr. Orphanides
has suggested the issue of special Cyprus government
bonds which could be lent to banks which in turn could use
them as collateral to access cheap funding from the
Eurosystem as well as the provision of government
guaranties to banks wishing to access the international
capital markets through a bond issue. Thus the cost of the
banks will be reduced leading to low lending rates. The
objective of the unconventional monetary measures, that is
the purchase by government of corporate and government
securities, is to give more liquidity to the banks but also
have lower lending rates.
Mr. Loucas Papademos, Vice - President of the ECB has
stated that the European Central bank should undertake the
monitoring of the big banks which operate in more than
one country in the 16 member countries of the Eurozone in
cooperation with the national Central Banks. There are
indications that the suggestion of Mr. Papademos is
supported by the members of the governing Council of the
ECB. In the EU about 45 big banks which operate in more
than one country in the Eurozone constitute about 70% of
the banks’ assets. In this respect Mr. Athanasios
Orphanides has stated that the present financial crisis is an
opportunity to move fast in the coordination of banking
supervision and monitoring in the Eurozone, something
which it will be important for avoiding future economic
crises.
The President of the Federal Reserve Mr. Ben Bernanke
has stated that the fiscal stimulus will greatly help in the
revival of the economy. But for a permanent revival of the
economy there must be significant measures for the
stabilisation and strengthening of the financial system. A
method which can be used is the creation “Bad Banks” to
buy toxic assets from banks and offer cash. With regard to
the setting up of “Bad Banks” we can use the experience of
Sweden which used this method to withdraw the toxic
assets from the banks in the financial crisis of the 1990’s.
47
The bail-out of banks
The Bail-out of Banks Internationally
A sound banking system is
the basis for a stable and
high growth rate. With out
satisfactory financing from
the banking system, the
businesses cannot make
investments while consumption demand is reduced
especially
for
durable
consumer goods which are
bought on credit. Fortunately our banking system
is sound and it is in a
By Christos V. Vasiliou,
position to offer loans to
Board Member, KPMG
businessmen as well as to
Limited
consumers. As the President
Head of Financial Risk
of the European Commission
Management
Mr. Jose Manuel Barosso
has stated “the return of the
banking system to normality is the parachute which will
lead to the smooth landing of the economy in conditions of
normal functionaring”. Towards this end in a recent
meeting in Brussels it was decided to set up a special
service for the monitoring of financial risk and the
coordinated supervision of banks. This project is expected
to be approved in the summit meeting of the 27 members
of the EU in June and is expected to give enhanced powers
to the Central Supervisory Authorities, for the supervision
of the Financial and insurance to companies.
As the President of the Federal Reserve Mr. Ben Bernanke
stated the serious recession in the USA would be extended
until 2010, unless the government succeeds to stabilize the
banks and the markets. Mr. Bernanke also stated that if the
measures taken by the government, the Congress and the
Federal Reserve succeed to bring financial stability, the
prospect is that the present financial crisis will end in 2009
and 2010 will be the period for the starting of the revival of
the economy. According to statistics from the IMF since
1970 there have been 124 financial crises during which bad
debts were extended to the whole economy and to a large
extent the banking sector was bankrupt. It is noted that
these financial crises, except six, occurred in emerging
markets. The crisis which occurred in Japan was the result
of the bursting of the property bubble at the end of the
1980’s. But the speed of recovery differs significantly. For
example in Japan the crisis lasted for a decade of economic
sagnation while South Korea succeeded to bring the
48
economy to economic growth in two years after the
financial crisis in 1997. Also Sweden recovered quickly
because it acted fast to remove the toxic products from the
balance sheets of the banks, injected capital in the banks
which faced problems and nationalized where it was
necessary to do so.
In most cases the economic crisis was the result of the
significant increase in the prices of immovable property
and the high bank credits. It may be stated that the bank
credit in Cyprus between January 2008 and 2009 increased
by 32% while on the basis of the growth rate and inflation
it should have increased by about 15%. The high bank
credit expansion in America but also in Cyprus, Spain and
other countries was a reason for the high increase of the
prices of immovable property.
In most financial crises as in the cases of Sweden and
South Korea, the situation was worsened by the
devaluation of their currencies something which increase
the cost of repayment of the loans in foreign currencies.
Sweden faced the situation more easily because the
banking system was concentrated to a small number of big
banks, especially by taking over the management of two
banks. However in America, even after the merging of
banks there are still twelve big banking institutions
something which makes more difficult the work of the
government for the bailout of the banking system.
The former President of FED, Mr. Alan Greensban, has
warned that without a sound banking system the financial
stimulus which is interview to be given by the government
will only have a temporary benefit. “In view of the
experience of the 1990’s we need to make sure that
rendering the banking system sound must precede a
significant financial stimulus”, Mr. Greensban stated. Mr.
Alan Greensban supports the temporary nationalisation of
systemic banks. At a later stage when the banks are
restructured and become sound they should be privatised
again. The government of President Obama, however, does
not agree with the nationalisation of the banks but with
their bailout without being nationalised. The American
government has agreed to become the biggest stake holder
of Citigroup so as to bail - out this big financial institution
something which will support the banking system. The
partial nationalisation of this institution will give the
government a shareholding of 36%. As a representative of
the Government of the President Obama has stated that the
The bailout of banks
share of 36% in the Citigroup is not something which it
will try to introduce for all banks, although it has also
offered financial assistance of $45 billion to the Bank of
America.
As regards the Eurozone in a climate which continuously
worsens has led the european banks to acquire more
government securities. According to statistics of the
European Central Bank the government bonds held by the
European banks between the first of November 2008 and
the end of January 2009 increased by m115 billion, which
was the highest increase since September 1997, to m1299
billion.
In the recent meeting of G7, that is of the seven richest
countries, they have agreed that systemic banks should not
be allowed to fail and thus funds both public and private
should be provided for the return of confidence. In the last
weeks the central banks have kept their promises so as to
make sure that the banks and other financial restitutions
have access to liquidity to continue to lend. In the case of
Cyprus the Government has agreed to guarantee m100.000
for each depositor while it has issued bonds amounting to
m1.4 billion which the banks can use as a security to
borrow from the European Central Bank at an interest rate
of 1.5%. In Greece the government has offered the banks
financial assistance amounting to m28 billion, provided
that these funds are not transferred to their subsidiaries in
the Balkans.
The British government which has already nationalised
Northern Rock and Bradford and Bingley, has stated that it
plans to inject additional capital amounting to$36.5 billion
in the Royal Bank of Scotland so that this banking
institution can avoid its full nationalisation. This solution
is based on the government scheme for the protection of
possible asset losses of the Royal Bank of Scotland up to
$325 billion. This scheme is the first and others will follow
so that the banking system in Britain can start giving loans
so as to face the recession in the British Economy. It may
be noted that a similar scheme will also be applied in the
case of Lloyds Banking Group. The objective of the British
scheme, known as Asset Protection Scheme, which has
been introduced by various governments so as to limit
future losses which emanate from toxic assets, is to induce
the banks to start offering credit in the economy. In the last
months the Swiss Bank UBS, Citigroup and Bank of
America of the USA and ING, the Dutch company, have
benefited from similar schemes with which protection is
offered by the governments. Although all the schemes have
differences they are all designed so that it allows the
governments to support the banks without being fully
nationalised.
Labour Mobility
Global Labour mobility still key to business
growth plans, finds KPMG International Survey
ñ Sources
ñ China
of labor may change, but global labor market here to stay
a future source for many countries, but may not be able to deliver
MARCH 09 2009
Traditional patterns of overseas employment are changing
under the pressure of a globalized economy, improved
communications and cheap international travel, a new
study from KPMG International has found.
Examining the future employment intentions of businesses
operating in 11 major economies, KPMG found that
despite the economic slowdown and the effect of increased
recruitment and wage costs as a result of hiring from
overseas, the urge to source skilled labor from other
countries remains strong.
More than eight out of ten (82 percent) agreed that better
labor mobility gives them a greater pool of talent from
which to choose, and 73 percent said that it allowed them
to hire better quality people. Sixty nine percent of
respondents felt that hiring people from other countries
fosters better understanding of global markets, with 76
percent saying that foreign workers help develop a
valuable global mindset.
51
Labour Mobility
But each country has a different pattern of overseas
employment, depending on its history, its particular
economic strengths and its future plans.
In the Asia-Pacific region, countries tend to rely on a small
number of other states for workers. Companies with
operations in Japan, for example, take significant numbers
of workers from Korea (14 percent), Taiwan (14 percent)
and Australia (16 percent).
China relies heavily on Singapore and Hong Kong for
labor, but the relationship between the three is complex,
with substantial two-way traffic.
Nineteen percent of companies with operations in China
bring in workers from Singapore, while 21 percent of
Singapore based companies use Chinese labor. A quarter
of companies based in Hong Kong use Chinese labor,
while 19 percent of Chinese companies use workers from
Hong Kong.
By contrast, companies in the UK, Spain and the US show
no particular preference as to where their workers come
from.
Among the European states there is a slight tendency to
take workers from other European countries, but the largest
groups of foreign workers among companies operating in
the UK is Australians (12 percent) Indians and French (11
percent each).
For companies in the US, the largest single group of
workers comes from the UK (14 percent) followed by
India (9 percent) China and Germany (both on 7 percent).
But looking ahead just three years, several countries seem
set for major changes in their foreign workforces.
The UK influence in Australia is set to decline sharply in
favor of workers from China, India and Hong Kong.
Companies in India expect to take far fewer workers from
the US and UK, and more from China, but a large number
do not know, or would not say, where their future
workforces would come from.
In Japan, Australians are expected to remain the largest
group of foreign workers, but Koreans are expected to be
pushed from second to third place by a significant increase
in the number of workers from China. Four percent of
companies with operations in Japan say they employ
Chinese now, but that rises to 12 percent in three years’
time.
Chinese workers are expected to feature heavily in future
52
international workforces, with companies operating in
Australia, India, Japan, the UK, Spain and the US all
planning big increases in the number of Chinese they
employ.
But, as Brian Ambrose, KPMG’s Head of Global Mobility
and partner in the US member firm, points out, it is
possible that the supply of skilled workers in China will
decrease over this period, as the smaller number of
children born as a result of the One Child Policy of the
1970s feeds through into a reduction in the adult
workforce.
The alternative may be India, where demographic
projections show a steady increase in the number of
available workers up to 40 years ahead.
“The interviews for this survey took place at the end of last
year,” said Angelos Gregoriades from KPMG’s Cyprus
member firm. “but respondents might not have guessed the
extent to which the financial crisis would impact the global
economy and their businesses.”
“What we are starting to see in terms of people flows”
Angelos Gregoriades continues “ is a tale in two parts.
There is mounting pressure in many countries to protect
domestic labor. Secondly, for the first time in a generation,
unemployment and the economic crisis may be creating
the impetus for skilled labor and professionals in the worst
hit developed countries to emigrate in search of greener
pastures.”
“In the medium to long term our survey indicates that
multinationals will still depend on a free movement of
people from country to country. Many called for
reductions in immigration restrictions to facilitate this
movement, alongside tax incentives to attract business into
new countries.”
“This suggests that a global mindset has become
embedded in the world’s big companies, and that
international availability of labor is and will remain a key
part of their business planning. Economic turmoil may
cause a short term hiatus in government immigration
programs but the global economy looks here to stay.”
KPMG is a global network of professional firms providing
Audit, Tax and Advisory services. We operate in 144
countries and have 137,000 people working in member
firms around the world. The independent member firms of
the KPMG network are affiliated with KPMG
International, a Swiss cooperative. Each KPMG firm is a
legally distinct and separate entity and describes itself as
such.
Financial crisis in the European Union
Financial Crisis - the response
from the European Commission
The European Commission
has presented a comprehensive recovery plan to
get Europe out of the current
economic
crisis.
The
objective of the recovery
plan agreed in December
2008 is to drive a
coordinated EU response to
the economic crisis,that
builds on the unprecedented
By Marina Pieri
level of coordination shown
Assistant Manager
in response to the financial
Assurance services
market crisis. The priority is
PricewaterhouseCoopers
to treat the symptoms of the
Limited
economic crisis and protect
Member of the European
Union Affairs Committee
jobs and purchasing power
in the short-term while also
investing in Europe’s long-term economic health and in
boosting the fight against climate change.
The Recovery Plan is based on two mutually reinforcing
main elements. First, short-term measures to boost
demand, save jobs and help restore confidence. Second,
“smart investment” to yield higher growth and sustainable
prosperity in the longer-term.
The parameters of the Recovery Plan are:
ñ A fiscal stimulus of 1.5% of GDP
underway under the Lisbon Growth and Jobs Strategy. It
includes extensive action at national and EU level to help
households and industry and concentrate support on the
most vulnerable. It puts forward concrete steps to promote
entrepreneurship, research and innovation.
As part of the EU’s contribution to this stimulus, the Plan
proposes accelerating payments of up to m6.3 billion under
the structural and social funds. To improve energy
interconnections and broadband infrastructure, the
Commission will mobilise a further m5 billion for the
period 2009-10.
The European Investment Bank will increase its yearly
interventions in the EU by some m15 billion in 2009 with
a similar figure in 2010.
ñ Protecting and creating jobs
The top priority is to protect Europe’s citizens from the
worst effects of the financial crisis, i.e unemployment.
Alongside the fiscal stimulus, the Commission is
proposing to simplify the criteria for European Social Fund
Support, re-programme spending and organise advance
payments from early 2009, so that Member States have
earlier access to up to m1.8 billion.
Up to m4.5 million of cohesion funding will also be
brought forward, alongside other measures in order to
accelerate the implementation of major investment
The Plan calls for a timely, targeted and temporary fiscal
stimulus of around m200 billion or 1.5% of EU GDP,
within both national budgets (around m170 billion, 1.2%
of GDP) and EU and European Investment Bank budgets
(around m30 billion, 0.3% of GDP). Every Member State
is called upon to take major measures good for its own
citizens and good for the rest of Europe. The Recovery
Plan will reinforce and accelerate reforms already
projects and this too will contribute to protecting and
creating jobs.
To create demand for labour the Plan invites Member
States to consider reducing employers’ social charges on
lower incomes and calls on the Council to adopt, before the
2009 Spring European Council, the proposed Directive to
reduce VAT rates for labour-intensive services.
53
Financial crisis in the European Union
ñ Smart Investments
structural funds. The changes will extend the deadline for
EU countries for projects and payments to use up their
The Recovery Plan includes detailed proposals for
allocations from the 2000-2006 funding period by six
partnerships between the public sector - using Community,
months to 30 June 2009.
EIB and national funding - and private sectors to boost
clean technologies through support for innovation: these
The total funding allocated to Member States in the 2000-
include a European green cars initiative with combined
2006 budgetary period was m257 billion. So far, m225
funding of at least m5 billion, a European energy-efficient
billion have been paid out - 87.5% of the total. Member
buildings initiative worth m1 billion; and a “factories of the
States can now make payments for this period up to 30
future” initiative estimated at m1.2 billion.
June 2009. The deadline for Cohesion Fund payments
from the 2000-2006 period is in most cases the end of
The emphasis throughout the Recovery Plan is on “smart
2010.
investments”. Investing more in education and (re-)training
helps people to retain their jobs and get back into the
Commenting on the decisions, Commissioner Hübner said:
labour market, whilst raising productivity. Investing in
“All our efforts are being deployed to ensure that every
infrastructure and energy-efficiency keeps people in the
euro from the structural funds is spent in an efficient way.
construction industry in work, saves energy and improves
We are adapting the Cohesion Policy to address new
efficiency. Investing in clean cars helps protect the planet
economic realities and to allow Member States to optimise
and will give Europe’s companies a leading edge in a
EU investment as an excellent anti-crisis remedy”.
highly competitive market.
Member states have requested an extension to the
The contribution of Cohesion Policy to the Commission’s
eligibility period for funding for 385 of the 555 Cohesion
recovery package consists of a variety of measures,
Policy programmes in 2000-2006, where funds had not
legislative and non-legislative. The main objective is to
been fully utilised. The extended eligibility period
accelerate payments to Member States and to facilitate
concerns the four structural funds in place.
access to the Structural Funds, which will help speed up
project implementation in an effort to inject confidence
This flexibility will enable Member States and regions to
and dynamism into the European economy
implement and finalise more projects on the ground. The
Commission is urging them to focus on ‘high-return’
MORE FLEXIBILITY ON STRUCTURAL FUNDS
sectors and measures, such as investing in energy
efficiency to create green jobs and save energy, and support
Danuta Hübner, European Commissioner responsible for
for clean technologies to boost sectors like the construction
Regional Policy, stated recently that: “In a context of
and automotive industries
global instability, EU cohesion policy provides stability. It
provides a stable and secure source of financing, a constant
The Commission has also adopted a measure to give
flow of funds on which regional and local partners can rely
Member States and regions more flexibility in allocating
on beyond any doubt, independent of the global financial
funding for different priorities. Until now, managing
sentiment. EU cohesion policy will continue to tackle
authorities had a 2% margin of flexibility if they wanted to
structural weaknesses and increase the competitiveness of
transfer funding between the so-called ‘priority axes’ that
the European economy, regardless of the emerging credit
define the strategic spending areas of each Cohesion Policy
crunch.”
operational programme. . In recognition of the exceptional
circumstances faced by Member States, the Commission
In response to the financial and economic crisis, Regional
has decided on a five-fold increase in flexibility between
Policy Commissioner Danuta Hübner has announced a
priorities, from 2 to 10%. This will enable the Member
package of decisions by the European Commission aimed
States to target remaining funding where its impact is
at giving Member States more flexibility in their use of the
greatest.
