Apr 2013 PDF

Financial Management
www.fm-magazine.com April 2013
Sir Terry Leahy

e xc lu s i v e
The former Tesco chief speaks exclusively to FM about building a global brand and entering emerging markets
Plus: Which countries register the most patents? p14 8 ways to... find alternatives to bank finance p36
Financial Management | April 2013
A word from the president
A sharper focus in the boardroom locates potential time bombs
t a recent CIMA event, I asked a senior finance professional what challenges he was currently facing at work. Without hesitation, he said one of his major headaches was the difficulty in getting a clear picture of his functions effectiveness because there were so many layers of administration and management. This troubled me. Effective leadership requires a clear line of sight across an organisation. Blurred vision can be catastrophic. This conversation came back to me as I recalled some of the major scandals that have hit the news here in the UK over the past year or so. The financial services sector was again rocked when three banks were found to have been attempting to rig the London inter-bank lending rate. The British media received a drubbing when the Leveson Inquiry revealed that the illegal phone-tapping of the great and the good by journalists at News International had been widespread. And towards the end of last year, the director general of the BBC was forced to resign after the organisation mishandled the reporting of a child abuse controversy. Underlying all these events was a common theme: a claim that the people at the top didnt know what was going on. Many commentators did not buy this line. In such cases, they said, ignorance was no defence. But with the shift towards globalisation, its fair to say that many organisations are now so complex that it has become difficult for boards to obtain the oversight needed to ensure that the right decisions are being made on the front line. Businesses have been grappling with this issue for some time. On an administrative level, there has been a significant push towards concentrating routine processes in shared service centres, either in-house or outsourced. This has reduced risk as processes are standardised and can be continuously and uniformly improved. Many organisations are also moving to flatter structures, with fewer layers of management. This
requires the remaining managers to have a wider span of control and thus presents challenges for performance management. Roles, responsibilities, objectives and reporting requirements have to be made clear; new performance metrics and reporting systems are often necessary. These developments provide an ideal opportunity for chartered global management accountants (CGMAs). A growing number of our members are playing a central role in guiding these new processes by formulating the best structures and measures to improve performance management. Their professional objectivity can also be engaged to ensure that organisations are managed in the long-term interests of the shareholders and stakeholders. And this is important if business leaders are to have a clear line of sight. Chartered management accountants are ideally positioned to act as the conscience of an organisation and can drive effective management information and reporting so that the board has 20:20 vision across the organisation. No organisation can be effective without understanding the drivers of cost, risk and value, and how to achieve the best outcomes. To further support our members, CIMA has been working with think tank Tomorrows Company (as a member of its Good Governance Forum) to help boards maintain this line of sight and to tune into important issues among the general managerial white noise. Some of this work is included in the CGMA report Governing for Performance: New Directions in Corporate Governance. This covers three key boardroom themes: ownership of strategy and risk; behaviours and relationships; and the dialogue between the board and the management team. It provides both insights and useful tools to help directors move towards boardroom excellence. As the UKs recent corporate scandals have underlined, a sharper focus in the boardroom not only improves an organisations effectiveness, it also locates potential time bombs before they ignite. Gulzari Babber, FCMA, CGMA CIMA president
Download the complete Governing for Performance: New Directions in Corporate Governance report: http:// tinyurl.com/ cnpkkps
Illustration: Masao Yamazaki/Dutch Uncle
At a glance
Front 3-18
A word from the president Gulzari Babber p3 Update p913 Digest of the latest developments in management accountancy and beyond. Hot potato Your ethical dilemmas resolved. Book in brief Going South: Why Britain Will Have A Third World Economy By 2014 Gen Y Collaborative consumption.
26
Study notesC39-49
Editors note
Most organisations now understand the significance of the data they hold. Yet it wasnt so long ago that technological restrictions and limited know-how prevented the ambitious use of this intelligence that we see today. Our interview with Sir Terry Leahy, who drove Tesco from being the UKs third biggest supermarket group to the worlds third largest retailer, reveals how his pioneering efforts in big data delivered these achievements. Amazingly, his initial efforts to kick-start his revolution began with queuing to use a computer. Sir Terrys early adoption of the Balanced Scorecard and e-commerce show the level of innovation required to drive Tesco to such heights. Keeping with the spirit of innovation, this editions infographic examines how fast global e-commerce is growing. It shows that B2C e-commerce passed the $1trn mark for annual sales for the first time last year. This comes on the back of fast-growing online retail in Asia especially in China, India and Indonesia. Meanwhile, our feature starting on page 26 investigates how brands are measured, given the multiplicity of information required to decide their worth. You may be surprised by how many measurement versions are available, depending on whether they are new or established brands.
Corporate foresight analysis, taking heed of prompts for F2 and singlecompany financial statements
I worked on... Delivering double-digit growth at KPMG Sri Lanka p6 The data G20 patent grants by country p14 Forum Blogs, polls and discussion p16 Opinion Simon Goodley of The Guardian on combating corporate corruption p18
20
32
Technical
50-56
Should the UK government switch to Plan B in its fiscal strategy, and driving change in social housing
Back
59-66
Features
20-37
A look at the... Fraud and corruption risk in business Mastercourse p59 CIMA events The calendar of CIMA events, including a summary of past events p60 The Institute Whistleblowing, plus CIMAs new director of learning p63 CIMA CEO column Charles Tilley p65 CIMA versus... p66
Global profile and communications manager Katie Scott-Kurti Financial Management is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ. Group editor Jon Watkins Editor Lawrie Holmes Group art director Simon Campbell Junior designer Josh Farley Creative director Michael Booth Editorial director Peter Dean Chief sub editor Steve McCubbin Senior sub editor Graeme Allen Head of pictures Martha Gittens Acting picture editor Louise Fenerci Picture researcher Alex Ridley Production manager Michael Doukanaris Account manager David Kershook Group publishing director Rachael Stillwell Commercial account director Hilton Young Advertising manager Philippa Mathers
Sir Terry Leahy Exclusive interview with the former Tesco CEO p20 Brand values Which brands are worth the most, and how they got there p26 Jasmin Harvey Manager of corporate governance implementation at Qantas p32 Prime number The growth of e-commerce sales p35 8 ways to... Find alternatives to bank finance p36
CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com Cover image: Matthew Stylianou
Lawrie Holmes
Please send your comments and ideas to editor@fm-magazine.com or join the FM feedback group on CIMAsphere at www.cimasphere.com/groups
Email: Philippa. Mathers@seven.co.uk Tel: 020 7775 5717 Managing director Jessica Gibson Chief executive Sean King Chairman Tim Trotter Seven
The contents of this publication are subject to worldwide copyright protection and reproduction in whole or in part, whether mechanical or electronic, is expressly forbidden without the prior written consent of CIMA/Seven. All rights reserved. Origination by Rhapsody. Printed in the UK by Wyndeham Press Group. Subscriptions: subscribe@fm-magazine.com Tel: 01580 883841 45 (UK), 54 (Europe), 72 (rest of world). Back issues: 7.50 (UK) 10 (rest of world) including postage, subject to availability. All payments should be in sterling drawn on a UK bank.
President Gulzari Babber, FCMA, CGMA Deputy president Malcolm Furber, FCMA, CGMA Vice president Keith Luck, FCMA, CGMA Chief executive Charles Tilley, FCMA, CGMA
www.cimaglobal.com
I worked on Delivering doubledigit growth at KPMG Sri Lanka