54
Monetary Policy
Central Bank Strategies and the free market
Among all the confusion of
the global financial crisis,
one thing is becoming clear.
There are major differences
among the central banks
which will be tested by the
current crisis. The results of
this test will influence the
conduct of governments and
their relation to market
economies for many years to
come.
On one side we have the
aggressive strategy of the
By Dr. Jim Leontiades
USA and UK central banks.
CIIM, The Cyprus Business At the other extreme we have
the conservative strategy of
School
the European Central Bank
(ECB) and more specifically,
the German economic policies which heavily influence
that institution.
The USA and UK central banks have of course lowered
interest rates more rapidly and to lower levels than those of
the ECB. But they have also been innovative, leading the
ways beyond traditional monetary mechanisms.
The USA central bank in particular has lowered interest
rates to virtually zero (from 0-.25%). The British Central
Bank is not far behind, lowering interest rates to the lowest
level in several hundred years. Both banks have also
engaged in innovative methods of supporting their
markets. They have become equity investors in financial
and non financial organizations (the automobile industry),
direct financial support to mortgage holders, mortgage
restructuring,INSURING
AND
GURANTEEING
DOUBTFUL ASSETS. Quantitative easing(putting
money into the economy)has been used on an
unprecedented scale.
The ECB on the other hand has maintained its traditional
conservativism. It too has lowered interest rates and
intervened in bolstering financial markets and institutions.
The difference is mainly one of speed and scale but
nevertheless reflecting major differences in their
interpretation of the best way to tackle the crisis.
A DIFFERENCE IN PRIORITIES
The roots of the discrepancy are to be found in the different
priorities of these institutions. The European ECB, heavily
influenced by Germany, has voiced more than once its
main priority is on defending markets against inflation.
Germany has repeatedly criticized the Anglo-American
level of government spending to fight the crisis.
The German Chancellor, Angela Merkel, has said: “ We
will not take part in a competition to outdo one another
with an endless list of new proposals in a senseless contest
over billions”.
Nevertheless, Germany has followed this statement with
commitment of more billions to fight the crisis.
The USA/UK governments have broader objectives -they
too profess commitment to fighting inflation. But their
actions indicate their main objective is a satisfactory level
of economic activity and particularly employment. Their
reasoning is that the first priority is to put out what they
perceive to be a fire (recession) - even if the water poured
into the blaze may cause some future damage (inflation).
Who is right will be determined a number of years from
now. The test will not be confined to overcoming the
current crisis but also avoiding a future crisis and
particularly inflation.
We may depend on it that the successful strategy will be
the one which influences central bank behaviour and the
role of government for many years to come. Should the
Anglo-American approach prove more effective, the role
of government, particulary in areas related to finance will
be much more pro- active. Secondly There will be an
examination of the specific tools which have succeeded or
failed. It is clear that today there is a good deal of
guesswork as to which of the many measures will actually
work. Thirdly, we may expect the introduction of new
regulations and practices, particularly as regards mortgage
lending
and
securitization.
BONUSES AND
COMPENSATION OF EXECUTIVES WILL ALSO BE
QUESTIONED.
MARKET ECONOMIES WILL SURVIVE
None of the above means that the present market system
will be threatened. It is well to keep in mind that during the
great depression of the 1930’s both the crisis as well as the
measures to correct it were more drastic than anything
which has been seen or contemplated today. American
unemployment then reached 25% (versus 7+ today). All
banks were closed for a time, social security was
introduced, labour legislation was revised. So many new
government owned and operated enterprises were
introduced, designated by acronyms, that they were
referred to as “alphabet soup”. Yet, the market system
survived.
Change there will be, particularly in regulations aimed at
preventing “overborrowing”, the real culprit behind the
crisis.
Here in Cyprus we remain up to this point better off than
many of the more so called developed economies. Quite
simply we have lagged behind in the stampede to offer ever
more liberal credit terms. While American and some
European banks were offering mortgages equal to 100%
and even 120% of the value of a house, our credit offerings
have been more conservative. In fact they may prove to be
more in line with future global credit regulations.
57
A reward scheme in a crisis period
Reward Strategy: A barrier or an enabler
in managing the economic downturn
Maria Georgiou
Senior Manager
Business Advisory Services
In the difficult economic
climate that is currently
shaping, organisations seek
to identify ways to deal with
the new challenges. The slow
down in consumer spending,
the difficulties faced in
securing finance, in combination with an inflexible
cost base, cause for many
organisations heavy pressures in profitability margins
and cash flow management.
include the following:
ñ Alignment with the BUSINESS STRATEGY - reward
schemes can be powerful tools in the hands of the
management to direct efforts and provide focus to
specific areas of the business
ñ Clear link with KEY PERFORMANCE CRITERIA -
the performance criteria measured through the scheme
should not be restricted to high level criteria (such as
profitability) but include also performance parameters
that measure the value of specific areas of the business
ñ Connection with FINANCIAL BUDGETS - linking the
In
this
environment,
incentive reward schemes
are
seen
with
great
scepticism. However, such
periods present organisations with an excellent opportunity
to review their reward strategy and realign more closely
their reward schemes with the organisation’s key
performance drivers.
The aims, parameters and resulting benefits of reward
schemes, should be presented to staff in a clear and sincere
manner, contributing towards a spirit of trust, cooperation
and shared commitment between staff and management.
In reviewing the reward strategy the organisation
management should be addressing the following key
questions:
Each organisation is presented with the following
alternatives with regards to managing rewards during this
period:
ñ Are the reward incentive schemes clearly aligned with
Run the same reward incentive schemes as in previous
years, with the danger of becoming ineffective or creating
more pressure in the current economic situation of the
organisation
the Key Performance Indicators of the organisation, or
they just distribute bonuses irrespective of results and
performance levels?
ñ What is the impact of the current reward strategy on the
total remuneration packages of various staff groups and
the organisation’s annual and monthly payroll?
ñ Does staff understand and appreciate the value of the
reward schemes?
ñ How clear and to what extent are rewards linked with
individual performance?
ñ Is this link clear to staff?
ñ How equipped is the organisation, to measure effectively
performance at individual, departmental and
organisational level?
ñ How relevant are the reward schemes in periods of low
turnover and pressed profitability?
The key characteristics of an effective reward scheme
58
performance criteria with the financial budgets makes
the reward scheme more flexible adaptable and relevant
in periods of big fluctuations in performance levels
Discontinue offering reward incentive schemes, which
may potentially create a negative climate and insecurity to
staff and of course deprive the company from an important
tool to manage and direct staff performance
Adapt the reward schemes to the current environment and
utilise them for reinforcing the business strategy and give
a clear message to staff that high performance and hard
efforts are recognised and rewarded
The alternative actions for each organisation are clear, it
can ether wait till the ‘storm is over’ and count its losses or
shape its business strategy to face these challenges
proactively and dynamically
The Excel Wizard
The Excel Wizard
By Stratos Panayides,
BA(Econ), ACA Training Consultant at AKTINA
59
The Excel Wizard
60
The Excel Wizard
63
Presentation of Financial Statements
Discussion Project on Presentation
of financial statements
By Yiannis Leonidou
Deloitte
In October 2008, the
International Accounting
Standards Board (IASB)
published for public comment a Discussion Paper
(DP) entitled Preliminary
Views on Financial Statement Presentation. The DP
represents the first step in the
development of a Standard
on this subject jointly with
the US Financial Accounting
Standards Board (FASB).
The IASB has requested
comments on the DP by 14
April 2009.
KEY PROPOSALS
This project deals with how information is presented in
financial statements, and does not address how the
components of financial statements are recognised and
measured. Key proposals include:
ñ the structure of the statements of financial position,
comprehensive income and cash flows would be such
that a
cohesive relationship would be evident across
the various statements (i.e. the line items presented,
descriptions used and order of presentation would be
aligned);
ñ the format for the financial statements would be such
that:
TABLE 1. PROPOSED CLASSIFICATION SCHEME FOR FINANCIAL STATEMENTS
Statement of financial
Position
Statement of
comprehensive income
Statement of cash
flows
Business
Business
Business
Operating assets and liabilities
ñ Investing assets and
liabilities
Operating income and expenses
Operating cash flows
ñ Investment income and expenses
ñ Investing cash flows
Financing
ñ Financing assets
ñ Financing liabilities
Financing
Financing
ñ Financing asset income
ñ Financing liability expenses
ñ Financing asset cash flows
ñ Financing liability cash flows
Income taxes
Income taxes on continuing operations
(business and financing)
Income taxes
Discontinued operations
Discontinued operations, net of tax
Other comprehensive income, net of tax
Discontinued operations
Equity
Equity
Notes
ñ Section names are in bold type.
ñ Required categories within sections are indicated by bullet points.
ñ Entities would be permitted to present the sections and categories within a section in a different order as long as the
order is the same in each statement.
ñ Each section and category within a section would have a subtotal.
ñ The statement of comprehensive income would also include a subtotal for profit or loss or net income and a total for
comprehensive income.
64
- information about how an entity creates value (its
‘business’ activities) would be presented separately
from information about the way it funds those
activities (its ‘financing’ activities);
- within business activities, ‘operating’ activities
would be segregated from ‘investing’ activities; and
- information regarding discontinued operations and
income taxes would be separately presented;
ñ the classification of items would be based on a
‘management approach’, so as to reflect how assets and
liabilities are used within an entity; and
OBJECTIVES OF THE PROPOSED
PRESENTATION MODEL
The objectives for financial statement presentation
underlying the proposed presentation model (as set out in
the DP) are that information should be presented in the
financial statements in a manner that:
ñ portrays a cohesive financial picture of an entity’s
activities. A cohesive financial picture means that the
relationship between items across financial statements
is clear and that an entity’s financial statements
complement each other as much as possible;
ñ disaggregates information so that it is useful in
ñ more detailed analyses would appear on the face of the
predicting an entity’s future cash flows; and
financial statements.
ñ helps users assess an entity’s liquidity and financial
These proposals would result in fundamental changes in
the appearance of the financial statements, both as regards
the structure of the statements (e.g. the segregation of
assets and liabilities would mean that the statement of
financial position would not necessarily present ‘total
assets’ or ‘total liabilities’) and the level of detail
presented. The proposed classification scheme for
financial statements is set out in Table 1 overleaf, and the
following pages review the most significant proposals
made in the DP.
HISTORY OF THE PROJECT
The DP relates to Phase B of a three-step joint project
between the IASB and the FASB:
ñ Phase A resulted in the revised IAS 1 Presentation of
Financial Statements issued in 2007. The key issues
addressed in that revision were the titles of the financial
statements, the periods for which they are required to
be presented, and the two options for the presentation
of the statement of comprehensive income;
ñ Phase B (i.e. this DP) is much more extensive in its
scope and ambition. Overall, it aims to make an entity’s
financial statements more useful by requiring entities to
provide detailed information organised in a manner that
clearly communicates an integrated (cohesive)
financial picture of the entity. As a result, the DP
addresses numerous issues relating to the presentation
and display of information in financial statements; and
flexibility.
To present a cohesive set of financial statements, entities
would be required to align the line items, their descriptions
and the order of presentation of information in the
statements of financial position, comprehensive income
and cash flows. To the extent practical, entities would
disaggregate, label and total individual items similarly in
each statement.
CONSISTENT DISAGGREGATION BASED ON
‘MANAGEMENT APPROACH’
The first step in the disaggregation process would be the
classification of assets and liabilities in the statement of
financial position as set out in Table 1. That classification
would determine the classification in the statements of
comprehensive income and cash flows.
For example, if an asset (e.g. plant and equipment) is
determined to be an operating asset, then any expense and
cash flows related to that asset would also be classified as
operating in the statements of comprehensive income and
cash flows.
Some further sub-classifications would be required, for
example:
ñ assets and liabilities analysed as short-term and long-
term;
ñ assets and liabilities analysed by measurement bases;
ñ Phase C will address interim financial statements.
and
65
ñ income, expenses and cash flows analysed by function
and nature.
The DP provides broad principles and definitions for the
identification of operating, investing and financing
activities. However, classification of items would be
determined in the context of the way in which the entity
uses the relevant asset or liability, and the way in which it
views its activities, (the ‘management approach’ to
classification).
An entity’s policy for classifying the components in its
financial statements would be an accounting policy choice
to be decided by management and would be described in
the notes to the financial statements. Any change in an
entity’s classification policy would be implemented
through retrospective application of the new classification
policy to prior periods. The IASB has not yet considered
how a change in the use of an asset or liability should be
presented in the financial statements, nor has it considered
how an entity should allocate an asset or a liability that is
used for more than one purpose (e.g. an entity’s
headquarters building).
STATEMENT OF FINANCIAL POSITION
Disaggregation of assets and liabilities by nature of
activities
A fundamental shift as regards the statement of financial
position would be that the statement would no longer be
separated primarily between assets, liabilities and equity.
The proposals suggest that the statement (and, therefore,
the assets and liabilities) would be presented in separate
sections:
ñ ‘business’ (further analysed between ‘operating’ and
‘investing’);
ñ ‘financing’ (with separate presentation of financing
presenting assets and liabilities in order of liquidity would
provide more relevant information. The distinction
between short- and long-term would be based on the
shorter of (a) contractual maturity and (b) expected
realisation (for an asset) or settlement (for a liability). This
would replace the current segregation between current and
non-current based on the entity’s operating cycle.
Further disaggregation by different measurement
bases
In addition, the DP proposes that an entity should
disaggregate similar assets and similar liabilities that are
measured on different bases and present them as separate
line items in the statement of financial position.
Total assets and total liabilities
Entities would be required to disclose total assets and total
liabilities either in the statement of financial position or in
the notes to financial statements. An entity that presented
its assets and liabilities in short-term and long-term
subcategories would also be required to disclose subtotals
for short-term assets, short-term liabilities, long-term
assets and long-term liabilities either in the statement of
financial position or in the notes.
STATEMENT OF COMPREHENSIVE INCOME
Single statement
The DP proposes that all entities should be required to
present one single statement of comprehensive income.
The existing option to present the components of profit or
loss in a separate income statement would be eliminated.
In the statement of comprehensive income, a sub-total for
‘profit or loss’ or ‘net income’ would continue to be
presented, which would be the sum of the business,
financing and discontinued operations sections and related
income tax amounts.
assets and financing liabilities);
ñ income taxes;
ñ discontinued operations; and
ñ equity.
Further disaggregation into short- and long-term
Assets and liabilities presented within each section would
be further analysed as short-term and long-term, unless
66
Items of ‘other comprehensive income’ would be presented
separately in the statement. For each item in the other
comprehensive income section (except a foreign currency
translation adjustment relating to a consolidated subsidiary
or a proportionately consolidated jointly controlled entity),
entities would be required to identify and indicate in the
statement of comprehensive income whether the item
relates to (or will relate to) an operating activity, investing
activity, financing asset or financing liability. Foreign
currency translation adjustments relating to a consolidated
subsidiary or a proportionately consolidated jointly
controlled entity would not need to be identified with a
section or category in the statement of financial position
because the translation adjustment may relate to more than
one category of assets and liabilities in the statement of
financial position.
Disaggregation by activities, function and nature
The statement of comprehensive income would be
presented in separate sections:
statements into its functional currency.
STATEMENT OF CASH FLOWS
Focus on movements in ‘cash’
For the purposes of the statement of financial position, the
DP proposes that the ‘cash’ line item should not include
any ‘cash equivalents’. For consistency, the DP would also
require that an entity’s statement of cash flows should
reconcile the beginning and ending amounts of cash (rather
than cash and cash equivalents as is currently required).
ñ ‘business’ (further analysed between ‘operating income
and expenses’ and ‘investing income and expenses’);
ñ ‘financing’ (with separate presentation of financing
asset income and financing liability expenses);
ñ income taxes on continuing operations;
Direct method
Under the proposals, entities would no longer be permitted
to use the indirect method for presenting operating cash
flows. The DP would require that cash flows from all
activities (including operating activities) should be
presented using the direct method.
ñ discontinued operations (net of tax); and
Disaggregation by activities, function and nature
ñ equity.
The items of income and expenses allocated to activities
(i.e. not related to discontinued operations or taxes) would
be further disaggregated to the extent that this would assist
users in predicting the entity’s future cash flows:
ñ first, by function (e.g. cost of sales, selling expenses);
and
ñ second, within the above disaggregation, by nature
(e.g. materials, labour).
INCOME TAXES
The rules for allocating and presenting income taxes in the
statement of comprehensive income would remain
unchanged. This could result in an entity presenting
income tax expense or benefit in the discontinued
operations and other comprehensive income sections in
addition to the income tax section. Note, however, that
income taxes would never be allocated to the business or
financing sections, nor to categories within those sections.
As for the other financial statements, the statement of cash
flows would first be disaggregated by activities,
discontinued operations, taxes and equity. The proposed
classification by activities would be likely to result in
different classifications to those currently presented under
IAS 7 Statement of Cash Flows, because the classification
of cash flows would be based on the classification of the
relevant asset or liability in the statement of financial
position. For example, cash outflows relating to the
acquisition of property, plant and equipment are classified
as investing cash flows under IAS 7 whereas, under the
proposals, if property, plant and equipment were classified
as operating assets in the statement of financial position,
then cash flows related to those assets would be classified
as operating cash flows in the statement of cash flows.
Within each activity, the cash flows would then be further
disaggregated on the same basis as in the statement of
comprehensive income (i.e. first by function and then by
nature) if this would help users to understand how those
cash flows relate to information presented in the
statements of comprehensive income and financial
position.
Foreign exchange differences
Statement of changes in equity
The DP further proposes that an entity should present gains
and losses on foreign currency transactions in the same
section and category as the assets and liabilities that give
rise to those differences. This includes foreign exchange
differences that arise on remeasuring the entity’s financial
ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008
The requirements for the statement of changes in equity
would be largely unchanged. In particular, the principle of
classification by activity would not flow through into the
statement of changes in equity.
69
NOTES TO FINANCIAL STATEMENTS
Reconciliation schedule
The DP proposes to require (for the first time) presentation
in the notes to the financial statements of a schedule that
would reconcile two statements: the statement of cash
flows (starting point) and the statement of comprehensive
income (ending point).
The components of the reconciliation (i.e. reconciling
items) would be:
long-term maturity schedules would be based on
contractual maturity dates, with an explanation if the
expected realisation or settlement dates are significantly
different.
Operating cycle
To enable users to assess liquidity and evaluate an entity’s
ability to meet its commitments as they fall due, the DP
proposes that if an entity has an operating cycle of more
than one year, the length of that cycle should be explained
in the notes to the financial statements.
ñ cash received or paid other than in transactions with
owners;
ñ accruals other than remeasurements (this includes
depreciation and amortisation);
ñ recurring remeasurements for fair value changes and
revaluation adjustments; and
ñ non-recurring remeasurements (i.e. only after a
triggering event) for fair value changes and revaluation
adjustments.
A detailed consideration of the format of this
reconciliation is set out in Appendix B to the DP.
Accounting policies
Entities would be required to disclose the bases used for
classifying assets and liabilities in the operating, investing
and financing categories, and any change in those bases.
This disclosure should include a description of the entity’s
activities and should provide users with the necessary
information to understand management’s approach to the
business.
Contractual maturity schedules
If the entity decides to present its assets and liabilities in
order of their liquidity in its statement of financial position,
it would also present information about the maturities of its
short-term contractual assets and liabilities in the notes to
the financial statements.
All entities would also present information about the
maturities of their long-term contractual assets and
liabilities on an undiscounted basis. These short-term and
70
Illustrative examples
As will be clear from the discussion above, the proposals
set out in the DP would have a fundamental impact on the
appearance of financial statements. Appendix B to the DP
sets out extracts from financial statements for a
manufacturing entity (ToolCo) and a financial services
entity (Bank Corp), which are intended to illustrate the
proposed financial statement formats and proposed
changes from traditional financial statement formats.
NEXT STEPS
Comments on the DP are due by 14 April 2009. During the
comment period, the IASB and the FASB will conduct a
series of field tests to learn about the costs and benefits of
the proposed presentation model. The Boards will evaluate
these findings, along with the comment letters received on
the DP, with a view to publishing an Exposure Draft in
2010.
This publication contains general information only and is
not intended to be comprehensive nor to provide specific
accounting, business, financial, investment, legal, tax or
other professional advice or services. This publication is
not a substitute for such professional advice or services,
and it should not be acted on or relied upon or used as a
basis for any decision or action that may affect you or your
business. Before making any decision or taking any action
that may affect you or your business, you should consult a
qualified professional advisor. Whilst every effort has been
made to ensure the accuracy of the information contained
in this publication, this cannot be guaranteed, and the
author of this article will not have any liability to any
person.
ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008
Attracting rich individuals to Cyprus
Passports for Cash?
During these difficult times
that the global economy is
experiencing, the Cyprus
Government has adopted a
similar plan that Canada
adopted when Hong Kong
ceased to be a British colony
some years ago. Canada was
offering
nationality
/
passports to the local Hong
Kong residents provided
they deposited USDollars
500.000 for a certain period
By Antonis Loizou of years. So it did not
Antonis Loizou & Associates
particularly surprised us
Ltd - Property Valuers &
when we studied a rather
Consultants
recent change of policy by
the Cyprus Government to adopt a similar approach. This
“new” policy, is not published widely and few people came
to know about it. We, who are dealing with real estate [and
the lack of financing - liquidity in some respects] we are
all for such a policy, because, in addition to the much
needed cash in the economy [and by projection in the
building sector] Cyprus will attract wealthy individuals
who [hopefully] will require housing/office etc., a much
needed boost, again for the real estate. This policy which
was adopted on 11.7.07, has attracted so far only 15
wealthy individuals, but we hope that this will catch up
and we will attract more. Most of those who opted for the
scheme so far, are Russians and Ukrainians.
The scheme basically stipulates the following.
ñ A deposit at a local bank is required of m17.mil.
[minimum] and without the right to withdraw for a
period of 5 years.
ñ As an alternative to the above deposit, an applicant may
undertake to set up a business in Cyprus, whose turnover
should be in excess of m85.0 mil, p.a.
ñ Applicants must be at least 35 years of age and without
a criminal record.
ñ Those who do not meet these requirements and provided
they live as permanent residents in Cyprus for a period
of at least 7 years [continually] can apply for Cyprus
passport.
ñ A detailed check is carried out by the Government and
those who have business in the Turkish occupied areas
are not accepted as such under the scheme.
The report refers also of the interest that an Israeli multimillionaire [38 years old whose assets exceeding US
Dollars 1 bil. and who is already active in the Cyprus local
Jewish community] has expressed under this scheme.
Obviously we might attract tax-dodgers and others with a
not too clear source of income, but, other things being
equal, this is a “detail” during these difficult times. We
have already a number of mainly German ship
management companies and international stockbroking
firms who are based in Limassol and in their attempt to be
“accepted” by the local community, these firms have
contributed considerably [in terms of millions] both
in sports [mainly fooball] infrastructure and future projects
and most of them they employ numerous local,
professional people and others.
Who said that the Cyprus Government is not market
orientated? It reminds us also of the “questions for cash”
and more recently “made to measure private members bills
for cash” in the U.K. [House of Parliament and Lords].
Admittedly the U.K. situation is far from being
comparable to our Government’s approach, but it shows
the trends.
We do hope that small politics will not discourage this [and
others] much needed measures to help the economy, since
we do not expect that applications will reach thousands but
more, 1-2 hundreds [we hope]. Politics being what they
are, we studied with much worry the objections that some
political parties have for those measures that have been
decided by the Government and which refer to the
improvement of the local infrastructure and the touristic
sector [see delays on marinas, golf etc.]. These political
parties require that normal democratic procedures are
undertaken in all actions and the Government to be
precluded from entering into direct deals with third
parties.A recent example to be considered is the dispute
that has now come up referring to the Quatary Investment
fund, who expressed its interest to build a multi million
project comprising of offices/hotel/ apartments in the
center of Nicosia. If the normal tender procedures are
followed, the project will not come about even after 5
years.
During the Arch.Makarios era, “things were done”
speedily, but then, democracy at that time, did not work to
the same extent that is is now. As Winston Churchill said
“....democracy is not a good system, but it is the best
system that we have so far....”.
71
The going concern principle
Going concern: More Popular than ever
Sad but true going concern is
at its best as a hot
consideration for auditors in
the light of the severe
financial crisis. The audit
risk of giving an inappropriate audit opinion in
relation to the going concern
assumption is considerably
increased. In this manner
auditors need to be twice
By Andreas Vilanides
careful in their audit
Audit Assistant Manager
procedures in order to assess
Baker Tilly Klitou
whether the company of any
industry and any size has
correctly prepared its financial statements on a going
concern basis. However the impact of the economic crisis
is different between industries and jurisdictions.
THE GOING CONCERN ASSUMPTION
The going concern assumption is a fundamental principle
in the preparation of financial statements. Under this
assumption an entity considers that will continue in
operational existence for the foreseeable future. A
company prepares its financial statements on a going
concern basis unless there is an intention by management
for liquidation or ceasing trading. Once the assessment by
management is that the going concern is appropriate assets
and liabilities are recorded on a basis that the company will
be able to realize its assets and discharge its liabilities and
obtain refinancing if considered necessary.
RESPONSIBILITIES OF DIRECTORS AND
AUDITORS
The responsibility for the assessment of going concern lies
with the company’s management. Management is required
to assess whether there is a material uncertainty related to
events or conditions which may cast significant doubts
about the company’s ability to continue as a going concern.
72
In such a case management is required to disclose those
uncertainties in the financial statements. In order to assess
the company’s ability to continue as a going concern
management takes into account all available information
about the future which is at least, but not limited, twelve
months from the balance sheet date.
The auditor’s responsibility is to obtain sufficient
appropriate audit evidence about the appropriateness of
management’s use of the going concern assumption in the
preparation and presentation of the financial statements
and to conclude whether there is a material uncertainty
about the entity’s ability to continue as a going concern.
The auditor must consider the appropriateness of
management’s use of the going concern assumption even if
the financial reporting framework used in the preparation
of financial statement does not include an explicit
requirement for management to make a specific
assessment of the entity’s ability to continue as a going
concern.
AUDIT CONSIDERATIONS IN TODAY’S
ECONOMIC ENVIRONMENT
Over the last months, there has been a business failure and
finally a collapse of some of the world’s largest financial
institutions, government financing of the economy as a
makeweight and financial injections, an extreme
depression of global credit markets and a general
increasing worries for global recession.
The degree to which companies and their financial
statements will be affected by the current economic
environment will depend in matters as the following:
ñ
The industry in which the company operates and the
potential impact the economic downturn on the
volume of sales of its products or services.
ñ
The company’s financing ability through credit
facilities or credit access from financing
The going concern principle
intermediaries and trade and other creditors.
ñ
The investment of the companies in financial
instruments and its extent, as it is the market most
hardly hurt by the credit crunch.
Auditors must deal with the risks associated with the
ability of the companies under audit to continue as a going
concern, amongst others. The reduced availability of credit
and liquidity stiffness in short-term financing, could lead
to indications and conditions or jeopardize the going
concern ability of the company.
Indications and conditions of going concern problems
include:
ñ
the withdrawal of credit facilities from entities that
previously had easy access to credit as and when
necessary;
ñ
the potential change of terms on existing credit
facilities by lenders
ñ
guarantees may not be available by those charged
with governance or other group entities and of
significant value
ñ
the likely refusal from the banks to renew the existing
credit facilities
ñ
clauses in term loans affecting the classification of
such liabilities on a company’s balance sheet and
whether the lenders may trigger these clauses
ñ
the financial and operational performance of the
company is deteriorating; trading losses and adverse
liquidity and profitability ratios in conjunction with
valuation issues have led or are expected to lead to
breaches in lending covenants
ñ
loss of key customers/suppliers
ñ
loss of major market, franchise, licence
ñ
inability to pay taxes
The above and other factors, may affect the nature and
extent of audit evidence available; i.e. the potential to
obtain confirmation of the existence of facilities from
banks and third parties. In addition the professional
judgment required in assessing the effect of one or more
factors on the risk of material misstatement on the
financial statements may be more difficult than in prior
years.
In response to the increased risk of giving an inappropriate
audit opinion in assessing management’s assumption to
adopt the going concern as appropriate in the preparation
of the financial statements the auditor must consider the
process management followed to make its assessment, the
assumptions on which the assessment is based and
management plans for the future.
Analysis of cash flows may be significant factor in
management’s assessment which must be carefully
reviewed and assessed.
Assumptions that have been used in prior years may not be
relevant any more and may need to be adjusted to be
representative of the current economic environment.
IN CONCLUSION
Auditors should bear in mind that each set of financial
statements to be audited in this year are likely to be highly
risky in relation to the going concern assumption and its
appropriateness as adopted by the management in the
preparation of the financial statements, in the context of
the current adverse economic conditions. In this respect
auditors should take more and different steps to prevent
audit failures. Such steps will include effective assessment
of and responses to the risk associated with going concern
assumption but other increased risks of material
misstatements due to the economic downturn conditions as
well. An increased attention should be devoted in assigning
audit engagements to competent and experienced audit
staff. It must be ensured that the level of supervision,
direction and review by the engagement manager and
partner, consultation and quality control review,
documentation of significant matters, as well as the nature
and frequency of communications among the engagement
team, are appropriate to the circumstances of each audit.
The importance of professional skepticism is critical in
these hard times.
73
Foreign workers in Cyprus
Foreign Employment in Cyprus
The Minister of Labour,
Sotiroula Charalambous, this
week launched a campaign
to stamp out illegal
employment and non-registered employment focusing
on workers from third
countries, within the general
context
of
reducing
unemployment. It is, therefore, evident that as the
By Costas Apostolides,
economy
slows
down
Economist
employment of persons from
third countries (that is non-EU citizens) will become an
issue, and employers have been warned to keep to the law.
Deciphering what the situation is with regard to foreign
workers is difficult because the statistical definitions differ,
and the various data sources provide different results
according to the definitions used, the period referred to
(i.e. average for year or a figure at one point in term), and
the issuing agency. One of the major differences being
between annual full time employment equivalents and
physical persons, while another is full time as compared to
part time work, and yet another arises from registered
employment with the social insurance scheme and
unregistered work.
As a consequence the range of people employed in Cyprus
in 2007 appears on the basis of data from the Statistical
Service to be 387,600 and 421,352 shown by the
Department of Social Insurance. Whatever the figure one
uses the number of foreign workers (EU and others) is
extremely large, varying from about 80,000 in the former
estimate, to 119,000 in the latter for 2007. Consequently,
the estimates of the number of foreign workers in Cyprus
varies from 21% in the former to 28% in 2007. This is
probably the highest ratio in the European Union.
In 2008 the level of employment of foreigners appears to
74
have been somewhere between those extremes with social
insurance data showing 108,000 in October 2008 and
100,000 average for the first ten months of last year. Again
confirming very high levels of foreign employment in
Cyprus.
In Table 1 the social insurance data shows 32.3% of
employees registered being foreigners, with third country
citizens being greater than EU citizens. As a consequence
it is likely that the Government will endeavor to restrict
third country employment further. For the Ministry of
Labour has already announced that illegal cheap labour
will be tackled, and because EU regulations do not provide
Cyprus with derogations for employment action on
employment of EU citizens cannot be taken. Consequently,
restrictions on third country employment, other than
students, are likely to be tighter.
The structure of employment for foreign labour is shown
in Table 2. As one would expected the largest proportion of
foreign employment is household labour (housemaids,
gardener’s etc), but 100% is clearly too high a proportion.
Some Cypriots continue to be employed in this sector. The
other sectors drawing upon foreign labour are hotels and
restaurants (38%), construction (27%) extra-territorial
bodies, real estate and businesses services, agriculture and
fisheries.
A recent study prepared by the Economic Research Center
of the University of Cyprus found that foreign employment
has increased the probability of unemployment of younger
people (20-29 year age range). But that Cyprus university
graduates are not affected at all. Foreign workers also
increased the likelihood of part time employment, by the
local population.
Clearly, policy on third country employment in Cyprus has
to be reconsidered. There seems to be no alternative but to
restrict employment from third countries, and to tackle
illegal immigration and employment.
Foreign workers in Cyprus
TABLE 1
EMPLOYEES REGISTERED FOR SOCIAL INSURANCE 2007
CYPRIOTS / FOREIGNERS
NO.
%
298,863
70.9
Turkish Cypriots
3,456
0.8
Third Countries
66,522
15.8
EU
52,511
12.5
421,352
100.0
Greek Cypriots / Others
Total
Source: Department of Social Insurance
TABLE 2
TOTAL EMPLOYMENT, EU AND FOREIGN WORKERS IN CYPRUS, 2007
(000’s)
ECONOMIC ACTIVITY
EMPLOYMENT
A. Agriculture
TOTAL
FOREIGN
WORKERS
FOREIGN
(%)
16.9
3.8
22.5
B. Fisheries
0.5
0.1
20.0
C. Quarrying
0.7
0.1
14.2
37.6
6.7
17.8
1.7
0.04
2.3
F. Construction
38.3
10.2
26.6
G. Wholesale / Retail
70.8
9.4
13.3
H. Hotels / Restaurants
40.0
15.2
38.0
I. Transport / Communications
26.0
2.5
9.6
J. Financial Institutions
17.8
0.8
4.5
K. Real estate, businesses services
24.8
5.4
21.8
L. Public Administration / Defense
35.1
2.2
6.3
M. Education
21.7
1.1
5.1
N. Health / Social Services
15.3
1.5
9.8
O. Other Social
19.9
2.7
13.6
P. Household employees
17.5
17.5
100.0
2.8
0.7
25.0
387.6
79.9
20.6
D. Manufacturing
E. Electricity, water
Q. Extra-territorial Bodies / Others
Total
Source: Statistical Service
77
Audit Monitoring
“The Audit Monitoring Visit :
- Important Considerations”
It was some years ago when
our firm realised we had to
make a serious decision :
should we decide to aim to
reach required standards,
adopt new procedures,
employ further experienced
staff and invest considerable
time, energy and money so
as to stand a chance of
getting through an audit
monitor visit with a
satisfactory result ?
investment of time and it is well worthwhile giving it your
best shot !
I look around the office and whilst the faces I saw prior to
the monitoring visit were faces of utter determination and
at times frustration, those faces today are calm and the
message they give is simple “mission accomplished, life
moves on, it was a challenge .......and now we must build
on what we have achieved “.
So many years later, our practices now have the chance to
go through a further reorganisation and whilst for many the
monitoring visit appears as once VAT appeared ....”a
burden”, really it should be viewed as an opportunity to
improve further , as a “challenge” and an “opportunity” to
learn more and for those who think they are amongst the
“progressive and promising “ , their chance to actually
prove it !
By Anthony Ashiotis, FCCA,
Managing Partner
Anthony Ashiotis & CO
The decision we took then
Certified Public Accountants was unanimous, the effect it
had
upon
us
was
“exhausting” and the result
..... “MOST REWARDING” !
I guess at this stage the reader will realise our visit proved
satisfactory but if you visited our firm back in 1990 when
it was established with a mere CYP 5000 loan from the
local co-op and if you have heard about the poor success
rate of monitoring visits, I guess our actions were such that
helped us go a long way ... indeed it was not easy.
I remember the time when VAT was first introduced in
Cyprus back in the year 2002, the panic and stir it caused,
the time, effort and expenses practices engaged in so as to
be able to effectively enforce VAT legislation by adopting
new methodologies, new accounting systems, new
technology, countless training and development, let alone
briefing the clients on what they had to do!
The result was that accountants became more organized,
clients records were updated on a regular basis, income for
accountants became greater due to provision of VAT
services whilst clients had to upgrade their accounting
systems which in turn helped both accountants and
auditors. Therefore, what at first appeared as an obstacle,
what originally appeared as a real burden on all, today is
simply part of life and an aid in many senses.
But how have we as a firm managed to get a satisfactory
visit ?
In brief what we had to do was the following:
The question at this stage is why being a relatively small
firm did we decide to invest so many resources towards
achieving the almost “impossible”?
1. Revise our policies and procedures from top to bottom
without any “fear of change” always with a positive
attitude and a strong will to succeed.
The answer is simple. Size has no relevance and the
outcome can be positive irrespective of the result of the
visit. Whilst aiming to improve, learning and experiencing
change with a progressive attitude can only produce a
positive impact on the firm whether the monitoring visit
proves satisfactory or not. The effort alone is a good
2. Realise that if we pass or fail it is not the end ......but a
“new beginning”!
78
3. Reorganize our clients, our staff responsibilities and
where needed employ new staff.
Audit Monitoring
4. Organize in-house training and attend external courses.
5. Employ consultants who are experts in the field (In our
case PCP Limited of the UK - Mr. Michael Scott).
6. Reward hard working employees and encourage
overtime work so as to minimize any negative impact
on flow of work.
7. Hold regular meetings with managers and staff and our
consultants.
If one has “character” this will bring results sooner or later
and under any circumstances the chance is that with real
“EFFORT”, a monitoring visit can produce if not a pass at
least a recognition that a lot has been achieved and help
identify those areas that require greater attention.
In our case, we continue to target areas for improvement as
one can not ignore that fact that the monitoring visit
repeats itself and therefore at some future stage we will be
tested once again !
In conclusion:
8. Invite “hot” and “cold” reviews.
ñ The ACCA monitoring visit can produce rewards
9. Perform regular self-assessment of our firm, our
procedures, records, overall organization and quality of
both our audit and non audit services.
whether a practice “passes” or “fails”, one simply has
to learn from the experience and move on.
ñ A realistic self-assessment and if possible obtaining the
10. Visits to professional websites, reading of related press
articles of ACCA, ICPAC and professionals in the
business and participation on many related professional
courses organized by ICPAC and ACCA.
opinion of reputable professional consultants can help
a lot towards planning those changes that need to
happen and also monitoring progress along the way.
ñ Size of firm is not an important factor, what is critical
11. ‘’HARD’’ work !
HOW LONG DOES IT TAKE TO REACH
SATISFACTORY MONITORING STANDARDS?
In our case it took about two and a half years to get things
where we wanted and I think two to three years is a
realistic time required to meet a level at which a
monitoring visit can prove satisfactory. How long exactly
will depend on a number of factors:
a) Existing standards of the practice in question;
b) Capability of its staff;
c) Premises (Spacious offices are always helpful in redesigning systems and procedures, re-allocating
responsibilities, employment of further resources and
so on );
d) Size and number of clients (The greater the size and
number, the more effort required);
e) Attitude of staff (Are they willing and able to put in
extra hours?);
f) Money (this is not a big factor but it is a factor to be
considered as one has to invest in courses, training,
consultation etc).
is the will to improve.
After so many long years of hard work, having finally
reached the standards we aimed for and having concluded
our long expected monitoring visit, I can only say that for
all of us at “Anthony Ashiotis & Co”...... it’s a “new
beginning’’ !
AT THE END IS IT A CASE OF THE STRONGEST,
MORE PRIVILEGED AND LARGEST?
Our story proves the opposite !
79
Cyprus group relief provisions
Are Cyprus group loss relief provisions compatible
with European Community Law? - Part 2
INTRODUCTORY
COMMENTS
Andreas Iosif
Manager
Tax Services
Following my recent article
(September 2008 issue of
Accountancy),
on
the
incompatibility
of
the
Cyprus domestic tax provisions on group relief with
the European Community
(thereinafter referred to as
“EC”) Law another recent
European Court of Justice
(thereinafter referred to as
“ECJ”) ruling highlighted
the need for these Cyprus
group relief provisions to be
amended.
THE FACTS OF THE PAPILLION CASE
Societe Papillon (thereinafter referred to as ‘Papillon’) was
the owner of various subsidiaries as illustrated in the group
structure below:
Following the ICI (case C-264/96) and Marks and Spencer
(Case C-446/03) rulings on UK group relief provisions, on
27 November 2008 the ECJ has announced its decision on
the Papillon case (case C-418/07). The subject matter of
this case was the French group tax consolidation
provisions which held to be incompatible with the EC Law.
More specifically, the French group relief provisions
infringed article 43 of the EU Treaty ‘freedom of
establishment’.
FRENCH TAX LEGISLATION
Under the French domestic tax legislation, French
companies that are members of a group can file a
consolidated tax return. As a result, the profits and losses
realised by the French group companies are consolidated
and the internal transactions within the group are
neutralised.
For a group to be eligible to claim these French tax law
provisions, group companies should be connected through
at least a 95% ownership interest. However, a parent
company subject to French corporate income tax is
prohibited from including within the group tax
consolidation French lower-tier subsidiaries held indirectly
through a foreign company which is not subject to French
corporation tax and does not have a PE in France.
80
ILLUSTRATED ABSTRACT OF THE PAPILLON
GROUP STRUCTURE
Upon filing its consolidated tax return, Papillon has
included Kiron SARL’s (thereinafter referred to as
‘Kiron’) financial results and therefore the tax losses of
this indirect holding had been taken into account for the
determination of Papillon’s French final tax obligations as
a group.
This was not been accepted by the respective French tax
authorities on the basis that Kiron was owned indirectly
though a non-French tax resident company which was not
subject to tax in France. French tax authorities issued a
revised assessment for the group without taking into
account Kiron’s results.
Papillon considered this as a restriction of the freedom of
establishment (article 43 of the EC Treaty) since in a
similar domestic situation i.e. a holding company resident
in France could consolidate for tax purposes a French subsubsidiary which was owned by a French subsidiary.
Therefore Papillon filed an objection against this to the
French Court. The French court in turn stayed the
proceedings and referred the Case before the ECJ by virtue
of article 234 of the EC Treaty for a preliminary ruling as
to whether the above described French tax legislation
provision was incompatible with article 43 of the ECJ.
At this stage, it is worth to mention that the subject matter
of this case is not similar to those of ICI and Marks and
Spencer. The subject matter of these later cases was the
cross border group relief between Member States. The
subject matter of the present case is whether a non-tax
resident company can provide the necessary link between
a resident company and a resident sub-subsidiary
company.
CASE ANALYSIS
Historically, the ECJ accepted the fact that direct tax is a
competence of each Members States but it is now settled
case law that such competence must be exercised
consistently with the EC Law. Therefore, pursuant to the
EC Treaty Article 43 in conjunction with Article 48,
companies resident in any EU Member State have the
freedom of establishment within the European Union zone.
These two aforesaid articles have been designed for the
purposes of preventing the host state to discriminate nonnational companies. However, it is also settled ECJ case
law that the state of origin should not implement
provisions which prevent its national companies from
investing in other Member States.
Therefore, the examination concentrated as to whether the
French tax consolidated provisions were restricting a
French company from investing in another Member State
via a subsidiary company.
From the outset, it is clear that the French tax consolidated
provisions provide for an advantage for those companies
that could apply these provisions. This was due to the fact
that consolidated companies could utilise their tax losses
within the group immediately rather than carrying these
tax losses forward.
Advocate General (Kokott) (thereinafter referred to as
‘AG’) said that two conditions must be met to be able to
apply this French tax regime; (1) all French companies
must be uninterrupted chain and all companies in the chain
must be included in the fiscal integration (2) all companies
must be subject to French taxation.
Therefore, as Artist Performance and Communication
(thereinafter referred to as ‘APC’) was not a French tax
resident company it could not be included in the
consolidated integration and therefore the link was broken.
To this end, Kiron, the French sub-subsidiary company
could not be included in the tax consolidation either.
The ECJ agreed with the AG and in paragraph 30 of his
opinion stated that these French tax provisions creates a
different treatment in an objectively comparable situation.
Based on these findings, a restriction of the EC law was
found which in principle is prohibited.
AG also stated that such restriction is only permissible if it
is justified by overriding reasons of public interest. It is
also crucial that such justifications are not beyond what is
necessary to attain it he said.
FRENCH JUSTIFICATIONS OF THE
RESTRICTION
Preserve the allocation of the power to impose taxes
between Member States.
ECJ advocated that this justification was accepted in the
case of Marks and Spenser and Oy AA (case C - 231/05)
emphasising, however the facts of these cases were
different. The object of these cases was the utilisation of
losses of a company resident in a Member State other than
that of the claimant company.
In this case, the claimant company was resident in a
Member State where the company with the losses was also
resident. Therefore since Kiron was also subject to French
tax France’s power to impose taxes on Kiron was not
diminished.
COHERENCE OF THE TAX SYSTEM
The French Court stated that the current French tax
consolidated provisions assist the coherence of the French
tax system. This was due to the fact that these provisions
require the neutralisation of the inter-company transactions
between the companies included in the tax consolidation.
81
Having included a sub-subsidiary within this integration,
there was a risk of losses to be deducted twice as illustrated
in the example below. Due to the fact that the French subsubsidiary realised losses, the Dutch subsidiary may
impair its investment in the shares of this French subsubsidiary company. The French holding company in turn
may also proceed with a depreciation of the investment in
the shares of the Dutch company.
In such a case, should the sub-subsidiary company was to
be included in the tax consolidation, its losses will be taken
into account but the inter-company transactions would not
be completely neutralised. This is because the Dutch
subsidiary would not be part of the integration and thus the
parent company’s impairment provision for the Dutch
company’s shares (which relates to the loss of the subsubsidiary French company) would not be eliminated.
At the outset, ECJ accepted this justification. However,
this justification failed the proportionality test. ECJ
accepted that the cohesion of each Member States’ tax
system should be protected, however, where this was
possible less restrictive provisions should be put in place.
In addition, where the EC law provides for any available
mechanism to assist Member States of a harmonised
cooperation, these should be utilised. Therefore, as
exchange of information mechanisms (such as Mutual
Assistance Directive) is available, relevant information can
be obtained in order for a Member State to protect the
82
cohesion of its tax system.
Moreover, even if the ECJ did not make any reference,
France and the Netherlands have also a double tax treaty in
force. Mutual assistance procedures are also available
pursuant to this treaty.
In conclusion, the ECJ ruled that the French tax
consolidation provisions were incompatible with the EC
Law.
Effect of the above ruling on the Cyprus tax legislation on
group tax relief provisions
Cyprus relevant group tax relief provisions
.... In determining whether one company is by seventy five
per cent subsidiary of another company, the other company
shall be treated as not being the owner .....
(iii) of any share capital which it owns directly or
indirectly in a company not resident in the Republic.
Pursuant to the above provisions of the Cyprus tax
legislation, group relief is not available for Cyprus
companies as illustrated below.
A (Cy) cannot form a group for the Cyprus group tax relief
provisions with C (Cy) Ltd and D (Cy) Ltd because the
link is broken with the investment in B (non-Cy) Ltd. The
example above is similar to the facts of the main
proceedings of the Papillon Case above.
Therefore, this is an area of the Cyprus group relief
provisions that seems to be incompatible with the EC law
and ECJ rulings.
We are now in a very competitive environment where
almost all jurisdictions around the world have appreciated
the importance of tax revenues and the need to have an
investor attractive and friendly tax system. Many EU states
have already expressed their intention to have a tax reform
to that effect.
In addition due to the credit crunch, the world economy
currently finds itself in a crisis and all governments are
now considering alternative ways to raise revenues. The
vast majority have come to the conclusion that a tax reform
with low corporation taxes and reputable tax system would
attract significant funds in their countries.
Even though Cyprus has a very favourable tax system it
should take into account these global trends and proceed
with the relevant tax law amendments so that to avoid
being challenged, protect and enhance its current
reputation. It is accepted that the Cyprus tax system is a
driving force for many investors to structure their
investments though Cyprus. Therefore, any level of
uncertainty in its tax legislation (such as group tax relief )
should be eliminated as a matter of urgency.
Accountants in the Public Sector
The Public Sector recognizes the invaluable
contribution of its accountants
By Stelios Ioannides
Public Sector Committee
Major reforms in the Public Sector in recent years have
evolved around the fol-lowing:
1. Better Accountability and Decision Making,
2. Risk Management and Control,
3. Quality control,
employed in the wider Public Sector, took the initiative to
meet with the Director of the Department of Public
Administration and Personnel of the Ministry of Finance,
in February 2009, and discuss the above issues. The
Director of the Department of Public Administration and
Personnel recognised the invaluable contribution of
accountants to the Public Sector and expressed his
willingness to support them, whenever possible. Issues
raised included:
4. Efficiency and Effecti-veness of services offered.
Public Sector qualified accountants have been in the heart
of such reforms and hence more and more Public
Organizations sought to recruit them and utilize their
knowledge and expertise. Despite their evident
contribution however, career prospects for them have been
uninspiring at best. Starting salaries in many cases were
low and career progression was very slow resulting to
increased turnover.
The Public Sector Committee of ICPAC, identifying a
number of issues concerning qualified accountants
1. The diversity in salary scales between Public Sector
Organisations employing qualified accountants needs
to be reassessed,
2. In positions requiring qualified accountants in the
Public Sector, the requirement, for applicants to be
members of ICPAC (a significant number of job
descriptions have already been amended thus) and,
3. The quantification of post-qualification experience of
qualified accountants applying for positions in the
public sector.
85
Hiring the right people
Topgrading: Process used by top companies to
hire, coach and keep the best talent.
OVERVIEW:
Marios Paraskeva,
BSc, MBA, CPA
Advisor to the CEO
Russian Commercial Bank
(Cyprus) Ltd
Topgrading is about filling
every position in the
business with top candidates
(A
players)
at
the
appropriate pay grade. It is a
process which involves the
seeking out, hiring and
retaining these A players by
using the best assessment
methods so that:
ñ
less
than
10%
mistakes are made in
hiring and promoting
ñ
improves existing staff through coaching
ñ
redeploys staff who are not performing at the highest
level in a position in which they can excel
The old slogan that “People are the most important asset”
is no longer applicable; people are not the most important
asset for a company, the right people are!
It is therefore absolutely vital to approach important
decisions about hiring, promoting, developing and
redeploying people with at least as much rigour as we do
for any other important business decisions. The right
person has more to do with character traits and inborn
capabilities rather than specific knowledge, background or
skills. Knowledge, background and skills are essential
factors but not in themselves sufficient. The character traits
and inborn capabilities principles of hiring the right people
have been adopted by many high performance
organizations such as GE, Microsoft, Procter & Gamble,
3M and many others.
Within an organisation, people are divided according to
performance into A players, B players and C players.
86
When a company is topgrading, by definition is not
accepting a mixture of A, B and C players; it is proactively
seeking to fill each team with A players.
An A player is one who is among the top 10% of those
available for a position and is doing the job at the right
price, in the right location and at the right time. (B players
fall into the next 25% of those available and C players fall
below the top 35%).
BENEFITS:
A players bring huge benefits to a business because: they
contribute more, they innovate more, they work smarter,
they earn more trust, they display more resourcefulness,
they take more initiative, they develop better business
strategies, they articulate their vision more passionately,
they implement change more effectively, they deliver
higher quality work, they demonstrate greater teamwork,
and they find ways to get the job done in less time with less
cost.
They are clearly essential in a high performance culture.
The most truly high performance organizations have at
least 75% of their people in the A player range and almost
no C players. Research however, has shown that the reality
is different in most business. The split is more likely to be:
25% A players, 55% B players and 20% C players.
It therefore reasonable to assume that, most organizations
need to take a journey towards high performance. The
challenge is to convert B players to A players and examine
ways to help C players become at least B players.
This journey though, requires serious investment; however
the costs of making poor hiring decisions are even more
costly. According to research carried out with more than 50
companies, the average costs of mishiring are as follows:
ñ Base Salary of less than Eur 60K: 14 times the salary
Hiring the right people
ñ Base salary between Eur 60K- Eur 120: 28 times the
TOPGRADING ASSESSMENT PROCESS:
salary
ñ All Salaries: 24 times the salary
The above figures are very conservative as they did not
take into consideration maintenance and disruption costs.
The topgrading assessment process combines (a)
Competency based interviews, and (b) Chronological InDepth Structured Interview. Topgrading enables the hiring
manager to more accurately, as compared to more
traditional unstructured interviews, identify and assess the
best candidates.
KEY THEMES:
The six competencies assessed are as follows:
ñ Recruitment and retention of A players is the leader’s
accountability; HR functions can facilitate the process
but only effective leaders can attract and retain A
players
ñ A players tend NOT to work for B or C players; they
become stifled and either leave or become ineffective
in their role. Leaders therefore, need to continuously
develop themselves as well their teams to ensure A
player status
ñ A players tend to be more cost effective than B and C
players as they contribute greater value
ñ Whilst compensation is important, it is not the
overriding factor in attracting and retaining A players.
Other factors such as challenge, variety and career
progression also need to be considered. Leaders need to
maintain the right mix of these factors.
ñ Business Skills: Encompasses an understanding of
customer needs and priorities to provide quality service
ñ Commercial Effectiveness: Encompasses productive
contribution to revenue generation
ñ Control Environment: Encompasses an awareness of,
adherence to and compliance with governance and risk
policies and procedures as well as compliance policies.
ñ Management & Leadership: Encompasses the ability to
adapt to change and effective decision making
ñ Personal
& Interpersonal Skills: Encompasses
integrity, initiative, and commitment through
interactions with colleagues and clients.
ñ Not all talented people are A players. It is necessary to
ñ Technical Knowledge: Encompasses an in-depth
view A players in the context of the organization’s
environment and ensure that roles and responsibilities
are clearly defined.
understanding of relevant and up-to-date technical
knowledge.
ñ A players do exist and required at all levels in the
business
ñ Top grading cannot accommodate C players; leaders
must coach and train to drive up performance levels
and therefore upgrade C players to at least B players.
ñ Many obstacles to topgrading exist. These range from
lack of available talent to location difficulties.
Whatever the obstacles are, leaders can and should
overcome them.
Following the competency interviews, if the candidate is
recommended to progress further, the Chronological InDepth Structured Interview is then undertaken. This
interview can take up to 4 hours and depending on the
seniority of the candidate, it is run by two senior staff and
is a thorough walk-through of someone’s work and
academic experience, achievements and challenges. The
structure of the interview helps the interviewers “get under
the skin” of a candidate by looking at the underlying
values, beliefs and understanding what guides their
decision making process.
87
Auctioning property
Selling Property by Auction
It is not the last but possibly the best choice, with the current market conditions
It is outdated to believe that
selling property by auction is
an indication of the financial
problems of the seller.
Auctioning is simply a good
option and under certain
conditions perhaps the best
option that the seller has in
order to sell his property. It is
perhaps the most impressive
way of making a sale but
also the most competitive for
buyers. Auctioning is a
George Mouskides
different and effective
Manager
method of selling property. It
Smart FOX Estate Agency
is an intense accelerated
marketing process which
gets the property drawn into a public sale.
The history of auctions, according to ancient Greek
inscriptions, began in 500 B.C. in Babylon when once a
year beautiful women were auctioned off to suitors. In
Ancient Rome plots of land were granted using auctions.
During the 17th century in France works of art and
furniture was sold via auctions.
Why Auction? Contrary to public opinion, selling
property via an auction offers additional and more
effective ways of selling than the traditional methods of
promoting property.
Auctioning has advantages for both the seller and the
buyer.
The seller knows that,
the buyers that are present at the auction are ready to buy,
ñ that their property will be sold at true market value,
ñ the auction accelerates the sale,
ñ that a specific day for the negotiation of the property
exists,
ñ that the process limits visits to the property by buyers
that have not been screened,
ñ that he himself controls the terms of the sale,
ñ that the property is sold as is,
ñ that the auction creates an effective way of advertising
the property, and
ñ that the price at the auction might exceed the expected
price of the sale.
88
The buyer knows that,
ñ he gets property at a reasonable cost in a competitive
sales process,
ñ the seller wants to sell,
ñ he determines the final price,
ñ the auction limits the duration of the negotiations, and
that
ñ he is competing on equal terms with all other interested
buyers.
The English method is the most widely used auction.
The participants outbid each other openly and the auction
ends when the participants stop bidding and the last
(highest) bidder is the victor. The seller has the right to
determine a minimum price of the sale (Reserve Price) and
if the amount at the auction does not exceed it, the auction
is postponed. The seller can also select an absolute
(Absolute) auction in which a minimum price is not
determined and the highest bidder is selected. In both cases
the seller has the right to withdraw the property from the
auction if an agreed minimum with the auctioneer is not
reached during the bidding process.
The auction begins from the day that the seller and the
Auctioneer agree on the terms and the method of
promoting the property and the date and location of the
auction is fixed. The Auctioneer will publicize and draw
the attention of potential buyers and will show the property
on predetermined viewing days.
The Location where the Auction takes place can be the
property itself or any other location that the person in
charge of the auction might indicate. The interested buyers
indicate that they intend to participate in the event and to
compete for the property. The victor at the auction is
obliged to immediately pay a deposit (usually 10% of the
value of the property) and the balance within 30 to 60 days.
In the event that the buyer does not manage to cover the
remaining balance, he loses the deposit.
It is commonly accepted that selling property by auction
is one of the most effective and speedy methods and is
increasingly preferred by buyers and sellers because it
offers another approach in the sale of property. Auctioning
is a method that all sellers need to evaluate before they
decide on how they will make their property available for
sale. For more information, please contact us on tel 800
800 82.
Risk Management Practices
Become a Risk Intelligent Enterprise
When it comes to risk and
assessing the impact it can
have on the organization,
there is much at stake;
Customers, Revenues, Reputation,
Brand,
and
Shareholder Value. Welldesigned and implemented
risk management practices
can help to protect and
leverage these valuable
assets.
Harry Xenophontos, CISSP
Senior Consultant
Enterprise Risk Services
Deloitte Ltd
ñ Many
industries engage in sophisticated risk
management practices, yet these are often narrowly
focused. Most organizations do not intelligently
manage the full spectrum of risk across the
organization.
ñ Risk Intelligent Enterprises break through risk
management “silos” to address the possibility of risk
interactions and risks in combination.
ñ Risk Intelligence pays as much attention to the upside
ñ Do you have insight into
as the downside by considering the ability to anticipate
and react to a market opportunity as an important part
of the risk framework.
the full spectrum of risks
facing your company?
ñ Organizations that are most effective and efficient in
ñ Does your organization have the resilience to recover
from a severe disruptive event?
ñ Do you systematically include risk considerations in
the development of corporate strategy?
ñ Do you embrace intelligent risk-taking as a means to
competitive advantage and increased shareholder
value?
ñ Do you consider both vulnerability and probability in
managing risks to both existing assets and to future
growth will, in the long run, outperform those that are
less so. At stake is not only earnings and market cap,
but also opportunities for growth, gains in market
share, and the ability to become viewed as an industry
leader.
Traditional approaches to risk management emphasize
mitigation, focusing on the readily apparent risks facing a
company in the areas of security, privacy, credit,
regulatory, technology, fraud and more. These threats are,
of course, important and must be addressed.
your risk assessment process?
ñ Do you consider risk scenarios and the interaction of
multiple risks?
ñ Have you infused Risk Intelligent practices into your
corporate culture?
In today’s environment of complex and multiplying risk,
chief audit executives (CAEs) have a unique opportunity to
influence multiple fortunes - their company’s, their
department’s, and their own.
As you know, Enterprise Risk Management is currently
one of the hottest topics in the marketplace. Yet despite this
widespread awareness, little consensus exists regarding
ERM philosophy, methodology, or even an agreed-upon
definition of the term.
But enlightened risk managers (and we are talking about
the entire C-suite here, not just the chief risk officer) don’t
worry just about the bad things that could happen, such as
the theft of sensitive customer data. They also consider the
good things that might occur, like introducing a hit product
to the marketplace. While it’s important to evaluate
potential crises, it’s equally critical to consider risks that
are linked to success so you can capitalize on
opportunities.
WE CALL THESE TWO FACES OF RISK
“REWARDED RISK” AND “UNREWARDED
RISK.”
In enterprises where risk management capabilities are not
fully developed, unrewarded risk often represents the full
extent of their risk management activities. Unrewarded
risk gets its name from the fact that there is no premium to
91
be gained for taking certain kinds of risks (for example,
risks affecting operations, integrity of financial statements,
and compliance with laws and regulations). Unrewarded
risk represents what poker players call “table stakes”:
you’ve got to ante up just to get into the game. The ante, of
course, doesn’t guarantee success; it only ensures that a
hand of cards will be dealt to you. The attendant risks can’t
be ignored, but the primary incentive for addressing them
is value protection, not value creation.
Conversely, rewarded risk focuses on value creation; it
involves managing risks to future growth, including
putting capital at risk and making profitable bets. In
rewarded risk-taking, a company receives a premium for
taking and managing risks - and receiving approval in the
marketplace - associated with new products, markets,
business models, alliances, and acquisitions. Rewarded
risks represent the strategic bets that you place during your
poker game. You’ve assessed your hand, sussed out the
competition and wagered a stack of chips with the
expectation of raking in many more than you’ve laid out.
In business, rewarded risks are those bets you make as you
develop new products, enter new markets or acquire new
companies. The primary motivation for taking rewarded
risks is to spur value creation.
Fixate on just one side of the coin and you’ll get a onesided result. Focus on value creation (rewarded risk) to the
exclusion of value protection (unrewarded risk) and you’ll
quickly find yourself on the slippery slope of
noncompliance, litigation, reputational risk and other
nastiness. Similarly, address only unrewarded risk and
ignore rewarded risk, and your company may survive but
will never thrive.
into protecting themselves from threats, but don’t actively
look for ways to convert those threats into opportunities.
Similarly, on the value side, they might make bold
investments in new market opportunities, while not doing
enough to actively manage the risks that could prevent
those opportunities from paying off. In reality, risk and
value are two sides of the same coin - and should be
managed as such. The key to being risk intelligent is
finding the right balance to both protect and create value.
In most cases, that means increasing your emphasis on
rewarded risks and actively managing those risks to deliver
the expected returns. It also means scrutinizing your
investments in unrewarded risks to be sure they are
effective and efficient.
THE REWARDS OF RISK INTELLIGENCE
The competitive benefits of improved Risk Intelligence
include:
ñ improved ability to prevent, quickly detect, correct, and
escalate critical risk issues
ñ reduced
burden on business operations by
standardizing risk management principles and
language
ñ reduced cost of risk management by improved sharing
of risk information and integration of existing risk
management functions
ñ a means to improve strategic flexibility for both upside
and downside scenarios
ñ the ability to provide a “comfort level” to the board and
In acknowledgement of these two faces of risk, we have
coined the following business maxim: “Organizations that
are most effective and efficient in managing risks to both
existing assets and to future growth will, in the long run,
outperform those that are less so. Simply put, companies
make money by taking intelligent risks and lose money by
failing to manage risk intelligently.”
Risk is a fundamental part of business. But that doesn’t
mean all risks are the same. Companies that focus on the
wrong risks are wasting their time and money-and
ultimately, short-changing their shareholders.
other stakeholders that the full range of risks is
understood and managed.
Inherent risk refers to the risk that exists before you
address it; i.e., the risk to your company in the absence of
any actions you might take to alter either the likelihood or
impact. Every company in every industry faces inherent
risk; of course, not every company manages it effectively
or efficiently.
DRIVING MORE VALUE BY BECOMING “RISK
INTELLIGENT”
Residual risk is also known as your “vulnerability” or
“exposure”; i.e., the risk that remains after you have
attempted to mitigate the inherent risk. Companies can
only understand residual risk if they have first addressed
inherent risk.
Companies often treat risk and value as separate silos. On
the risk side, they may invest significant time and effort
Risk Intelligent Enterprises consider both inherent and
residual risk. This process puts both the executives and the
92
board in a better position to evaluate the level of exposure
and then decide whether or not to accept the exposure.
THE RISK INTELLIGENT ENTERPRISE:
FUNDAMENTAL STEPS
As noted previously, every company is unique, and
intelligent risk management practices must be tailored to
specific circumstances and needs. Key steps to creating the
Risk Intelligent Enterprise.
1. Establish an overall framework, policy, and process
for assessing and managing risk.
Does your company have an overall risk framework that
addresses the risks the company is exposed to, how it
views those risks, and how it manages them? Does your
company have a risk policy? Many regulatory bodies
require that the audit committee discuss with management
the major financial risk exposures and the steps taken to
monitor and control such exposures; also that the audit
committee should be satisfied with the company’s risk
assessment and risk management processes. Risk factors
that affect business, operations, industry or financial
position should be described in plain English. Do you have
a process? Policies alone won’t create a Risk Intelligent
Enterprise. Directors should challenge management to
demonstrate a systematic and disciplined process for risk
identification, assessment, and prioritization; risk
response; and risk monitoring and reporting. Executives
should provide regular updates to the board and audit
committee to demonstrate that their risk processes perform
as expected and that reports on risk are reliable.
2. Identify key risks and vulnerabilities and the plans to
address them. Assess value and determine where risks
could impact value.
Engage in scenario planning: What are the alternative
futures? What could cause you to fail? What are the
mission-critical risks that could have the highest adverse
impact on company value and strategic objectives? Where
are you most vulnerable? What are the early warning
signals and how will you recognize them? A key
characteristic of effective Risk Intelligence is the ability to
separate irrelevant from relevant information. An
important consideration in this area is the problem of
multiple risks in combination. Consider how risks may
interact, keeping in mind that risks don’t respect
organizational boundaries. What are you doing to address
those risks? And how do you know it’s working?
(According to a Deloitte Research study: Most major
losses at the global 1000 companies surveyed were the
result of multiple high-impact but low-likelihood risks.)
3. Establish your risk appetite. Determine how much
risk you have taken on. Decide whether you can take on
more or should reduce risk.
Once you have decided to take a risk, how much risk is
your company willing to accept? What is your capacity to
bear risk? How much of your capital or existing assets are
you willing to put at risk at any one time? How much risk
are you willing to take to achieve future growth? How
resilient are you in the face of an extreme event?
The key question that is often overlooked: Are you
intelligently taking enough risk? The implications of
practicing risk avoidance without pursuing rewarded risktaking may include missed business opportunities,
decreased competitiveness, and, ultimately, the demise of
the business. Businesses must take risks to be competitive.
4. Decide who has responsibility and authority to take
risk on behalf of the company.
Surprisingly, a number of companies fall short in this area;
the roles and responsibilities around risk are often unclear
and misunderstood. How will responses be integrated and
coordinated across the entire enterprise? Specificity is a
necessity: What powers are reserved for the board? Who
can commit the company? When can authority be
delegated? What are the escalation procedures for “red
flag” risks? Who, if anyone, has the ability to “bet the
farm”?
5. Determine your capability to manage risk on an
integrated and sustainable basis.
The Risk Intelligent Enterprise cannot be achieved
overnight. In most cases, organizations will move through
distinct stages of development. The lowest state of risk
management capability is characterized by an ad hoc (if
not chaotic) approach that depends highly on individual
responses and often “heroic” efforts in the absence of more
systematic approaches. Once specializations have
emerged, subsequent stages will involve moving risk
management out of “silos” and toward a fully integrated
and coordinated response.
The highest state of capability will build risk
considerations into corporate strategy and the decisionmaking process, with an emphasis on risk-taking for future
growth and reward as well as the protection of existing
assets. In the fully developed Risk Intelligent Enterprise,
risk management is viewed not as a project but part of the
culture, the way of doing business. Risk Intelligence is all
about enterprise management.
93
Statutory Auditing
The Profession of the
Statutory Auditors in Bulgaria
The beginning of the
profession of the statutory
auditors in Bulgaria was set
in 1991 with the issue of the
Accounting Law. Through it
the institution of the certified
public accountants to the
Ministry of Finance was
formed, with the intention to
organize and implement
independent financial audit.
In a special part of the
Ass. prof. PhD. Stoian
Accounting
Law,
the
Stoianov CPA
functions of the certified
Head of Department
public accountants, the
“Accounting and Control”
stipulation for payment for
University of National and
their work, the form of
World Economy, Sofia,
practise of the audit and the
Bulgaria
competence of the Ministry
of Finance in solving their disputes with the audited
enterprises were determined. It was laid down as law, that
the profession of the auditor can be practised individually
or collectively (in offices, chambers or alliances). The
same year, the finance minister approved Regulation of the
certified public accountants, with which the normative
base for the practise of the auditor profession by the
certified public accountants was established. In the
regulation, the way to acquire and forfeit professional
qualification by the certified public accountants, their
rights and responsibilities, as well as the order of the
review procedures and audit certificates of the annual
accounting reports were set. Then and there the
regulations and the practice were established for the
certified public accountants to acquire qualification only
after taking the compulsory examinations. In the
beginning, the examinations were organized and
administered under the guidance of the Ministry of
Finance.
participated in the national examinations boards, which for
a while conducted the examinations with the candidates for
certified public accountants. With a special paragraph of
the regulation of certified public accountants, right was
given to the individuals with qualification of ‘sworn
certified accountant’, acquired under the conditions of the
Law of the Institute of Certified Sworn Accountants
(ICSA), effective from 1931 till 1948. This decision has
been taken more as an act of continuity of the institution of
certified public accountants with the Institute of Certified
Sworn Accountants, because in practice rather small
amount of individuals could make use (benefit) from it. At
the same time, this gave the ground for some researchers to
point 1931 as the beginning year for the profession of the
statutory auditors.
In 1992 the Association of Certified Public Accountants in
Bulgaria was found, as a voluntary non-profit-making
association. Its main purpose was to form, develop and
improve the profession of certified public accountants. The
association undertook from the Ministry of Finance the
right and responsibility to administer the examinations
with the candidates for certified public accountants. In
1996 the Association of Certified Public Accountants in
Bulgaria terminated its work and its functions were
undertaken by the Institute of Certified Public Accountants
(ICPA) , established in accordance with provision of the
Accounting Law.
The present status of the profession of the statutory
auditors in Bulgaria is regulated with the Law of
independent financial audit, effective since the beginning
of 2002. According to it, the independent financial audit is
conducted by statutory auditors, members of ICPA. The
exclusive rights for the practise of the profession of
statutory auditors are conducted:
1. directly
The first group of certified public accountants acquired
their certificates after successfully sitting for examinations
before a Commission of experts of the European
Federation of Accountants (FEE). After that, they
94
2. through an enterprise of a statutory auditor
3. through participation in a specialized auditors company
The specialized auditing company is defined as a company,
Statutory Auditing
registered by the Bulgarian business legislation or by the
legislation of another country - member of the European
Union, or country - party to the Agreement of European
Economic Area, with independent audit of the financial
reports of enterprises as main subject of business, three
fourths of the members of the executive body of which are
statutory auditors, auditors or auditing companies from
other countries - members of the European Union, with
good reputation. For the financial commercial companies
is required over 50% of their capital to be the property of
statutory auditors. An individual - statutory auditor can
participate in only one specialized auditing company.
For certified public accountant and statutory auditor a
candidature can be lodged by an individual, who has not
been convicted of crime and meets defined by law
requirements for educational qualification, training and
professional practice. The candidates sit for examination
through ICPA on:
1. accounting, including the International financial
reporting standards
member of the European Economic Area, is enlisted in the
registry of statutory auditors in Bulgaria after successfully
sitting an examination through ICPA in Bulgarian
commercial law, tax and insurance law in Bulgarian
language.
In compliance with reciprocity, ICPA enlists in the register
an auditor (specialised auditing company) from a third
country after he represents evidence that he satisfies
conditions equivalent to those in Bulgaria.
In the Law of independent financial audit the rights,
obligations and responsibilities of the statutory auditors are
defined. The first and most important obligation of the
auditor is to observe the principles: independence,
professional competence, confidentiality, respectability
and objectivity. Other more important obligations are:
ñ to implement the undertaken auditing obligation,
except in the case where at hand are objective
circumstances which hinder him from doing so
ñ to inform the management of the enterprise client for
2. commercial law
3. Independent financial audit, including International
Auditing Standards
4. tax and insurance law
Before sitting for the examination on independent financial
audit the candidates must have at least two years of
professional practice in a specialized auditing company or
in a company of a statutory auditor.
The individuals, who acquired a certificate for certified
public accountants are enlisted in a special register in the
Institute of Certified Public Accountants (ICPA). They
acquire the right to sign auditing reports with opinion on
financial reports after one year of professional practice in
a specialized auditing company or in a company of a
statutory auditor and after their entry in the registry of
statutory auditors. The statutory auditor takes an oath and
signs a declaration under oath with content defined in the
law. In the register are also entered the specialized auditing
companies.
An individual, who acquired the qualification to sign
auditing reports with opinion on financial reports, in a
country member of the European Union or country
all circumstances, which would impede his
independence in implementing his auditing obligation
ñ to
continue abiding by the requirement for
confidentiality, when he has terminated or finished
work on given auditing commitment
ñ to inform the management of the enterprise client for
substantive violations of the legal and normative acts,
of its articles of association and other internal
regulations, norms and procedures, as well as all other
information, as far as he has become aware of in the
process of implementation of the independent audit
ñ to warn the enterprise client in the field of his
competence for actions or omissions, which may harm
the enterprise, as far as he has become aware of in the
process of implementation of the independent audit
ñ to present documents, proving the implementation of
the auditing obligation and the given opinion
ñ to comply with the International Auditing Standards
and the Professional Code of Ethics, adopted by the
Institute of Certified Public Accountants to report his
activities to the Institute of Certified Public
Accountants in an order confirmed by it
95
Statutory Auditing
ñ to participate in the activities of the Institute of
Certified Public Accountants and its agencies, and to
observe the statutes of the institute
ñ to insure against the risks of his professional
occupation
The owners of auditing companies, as well as the members
of their managing or controlling bodies do not interfere
with the implementation of independent financial audit in
a way, which endangers the independence and objectivity
of the statutory auditor, who alone conducts the
independent financial audit on behalf of the auditing
enterprise. The statutory auditors bear limited liability up
to threefold the amount of the contractual remuneration
agreed upon for audit, for damages which they have caused
to their clients, if the damages are direct and immediate
result from their actions and inactions. The limitation of
obligation is not applied in the occasion of deliberate
illegal conduct by the auditors. However, they do not bear
responsibility for the violations allowed by the
management bodies and employees of the auditing
company.
The professional activities of the certified public
accountants and the statutory auditors in Bulgaria are
organized and managed by ICPA, established as a legal
entity of independent maintenance with headquarters in
Sofia. The institute is a professional organization of the
certified public accountants, which represents its members
before the community, the public authorities and the
international organisations. It performs the following
functions:
1. organizes and administers the examinations of
candidates for certified public accountants
2. registers the auditors, who acquire their qualification
according to the statutory requirements
3. organizes and carries out various forms to advance
their professional qualification
4. organises training for the candidates for certified
public accountants by cooperating with selected
universities
5. issues own magazine, teaching aids and research
works, related to the development and promotion of
the auditing profession
6. approves internal system for control over the activities
96
of its members
7. develops, when required, professional auditing
regulations and techniques for additional assistance
and regulation of the activities of its members
8. controls the quality of auditing practice and the
professional conduct of its members
9. organizes, assists and conducts research in the fields of
independent financial audit, accounting and financial
analysis, and other accompanying fields
The Institute of Certified Public Accountants prepares
regulations for continuous training of the certified public
accountants and the statutory auditors. The regulations for
organisation and conduct of continuous training are
accepted by the institute’s management Commission,
endorsed by the Commission for public oversight of
statutory auditors and are announced annually in the
appropriate way. The training for every calendar year
cannot be less than 40 hours. For the statutory auditors
who have not conducted independent financial audit in the
course of three successive years, the training cannot be less
than 80 hours.
The following specialized boards have been organized and
are working for the implementation of specified, by the
Law of independent financial audit, managerial and
supervisory functions on the practise of the auditing
profession by the statutory auditors in ICPA: management
board, supervisory board, professional ethics board,
quality control board of auditing services and disciplinary
board. An Educational-Methodological board has been
established with an ICPA management board resolution,
which organizes and manages the continuous training of
the statutory auditors.
ICPA is member in the following international
organizations:
1. International Federation of Accountants (IFAC) - since
1995
2. South Eastern European Partnership on Accountancy
Development (SEEPAD) - since 1999
3. Federation Internationale des Experts-Comptables
Francophones (FIDEF) - since 2002
4. Fédération des Experts Comptables Européens (FEE)
Statutory Auditing
- member correspondent since 2002, full member
since 2006
5. Fédération des Experts Comptables Mediterranéens
(FCM) - since 2003
The work of the statutory auditors in Bulgaria is subject to
public control, which is carried out by the Commission of
public control of statutory auditors. The Commission of
public control was established in accordance with the
requirements of Directive 2006/43/ of the European
Parliament and the European Council, in reference to legal
audit of annual financial reports and consolidated reports.
The Commission is an independent camaraderie agency
with four year mandate and is financed by the central
government budget.
It consists of chairman and six members, who are elected
by the Bulgarian Parliament, in condition that they meet
defined by the law requirements for educational
qualification, training and professional experience.
The more important functions and activities of the
Commission for public oversight of statutory auditors are:
to carry out ICPA practice supervision, to approve rules
and procedures for control of auditor practice quality, to
conduct investigations in connection with received signals
and suggestions by interested parties for presumed
violations, as well as in other cases, in their judgement, to
carry out co-operation with the respective authorities of the
European Union, or third countries, responsible for the
independent financial audit, to impose a fine in the
stipulated by the law cases, etc.
The statutory auditors carry out independent financial
audit in concordance with the International Auditing
Standards and in compliance with the principles of the
Ethical code of the professional accountants, adopted by
the International Federation of Accountants. The audit is
carried out on the basis of a contract between the enterprise
client and the statutory auditor as a private entity or
through his company, or specialised auditing company
with indication of the statutory auditor responsible for the
independent audit. The remuneration and the terms of
payment for the auditing service are negotiated on the
basis of developed by ICPA and confirmed by the
Commission for public oversight of statutory auditors
methodology for quantity of working hours necessary for
qualitative and effective implementation of the
independent financial audit. The methodologies recognize
the character of the business activity of the audited
enterprise, its size and number of workers and employees.
The remuneration is determined as a set amount only for
the auditing service and cannot be influenced by the
provision of additional services or to be put under
stipulation.
During the implementation of the audit, the statutory
auditors are independent from the auditing company and
do not participate in taking decisions in it. They do not
carry out audit if there is a direct or indirect financial
connection, employment or other connection, including
provision of additional services unconnected with the
audit, between the statutory auditors or the network and the
auditing company, from which objective, rational and
informed third party can conclude that the independence of
the auditor has been compromised.
The statutory auditors, including auditing companies from
third countries, registered in ICPA are subject to quality
control of their practice. The system of quality control is
build and functions upon rules, procedures and plans
established by the Commission for public oversight of
statutory auditors on proposal of ICPA. The check of
quality control of auditing practice is carried out by two
groups. The first group includes members, who are
appointed by the Commission of quality control to ICPA
and are approved by the Commission for public oversight
of statutory auditors. These are certified public accountants
and statutory auditors, who keep their right to practise
auditing.
The members of the second group do not have the right to
practise activities connected to independent financial audit.
They are appointed directly by the Commission and enter
in labour or contractual relations with it.
For asserted during checking lapses or violations in the
auditing practice for the legal auditors the examiners make
proposals to the Commission, who has the right to give
compulsory directions to the statutory auditors and to take
actions towards them.
The Commission of public control of statutory auditors can
conduct investigations in connection with received signals
and suggestions by interested parties for presumed
violations, as well as in other cases in their judgement. In
those cases it is allowed the Commission to be assisted by
the respective agencies of ICPA.
99
Statutory Auditing
The quality control on the practice of statutory auditors
includes:
1. Check of the auditing documentation for
correspondence with the applicable auditing standards
2. Check for the observance of the requirements of the
International Auditing Standards
3. Check for the observance of the ethical norms and
requirements for the independence of the auditor
4. Establishment of the adequacy of time and human
resources, used for the audit, in compliance with its
scope and complexity
5. Establishment of the adequacy of the auditor’s
remuneration, received for the audit
6. Evaluation of the internal system for quality control,
applied by the statutory auditor
The statutory auditors are subject to quality control of the
auditing practices at least once in 4 /four/ years. If they
practise independent audit in an enterprise, whose activity
presents public interest, they are subject to quality control
at least once in 3 /three/ years.
The Bulgarian Law of independent financial audit
determines as an enterprise, with activities subject to
public interest, the public companies and issuers of
securities in the country, as well as in other countries
members of the European Union and the European
Economic Area, financial institutions, insurance
companies, providers and companies from the main
sectors
energy
industry,
water
supply,
telecommunications and railway. It is agreed, that there is
also public interest to the practice of all other enterprises,
which for the current year exceed the figures of two of the
following criteria:
the following functions:
1. Supervises the processes of financial reporting in the
enterprise
2. Supervises the efficiency of the systems for internal
control in the enterprise
3. Supervises the efficiency of the systems for risk
management in the enterprise
4. Supervises the independent financial audit in the
enterprise
5. Examines the independence of the statutory auditor of
the enterprise, in accordance to the requirements of the
law and the Ethical codex of the professional
accountants, including if there are additional services
performed by the statutory auditor of the auditing
company
6. Proposes to the management bodies the selection of
statutory auditor
The Law of independent financial audit obligates the
statutory auditor, respectively the key auditor form the
auditing company who is undertaking the independent
audit of the enterprise and whose activities are subject to
public interest, to withdraw after he has carried out
auditing engagements during 5/five/ consecutive years.
This auditor can participate in the audit of the same
enterprise at least two years after his withdrawal. He
cannot rank high in the audited company before the expiry
of the term of two years since his withdrawal from his
auditing engagement.
2. Net proceeds from sale for the year - 97,5 million lv.
/50million euro/
The Commission of public control of statutory auditors in
Bulgaria collaborates with the appropriate competent
authorities from other countries - members of the
European Union, in order to realize their authority in the
field of public control of statutory auditors. The
Commission is the competent authority for co-operation
and for receiving and providing information to the
competent authorities for public control of the auditors and
the auditing companies in other countries - members of the
European Union, and third countries.
3. Average numbers of staff for the year - 250 people
An enterprise, whose activities are subject to public
interest, forms an auditing Commission which performs
When a request was received for the side of competent
authorities of other countries - members of the European
Union, the Commission immediately undertakes the
1. Balance-sheet value of the assets to December 31 - 84
million lv. /43million euro/
100
Statutory Auditing
required actions to collect the requested information. In the
implementation of this action, the Commission was
assisted by the Institute of Certified Public Accountants. If
the Commission is unable to give the requested
information, it immediately informs the respective
competent authority form the other country - member of
the European Union, who made the request, for the reasons
for this. The requirement for professional discretion does
not obstruct the exchange of confidential information
between the Commission and the competent authorities
from countries - members of the European Union. In cases
when the Commission has reasonable suspensions, that on
the territory of the other country - member of the European
Union, activities are taking place which are in violation of
the requirements of Directive 2006 /43/ EC of the
European Parliament and of the European Council form
17th May 2006 in reference to the compulsory audit of the
annual financial reports and the consolidated accounting
reports, for the amendment of Directives 78/660/EEC _
83/349/EEC of the European Council and the annulment of
Directives 84/253/EEC of the European Council, it
represents detailed information for this to the competent
authority of the respective country - member of the
European Union. When the Commission is notified by the
competent authority of a country - member of the
European Union, for violation of the requirements of
Directive 2006/43/EC on the territory of Bulgaria, it
undertakes the necessary measures and informs the
appropriate competent authority of the county - member of
the European Union, for the results.
The Commission undertakes investigation on the request
of the respective competent authority of another country member of the European Union. In this case it can allow
representatives of the competent authority of the country member of the European Union, to participate as observers
in the investigation, when such a request is made, but the
overall investigation is under the control of the
Commission. The Commission can request an
investigation to be conducted by a competent authority of
another country - member of the European Union, on the
territory of this country, and also to request the
Commission’s members to participate in the investigation
as observers. The Commission can refuse to give
information for the conduct of investigation or to let the
participation of observers when:
1. Conducting investigation and supplying information
can affect the sovereignty, national security or social
order of Bulgaria
2. A legal proceedings have been made by the legal
authorities in Bulgaria in connection with the activities
and against the auditors, for which co-operation has
been requested
3. At hand is an effective judicial decision in Bulgaria in
connection to the activities and auditors, for which cooperation has been requested
In the case when independent audit has been carried out on
the consolidated financial reports of a local enterprise, the
auditor undertaking the audit on the associated company,
established in another country - member of the European
Union, does not require additional specifications in
connection with the independent audit concerning
registration, quality control, standards of audit,
professional ethics and independence. In the case of
independent audit of an enterprise headquartered in
another country - member of the European Union, whose
securities are traded on the Bulgarian regulated market,
there are no additional specifications required in
connection to the independent financial audit concerning
registration, quality control and assurance, standards of
audit, professional ethics and independence of the
statutory auditor, who is undertaking the independent
financial audit of this enterprise. The Commission can
approve the supply of work documentation connected to
the independent financial audit, or of other documents,
kept by the statutory auditors, to the competent authorities
form a third country on condition, that in the Law of
independent financial audit the work and other documents
are connected to the independent financial audit of
enterprises, which have issued securities in this third
country, or when the enterprises are part of a group, which
prepares the consolidated financial reports in the third
country. The supply of documentation is made through the
Commission of public control of statutory auditors to the
competent authorities of this third country and on their
request. The competent authorities of the third country
satisfy conditions, declared as adequate by the European
Commission in accordance with the procedure, provided in
article 48 of Directive 2006 /43/EO. Available are effective
agreements on the basis of reciprocity, agreed between the
Commission of public control of statutory auditors and the
competent authorities of the third country. The supply of
documentation is made in compliance with the
requirements of the Bulgarian legislation for personal data
protection.
101
The International and the Cyprus Economy
Economic Bulletin
THE BANK OF CYPRUS GROUP PLANNING AND RESEARCH DIVISION PUBLICATION,
14th ISSUE, DECEMBER 2008
INTERNATIONAL ECONOMY
The world economy suffered successive shocks within
2008, with the international financial and investment
climate deteriorating fiercely, mainly over the second half
of the year. What triggered the world financial crisis was
undoubtedly the collapse of the sub-prime loan market in
the United States of America in August 2007. However,
since then, the international financial turbulence
exacerbated far beyond initial estimates, and entered anew,
in September 2008, a phase of brisk aggravation in all
economic parameters across the globe.
Within the first six months of 2008, the world economy
was faced with forceful inflationary pressures, stemming
from leaping oil prices and rapidly rising prices of certain
commodities. Furthermore, the mounting financial woes
of major American enterprises and the subsequent collapse
of Lehman Brothers, dealt a severe blow to investor
confidence. This vicious circle of bank defaults, which in
essence wipe out savings of many years and result in
impaired balance sheets, led in turn to pessimistic
corporate profitability outlooks and resulted in mass stock
liquidations and plunging of all major bourses around the
world.
The unfortunate simultaneous occurrence of all the
abovementioned adverse economic events, touched upon
every single economy in the world while projections for
world economic growth by international organizations
have been successively revised downwards. According to
the International Monetary Fund’s (IMF) World Economic
Update (November 2008) the world economy was
expected to have grown in 2008 by 3,7%, while for 2009 a
slowdown was projected to 2,2%. It should be noted that
the IMF (as well as the European Commission), issued
another set of forecasts in January 2009, amidst a
reinforced global economic downturn since the last quarter
of 2008. Therefore, based on the latest forecasts by the
IMF for 2008 as a whole, world growth is expected to have
slowed to 3,3%, while for 2009 it is expected to shrink to
0,5%.
Based on IMF’s projections (in January 2009, which were
twice revised from the initial projections in October 2008,
due to the rapidly deteriorating environment) the United
States of America (USA), are expected to have recorded a
rate of growth of 1,1% for the whole of 2008. US GDP
growth for 2009 is projected at -1,6%. It is projected that a
102
severe slowdown will be observed in countries of the euro
area, whereby rates of economic growth are expected to
have reached 1,0% for the whole of 2008, while for 2009
the eurozone economy is expected to contract by -2,0%.
China, which continued its impressive economic path,
registering GDP growth of 9,0% for 2008, has nevertheless
experienced a slowdown (since GDP growth for 2007 was
at 13,0%). India and Russia were still among fast growing
economies, recording growth of 7,3% and 6,2%,
respectively, in 2008. However, both of these countries
also experienced a slowdown in growth within 2008,
expected to worsen severely in 2009.
CYPRUS ECONOMY
Based on the latest available national accounts of the
Republic of Cyprus, the GDP growth rate for the whole of
2008 is estimated to have reached 3,7% (from 4,4% in
2007), exhibiting signs of a slowdown.
Within 2008, the Harmonised Index of Consumer Prices
rose by 4,4% as compared to 2,2% for the whole of 2007.
It should be noted that despite of the sharp rise in fuel and
food prices over the first six months of the year, during the
second half of 2008 inflationary pressures faded out to a
great extent, since oil prices embarked on a rapid
downturn. More specifically, it should be noted that in
December 2008 the Harmonised Index of Consumer Prices
exhibited a rise by just 1,8%, compared to 3,7% in
December 2007 and 3,1% in November 2008.
The Consumer Price Index for the period January December 2008 marked a notable increase, rising to 4,7%,
compared with a rate of inflation of 2,4% in 2007. The rate
of increase of the Consumer Price Index in December 2008
was down to 2,1%, compared to a rate of inflation of 3,4%
in November 2008 and 3,9% in December 2007.
The average number of unemployed persons for the whole
of 2008 exhibited a drop by 4,0%, since from 12.017
unemployed persons in 2007, it was contained to 11.541
unemployed persons in 2008. By the end of 2008 the
unemployment rate was at 4,0%. It should be pointed out
that in direct contrast to the levels of inflation,
unemployment was sustained at low levels during the first
half of 2008, whereas exhibiting a rising tendency during
the second half, amidst exacerbated world economic
The International and the Cyprus Economy
conditions, which touched upon the domestic economy.
More specifically, the number of registered unemployed
persons at the end of December 2008 rose to 14.169
persons, compared to 12.073 persons in November 2008, a
rise mainly attributed to the public administration sector
and the hotel and restaurant, and manufacturing sectors.
The fiscal balance is expected to have resulted by the end
of 2008 in a lower surplus (approximately 1% of GDP),
compared to a surplus of 3,5% for 2007 (from a deficit of
-1,2% at the end of 2006). At the same time, the public
debt is projected to have shrunk further by the end of 2008
to 49,5% of GDP, compared to 59,5% of GDP in 2007.
Tourist arrivals retreated slightly in 2008 by 0,5%
compared to 2007. For the period from January December 2008 tourist arrivals in absolute numbers were
at 2.403.750 compared to 2.416.081 over the
corresponding period of 2007. Over the period from
January - December 2008, income from tourism is
estimated at _1.792,8 million compared to _1.858,1
million for the corresponding period of 2007, marking a
decline of 3,5%.
OUTLOOK
Short-to-medium term prospects of the Cyprus economy,
as for the world economy, do not appear favourable.
According to the latest projections by the Cyprus Ministry
of Economics and Finance on the main economic
indicators in 2009, the Cyprus economy is expected to
attain an economic growth rate of 2,1% for 2009. In the
labour market front, unemployment is expected to rise to
4,5% in 2009 (compared to an initial projection in the state
budget of 4,1%). The fiscal balance is expected to result in
a deficit by the end of 2009 of 0,8% of GDP (despite the
initial projection in the state budget for a surplus of 0,7%
of GDP).
It should be noted that based on the projections that have
been published by the European Commission in January
2009, the outlook for the Cyprus economy appears even
gloomier. The island’s rate of economic growth for 2009
is projected to shrink to 1,1%, while unemployment is set
to rise to 5,1%. Harmonised CPI inflation is projected at
2% by the end of 2009, while the fiscal balance is to result
in a deficit of 0,6% of GDP and the public debt is to further
shrink to 46,7% of GDP.
MAIN ECONOMIC INDICATORS
G.D.P. (real rate of growth - %)
Unemployment (%)
Inflation (Consumer Price Index - %)
Harmonised Index of Consumer Prices - %
Fiscal Balance (% of GDP)
Public debt (% of GDP)
Repo rate* (31 Dec.-%)
Euro exchange Rates (annual average)
m/US$
m/GBP£
2005
2006
2007
20081
3,9
5,3
2,6
2,0
-2,4
69,1
4,25
4,0
4,5
2,5
2,2
-1,2
64,8
4,25
4,4
3,9
2,4
2,2
+3,3
59,8
4,00
3,7
4,0
4,7
4,4
+1,0
49,5
3,00**
1,2441
0,6838
1,2556
0,6817
1,3705
0,6843
1,4708
0,7963
1: projection
* As of 1st September 2006, the main refinancing operations rate (repo) replaced the marginal lending facility rate (Lombard)
for the purpose of pricing local currency bank loans. It is also noted that as of 1st January 2008, Cyprus joined the eurozone
and therefore, interest rates shall be set by the European Central Bank.
**ECB marginal lending facility
Source of statistical data for Cyprus’ economy: Ministry of Finance, Central Bank of Cyprus & Statistical Service
Group Planning and Research Division
Bank of Cyprus, 51 Stasinos Str., Ayia Paraskevi
P.O. Box 21472, CY - 1599 Nicosia, tel. 22.12.23.00
Edited by Elena Triantafyllou
The content of the current publication is solely for information purposes and in no way does it intend to influence or
encourage specific actions. Furthermore, its contents are by no means binding for the Bank of Cyprus Group.
105
Audit File Reviews
Audit File Review
By Michael Scott, Director in PLC Limited
PCP Limited are a training company who provide training
services to firms of accountants around the world. One of
the most common services they provide to firms is that of
audit file reviews. In this article, Michael Scott, Director in
PCP Limited talks about common issues which arise on
these file reviews and key areas to make sure you have
addressed on your audit files for small companies.
The two most common issues arising are almost always
inadequate audit planning and lack of recording of audit
evidence. The following is not meant to be an exhaustive
list but includes many of the points which typically arise.
ENGAGEMENT LETTER
ñ There must be a signed letter of engagement in place.
ñ The letter should be reviewed annually and should
accurately reflect the services being provided to the
client.
with directors and inclusion in representation letter.
ASSESSMENT OF ACCOUNTING SYSTEM
ñ There should be an adequate record of the client’s
accounting system. This should always include as a
minimum income, purchases and payroll. The notes
should cover all income sources following the
transaction from when they start (the order for example)
to when reflected in the accounts.
ñ An evaluation of the system should be performed to
establish if reliance can be placed on the system.
ñ If reliance can not be placed on the system there should
be notes to demonstrate what alternative audit tests will
be necessary to provide a proper level of audit assurance
in these areas.
INTERNAL CONTROLS
ñ Irrespective of the size of the company, the internal
UNDERSTANDING OF BUSINESS
The permanent file should contain sufficient background
information on the client to satisfy ISA 315. In particular
there should always as a minimum be notes on:
ñ The history of the business.
ñ The nature of the business.
ñ Goals of the business.
ñ Key client personnel.
ñ Major customers and suppliers.
ñ The accounting system.
ñ The internal controls.
ñ Details of related parties.
ñ Money laundering considerations.
LAWS AND REGULATIONS
ñ To comply with ISA 250 there should be a record on file
of laws and regulations that are central to the operation
of the business. This is often missing.
ñ Where there are laws and regulations that are central to
the business, audit procedures should be designed and
completed to identify any instances of non compliance
e.g. review of source documents, legal letter, discussions
106
controls must be documented. This is a mandatory
requirement, but many firms incorrectly believe that it is
not required for a small company.
ñ The design and implementation of the internal controls
must be considered and this can’t just be done by
discussions with the directors. In many cases a walk
through test will be the most appropriate way to satisfy
this requirement.
INDEPENDENCE
The major issues to consider are outlined in IFAC Code of
Ethics and include:
ñ Self Review threat e.g. where the firm is also involved in
non audit services e.g. preparation of accounts, tax
planning etc.
ñ Self Interest threat e.g. where the bulk of referrals to the
firm are coming from one source (perhaps a law firm).
Another scenario is where a partner or employee in the
firm is also a director in the company.
ñ Familiarity threat e.g. where a family member is
involved in the management of the company or from
acting as the audit engagement partner for a long period.
ñ It is important that any threats are identified before the
Audit File Reviews
audit commences and if the threat is surmountable,
adequate safeguards must be in place. It is vital that
these safeguards are put in place, frequently firms
identify appropriate safeguards and then fail to
implement them.
year’s figures with last year’s figures, but more
importantly to a comparison with expected figures.
There should always be an adequate record of the
reasons for any variations and this should be linked into
any additional work necessary.
RISK AND MATERIALITY
FINAL ANALYTICAL REVIEW
ñ A materiality calculation should always be performed.
ñ A final analytical review should be performed if no
Frequently we find that this is missing.
ñ Some form of general risk and specific risk assessment
should be performed. It is particularly important that
they should be supported by adequate notes. Invariably
firms just tick the boxes in a checklist. This does not
constitute adequate appropriate audit evidence.
ñ Both materiality and risk should be set at a reasonable
level.
preliminary analytical review was undertaken or if there
were a large number of audit adjustments. In any event
the working papers should always contain evidence to
demonstrate that no errors have been found and the
figures and movements are in line with expectations.
DISCLOSURE REVIEW
FRAUD AND ERROR
ñ A review should always be undertaken to ensure that the
ñ ISA 240 requires the auditor to consider the risk of fraud
and error. In particular there is a presumption that
completeness of income will be an area to consider,
unless the auditor can demonstrate otherwise. It is very
common for firms fail to address this area in sufficient
detail.
IDENTIFICATION OF KEY AREAS
ñ The most important part of the planning process is to
identify the key areas of the audit to say why they are
key areas and illustrate clearly what work is going to be
performed in each of these areas. In particular this
should include tailoring the audit programme and
devising additional tests if necessary. The completion of
a planning memorandum can assist this process.
ñ The planning should always be approved by the
engagement partner before fieldwork commences.
Frequently on our reviews there is little evidence of any
involvement by the principals.
ADEQUATE CONTROL PROCEDURES
ñ The engagement partner should always carry out an
adequate review of the work to demonstrate that suitable
quality control procedures have been adopted. Often we
find that there is little or no evidence of this taking place.
ñ It is preferable that there is a formal written record of the
points raised and the action taken to address the points
raised.
accounts comply with current legislation and
professional standards. It is advisable to use a disclosure
checklist for this purpose. The ACCA’s Monitoring and
Supervision Department in particular place a lot of
emphasis on the use of a disclosure checklist.
POST BALANCE SHEET EVENTS
ñ It is important to record exactly what work has been
performed and not just to tick a standard checklist. The
working papers must specify clearly what the scope and
extent of the work performed was. Supporting notes
should always be present. Frequently we find that there
is a gap between the work being performed and the audit
report being signed off. The review must cover the
period right up to the date of sign off.
GOING CONCERN
ñ It is important for the auditor to provide positive
confirmation on the working papers that the company is
likely to continue as a going concern as required by ISA
570. Positive confirmation could include, for example, a
review of bank facilities, a review of future prospects
and order books, a review of key analytical review ratios
and notes of discussions with management. It is
particularly important in the current global climate that
this area of the file is adequately documented.
REPRESENTATION LETTER
ñ A letter of representation should be obtained which
PRELIMINARY ANALYTICAL REVIEW
ñ Consideration should be given not just to comparing this
covers all the points upon which reliance has been
placed. This should be dated either the same day or
immediately before the audit report is signed off.
107
Audit File Reviews
AUDIT EVIDENCE
Use of Accountancy Work
For audit evidence to be derived from the accountancy
work, it is important that:
ñ The information is relevant to one or more of the audit
objectives;
ñ The staff carrying out the audit work should understand
which aspects of their work will be relied upon to
provide audit evidence
ñ The accountancy work is carried out by staff with
relevant training, experience and proficiency; and
ñ The work must be fully documented. It is not sufficient
to just refer the work to the accountancy file.
NON CURRENT ASSETS
audit work performed on outstanding cheques and
lodgements.
ñ A bank confirmation letter should be obtained and
should be properly reviewed.
PAYABLES
ñ Adequate work on completeness of trade payables must
be performed e.g.
ñ Supplier statement reconciliations.
ñ Post year-end review of invoices and payments.
ñ Cut off work.
ñ Review of debit balances.
ñ Frequently on our reviews we see firms agreeing year
end payable balances to the payment after date. This will
only help support the existence and validity of the
balance and not its completeness.
ñ Physical inspection should always be performed on a
sample of fixed assets.
ñ The sample should include additions and items brought
forward from previous years.
ñ A check on the ownership of any freehold land and
buildings should be performed and documented.
ñ The file should contain some assessment of why the
auditor believes the carrying value of the property on the
balance sheet is reasonable.
INVENTORY AND WORK IN PROGRESS
ñ If material the inventory count should always be
attended unless other evidence can be obtained to
support existence.
ñ There should be procedures notes to outline what
happened at the stock take.
ñ Adequate work must be performed to verify the cost,
existence and net realisable value of the inventory.
ñ As for inventory, work must be performed to verify the
cost, existence and valuation of work in progress. The
validity of the work in progress should also be
addressed.
RECEIVABLES
ñ The recoverability of receivables should be properly
addressed. This normally is performed by agreement to
post year- end cash receipts.
ñ The work performed should be summarised and
evaluated and there should be a link to the adequacy of
the bad debts provision.
ñ Cut off must be considered.
CASH AT BANK
ñ A bank reconciliation should be present with appropriate
108
INCOME STATEMENT
ñ There are often inadequacies in the work carried out to
help verify completeness of income. Tests should be
performed from the stage before any invoice is raised
(e.g. order documents, goods out notes etc) through to
the invoice itself, then onto the sales figure in the
nominal ledger and finally on to the post year-end cash
received. Detailed analytical review should also be
undertaken
ñ If cash income is involved, till roll reconciliations and
detailed analytical review should be performed.
ñ Validity of expenditure should be considered and
detailed analytical review performed. Frequently firms
fail to perform these tests in any shape or form.
ñ The accuracy of payroll costs should be assessed.
AUDIT EVIDENCE AND AUDIT
DOCUMENTATION
ñ Without doubt the key weakness on the vast majority of
files is the poor quality or lack of audit evidence
documented on the file. It is imperative that audit work
is recorded in an adequate manner. ISA 500 clearly
indicates that the file must be capable of being reviewed
by an experienced auditor with no connection with the
job. This must be the benchmark for all your audit
documentation.
ñ Every substantive test performed should show clearly
what the purpose of the test was, how the sample was
chosen, which direction the test was performed in and
the results. There should also be a summary and
evaluation of the work and a conclusion to show that the
audit evidence obtained was sufficient and appropriate.
Board Processes and quality of decisions
Board Processes and the
Quality of Board Decision making
Sometimes good boards of directors make bad decisions, but it’s difficult to understand why.
By considering some theories in group decision making,
it’s possible to glean a few solutions to the problem
By Anthony Atkinson, CMA, FCMA, and Michael Atkinson (a)
Students of group decision making have written
extensively about what determines the quality of group
decision making. Of particular interest are articles that
explore the general theme of how or why a group of smart
people can make terrible decisions - and, when confronted
with overwhelming evidence that the decisions are bad,
remain committed to such decisions.
decisions. While the fiduciary rather than the
strategic/social focus of the current approach to improved
corporate governance has merit, there is considerable
evidence to suggest that boards that fail to challenge and
advise management effectively destroy more stockowner
wealth than management fraud or corruption.
WEAK BOARD OVERSIGHT
This article considers how or why boards of directors
sometimes make terrible decisions. Some commentators
rely on variations of an incompetence argument to explain
ineffectual board decision making; we will rule those out
since there is considerable evidence to suggest that most
board members are thoughtful, intelligent, and successful
people. Instead, we look for other explanations for what
are arguably bad board decisions.
Most responses to governance failures have concentrated
on specifying better structural inputs such as the
composition and characteristics of boards of directors (the
number, type, skills, number of meetings, director
independence). In addition, they have promoted increased
attention to systems of internal control in general and
financial reporting in
particular.
INATTENTIVE OR COMPROMISED BOARDS
Frauds and alleged frauds such as Enron, WorldCom,
Global Crossing, Livent, Hollinger International, Adelphia
Communications, and Parmalat have attracted immense
attention in the financial press, which in turn have called
into question the effectiveness of corporate boards. A
common explanation for these failures has been executive
greed, combined with a lack of board independence or
board inattentiveness. Regulators appear to have accepted
these explanations and have promoted requirements for
more independent boards, and that senior management
accept personal responsibility for their organizations’
financial statements and systems of internal control.
We believe that prescriptions that focus on inputs to, rather
than outputs from, the governance process are
demonstrably ineffective because they fundamentally
ignore that governance is conducted as a social process of
group interchange and influence.
In this article, we consider the sources of weak board
oversight resulting in failures to question bad executive
“Shaping good conduct,” by Atkinson and Salterio (CMA
Management, February 2002, pp. 19-23), concluded that
the preoccupation of regulators and lawmakers with
specifying inputs to the corporate governance process - the
socially interactive ways in which governance practices
and objectives are undertaken - is an incomplete and
potentially less effective approach than one focusing on
corporate governance objectives, designing Board social
systems to achieve those objectives, and measuring
performance on those objectives.
A stinging article in The Toronto Star (“Directors missing
in action,” December 9, 2001) argued that while Nortel’s
board met most of the extant suggestions for the
composition of a board, the board was, by any standard,
ineffective.
Ostensibly, Nortel’s board was a model of good corporate
governance. It was small - just 10 directors and,
therefore,efficient. It was not stacked with insiders- nonexecutive, or independent, directors filled eight of the
seats. And thepositions of CEO and board chairmanwere
109
not held by the same person.
The article went on to suggest that there was no evidence
of independent thinking taking place on the board. Air
Canada has attracted similar commentary. As Terence
Corcoran noted in the Financial Post (May 22, 2003):
Air Canada’s board is a model of independence. But guess
what? It is nowconventional wisdom that the airline’s
board, in bed with CEO Robert Milton, jointly and
dubiously ran the airline into insolvency. Even the judge
who’s presiding over the airline’s reorganization has raised
doubts about the board.
While some may attribute these observations to spurious
ex post facto reasoning, we believe that they, at the very
least, suggest that while inputs to the board process such as
skill, knowledge, and independence may be necessary they
aren’t sufficient to assure, let alone promote, an effective
board. What is missing, we believe, is consideration of the
structure and nature of board processes.
Gloria Stromber, a former commissioner of the Ontario
Securities Commission, in her submission to the
CICA/TSX Joint Committee on Corporate Governance,
observed: “I suggest that the Joint Committee take a closer
look at the whole subject of behavioural dynamics ... and
on techniques and approaches to encourage more effective
nvolvement.”
We agree with Stromber, who has been further quoted as
saying that there has been too much emphasis placed on
defining the logistical structure of corporate governance
and not enough emphasis on evaluating either the process
or results of Board activities.
individuals to suspend better judgment to maintain group
cohesion and conformity.
Social psychologists and psychologists have identified
ways that group processes can inhibit each of the four
elements Surowiecki has argued are essential for effective
group decision making.
DIVERSE OPINION
The requirement isn’t only that boards be populated with
people who are likely to have diverse opinions but that
board processes actively promote the expression of diverse
opinions. Common inhibitors to the expression of diverse
opinions are statements like: “I am sure we are all on the
same page,” “We all need to be onside on this issue,” or
“Any thinking person will agree with this point of view.”
These statements are a form of social pressure to conform
to group norms and beliefs and are often expressed to force
convergence to a conventional point of view when an
organization is under stress - a time when diverse opinions
are potentially the most valuable.
Group members who legitimately question a group’s
direction are often labelled disruptive and are silenced by
one institutional means or another. As a result, experts
embedded in larger groups may have difficulty finding a
common language to communicate their insights and
skills, negating the potential contribution of expert
knowledge. Studies of groups have observed that members
undergo a process of socialization by which they learn
group norms and expected behaviours communicated by
central figures (such as board Chairs) in the collective.
Certain leadership styles lead to socialization processes
that, instead of promoting a thorough debate of issues,
breed acquiescence by group members.
GROUP PROCESSES AND DECISION MAKING
James Surowiecki, author of The Wisdom of Crowds
(Random House, 2004), outlines a number of conditions
necessary to establish a wise group. These conditions
include: diverse opinion, independent opinion, the ability
of group members to develop and use task-specific
individual knowledge in contributing to decision making,
and the ability of the group to aggregate individual
knowledge and judgment into a group decision.
One of the major focus areas for social psychologists is the
way in which groups collectively decide on particular
courses of joint action, and how in the process, individual
judgment regarding effective or ethical action may be
altered. Stated differently, social psychologists concern
themselves with how a group may convince particular
110
Social loafing is a motivational/cognitive state in which an
individual sees little merit in working within a group
despite being one of its members. Research suggests that
loafing results when group members are relative strangers,
meet infrequently, and share few social bonds.
Contemporary boards of directors, by their design intended
to ensure a diverse group with diverse opinions, are prime
social contexts for loafing. Indeed, the movement toward
independence may only exacerbate loafing conditions on
boards.
When social loafing is left unchecked and becomes
standard operational procedure in a Board culture, it may
lead to a social psychological condition called herding.
Herding involves the coalescing of group ideologies and
practices around those of one central figure or small cluster
of charismatic figures. Social groups beset with herding
include members best described as sheeple; those who
accept dominant lines of thinking without criticism or
reflection, and view more utility in maintaining the status
quo than upsetting the proverbial apple cart. Although
extensive loafing in a group isn’t a prerequisite of herding
behaviour, excessive loafing is indeed a strong predictor of
the development of sheeple cognitive states and social
practices within a group. The sheeple phenomenon may be
one characteristic of boards that observers characterize as
inattentive or failing to challenge important management
strategies or decisions.
INDEPENDENT OPINION
While regulators and commentators have commented on
the importance of board members being independent of
senior management, there has been little discussion of the
importance of board members acting independently which, as we have just argued, the practice of constructing
diverse boards without regard to appropriately managing
board processes may work against.
Students of board decision-making behaviour appear to
have documented two major obstacles to the exercise of
independent opinion. The first is the failure to develop and
use board processes that effectively exploit board
members’ diverse opinions and skills, and the behaviour of
individuals in general when under stress.
Behavioural theories in social psychology suggest that
unless properly managed, groups of experts may encounter
serious impediments in exercising their skills in evaluating
and advising management.
The antithesis of independent group thinking is a
phenomenon known as groupthink - a situation in which
group members adjust their individual opinions to what
they perceive as the group consensus. This often results in
a situation in which the group ultimately agrees on an
action that each member might individually consider
unwarranted, irresponsible, unethical, or irrational. Indeed,
there is more than ample evidence to suggest that boards of
directors, at least historically, have been rife with
groupthink tendencies. When groupthink manifests into
board of directors culture, there is a marked reluctance to
change, innovation, and self-examination among directors.
Collaboration is a way to get everyone involved by
assigning each member unique tasks and responsibilities.
It is a way for group members to share diverse knowledge,
and assess the tasks to be fulfilled unfailingly. Content
recognizes the centrality of the individuals’ specific tasks
within the group decision-making process. If group
members envision their roles as contributing to the
completion of a worthy task, then they are more likely to
attribute their work efforts to their sense of self and
participate with more frequency and quality. Choice
provides group members with an opportunity to choose the
task they wish to fulfill; in other words, it allows for
individual agency within the group. Arbitrarily assigning
roles in a group often causes complaints, disinterest,
resistance, and frustration. Permitting members to choose
their role stimulates teambuilding and co-operative work.
Psychologists have studied extensively the bases of the
tendency of people to conform to a conventional wisdom
when under stress. They have coined terms such as
irrational escalation of commitment (by some accounts,
recently exhibited by the exuberant bidding for Dofasco)
and the sunk cost phenomenon1 to describe widespread
human behaviour. These behavioural tendencies along
with the self-esteem issue of not wanting to be proven
wrong tend to promote the suspension of individual
opinion and choosing an existing course of action long
after a more dispassionate observer would have called for
change.
This board tendency may be exacerbated by the common
phenomenon of executive over exuberance which Dan
Lovallo and Daniel Kahneman, in a July 2003 Harvard
Business Review article (“Delusions of success: how
optimism undermines executives’ decisions”), attributed to
widespread human traits such as a tendency of individuals
to:
overestimate their talents, underestimate the risk
associated with their decisions, and subconsciously bias
processing information to support their current point of
view.
Some observers have argued that an effective way of
promoting the independent expression of opinion is to
formalize the devil’s advocate role in board considerations
of proposed major management initiatives. The role of
devil’s advocate depersonalizes the expression of a
contradictory point of view, institutionalizes consideration
of alternative points of view, and may encourage people
who are otherwise hesitant to speak against a proposal that
seems widely accepted.
DEVELOPING AND USING INDIVIDUAL
KNOWLEDGE
It is important that individual board members are given the
information they need to enhance the intellectual capital
they bring to the board, while sustaining their individual
111
Board Processes and quality of decisions.
perspective and opinion. The common practice of
providing all group members with the same information
package - usually centred on financial or accounting-based
reports - doesn’t necessarily support this idea. Board
members should be able to solicit and evaluate the type of
information that they want, not what is dictated and
directed by senior management. What remains a challenge,
however, is developing an effective means to promote
collaboration and solicitation of the views of the various
experts that constitute the board.
AGGREGATING INDIVIDUAL KNOWLEDGE AND
BELIEFS
Perhaps the most difficult challenge in organizing and
managing board processes is developing an effective
means to solicit and discuss the knowledge, skills, and
beliefs of individual board members. This is perhaps the
most challenging role of the board Chair, since it means
developing a common platform that promotes individual
contributions to the group discussion and decision.
Forcing board members to evaluate a proposed course of
action by focusing on aggregate financial returns and risk
may be the least effective way of soliciting board
participation because it centres the discussion on an
abstract language (accounting) that may be neither
accessible to individual board members, nor possess the
requisite variety of information to solicit contributions
from individual board members. What may be more
effective is a strategy map approach that lays out the logic
of a proposed course of action so that board members can
contribute their specialized skills and insights in a cause
and effect model that is based on functions.
CONCLUSIONS
While the manipulation of board inputs through
independence structures continues to receive considerable
support in governance circles, sociologists and
psychologists both agree that decisions are made
interactively and interpretively as a process and not merely
via a structure of inputs. Therefore, if governance experts
continue to focus on the form of decision making over the
content of the process, there is reason to believe that
governance ‘meltdowns’ will continue.
To move toward a more processsensitive culture of
governance, three immediate considerations might be
explored. First, Chairs could attempt to engender both task
and relationoriented atmospheres in the boardroom. In
short, most groups look to one or several leaders to set the
tone for group interaction. By creating contexts wherein
112
individual members understand that they are responsible
for contributing to group discussions and proposing
amendments to management’s strategic directions (the
task) and in which diverse knowledge bases are openly
sought out and supported as part of the team perspective
(relationship building), greater critical deliberation in
boards should result.
Second, speaking rituals must be created in the boardroom
to create dialogue and interchange as habitual behaviour.
Groups tend to fall into interaction habits, and unless these
are recognized and disrupted they will continue. The
literature on groupthink, herding, and the escalation of
commitment teaches us this plainly. Careful attention,
then, must be given to hearing from all board members at
every meeting. This might be done by simply asking
members to contribute a report or analysis at each meeting,
offer a critical evaluation of other board members’ inputs,
or suggest five reasons why management’s
decision/direction might fail from their perspective as an
expert.
Third, and perhaps most consequentially, for members of
groups to care about providing insight and performing with
a high level of interest, their efforts must be socially and
institutionally recognized. The analysis of loafing
illustrates how, when members of a group feel ineffectual
or without agency, they stop producing. To discourage
loafing and encourage careful analytical work within the
boardroom, members’ insights must be routinely inserted
into strategic decisions and be presented with reaffirmation
of their efforts by management. Stated differently, board
members must be told they are actually doing a good job if
we want them to continue performing the associated roles.
We feel that while good governance tends to be a veritable
black box within the extant literature, a series of very basic
group tendencies and processes teach us how to cultivate
better corporate governance in Canada and elsewhere.
1 The sunk cost phenomenon, also known as the Concorde fallacy, is the
act of treating costs resulting from past decisions as relevant in a current
decision. Some researchers believe that the sunk cost phenomenon is
deeply ingrained in human behaviour and is rooted in evolution reflecting
the need to conserve scarce resources by seeing a course of action through
to its end. Some researchers believe they have seen the sunk cost
phenomenon exhibited by birds. Kacelnik, A. and Marsh, B. (2002).
“Cost can increase preference in starlings,” AnimalBehaviour, 63, 245250 and Anton D. Navarro and Edmund Fantino. (2005) “The Sunk Cost
Effect in Pigeons and Humans,” Journal of the Experimental Analysis of
Behavior. 83, 1-13.
Anthony Atkinson, CMA, FCMA, is a professor in the
School of Accountancy at the University of Waterloo and
the Management Accounting Area head. Michael Atkinson
is an asistant professor and undergraduate chair of the
department of sociology at McMaster University.

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