Start date 2010 End date 2012
When the civil war in Sri Lanka ended in 2009, the local economy grew. While a significant increase in revenues for KPMG was welcome, we were aware that this top-line performance masked a number of challenges. Our people were focused on revenue creation. However, this was not reflected in greater profits. If anything, we recognised that revenue growth was being achieved at the cost of margins and needed a more informed approach to growing the business. We decided to conduct an annual client service review it was not surprising to discover that our people spent the majority of their time on the most satisfied and highest revenue-generating clients, but there was room for improvement in our recoveries. KPMG hired CIMA-qualified management accountants to provide a real focus on cost drivers and analysis to support investment decisions. We were immediately challenged over our business model, our use of people and our route to market. Our CIMA people benchmarked our competition and provided recommendations to ensure we were market leading. It made staff aware of the margins of the jobs they were working on and allowed us to make some decisions around the utilisation of our people and our focus on investment. It also led to KPMG selling its secretarial services business and supporting a repositioning of service lines to complement the firms local market position and strategic focus. This targeted focus on analysis has created a deeper financial awareness among client-facing managers at KPMG, who have become better business managers as a result. The firm has seen a double-digit growth rate in two years and we are now more aware of the economics of the service we are providing. By doing this, KPMG remains competitive to the point where we have seen a significant increase in recoveries. As a result, KPMG now provides a channel profitability analysis service, supported by the skills of CIMA students and members. Most importantly, CIMA-trained staff are now responsible for the business management of the firm itself.
Name: Reyaz Mihular, FCMA, CGMA
Industry: Accountancy Location: Sri Lanka CIMA qualified: 1982
Gallery Stock
Role: Managing partner of KPMG, Sri Lanka and the Maldives
Update
Apple tops brand table as Samsung makes strides
Apple has retained its position as the most valuable global brand, according to the Brand Finance Global brand-value survey, as technology firms continue their domination of the top spots. While Apple has held on to its mantle as the worlds most valuable brand, Samsung was the big mover in this years survey, jumping from sixth to second in the rankings. The survey valued the Apple brand at $87.3bn (56.4bn), with Samsungs brand valued at $58.8bn (38bn). Google and Microsoft occupied the third and fourth spots respectively, with brand values of $52.1bn (33.6bn) and $45.5bn (23.9bn) although the positions marked a drop of one place on the previous years results for both organisations. David Haigh, Brand Finance chief executive, said of this years research findings: Brand is one of many intangible assets that drive profitable growth. Technology, contractual, human capital and customer intangibles, as well as
general goodwill, all drive overall corporate value. With revenues in the tens of billions, Apple and Samsung are slugging it out for global brand supremacy and are vying with each other to create strong customer love for their brands. The remaining places in the Brand Finance top ten were taken by Walmart (fifth), followed by IBM, General Electric, Amazon, Coca-Cola and Verizon respectively. l See our full feature on the value of brands, starting on page 26.
Shutterstock
11
Update Now on CGMA.org

For those who hold the CGMA designation, the following content is available online:
l How to make the transition from CFO to non-executive director: In governance regimes where executive directors are the norm, CFOs get a useful first taste of the boardroom. The next step is to broaden that experience beyond their own companies by taking on non-executive director roles. Two executives offer tips on making the transition. Visit http://tinyurl.com/ c5xj5vv
threats, these attacks are not easily deterred by traditional controls. Visit http://tinyurl.com/ ca67zoq
l How to pick the next emerging growth hot spot: Brazil, Russia, India and China are losing some of their attractiveness, and multinational companies have started to look for the next growth hot spots, a global Ernst & Young survey suggests. Find out how selecting new markets has changed. Visit http://tinyurl.com/ d6j8pyv
Our guide to the best online tools
Workshare Weve all been there: youre stuck at the office working late on a document and want to send it home to finish it there. Emailing it to yourself may not be secure, while USB sticks get lost and left on trains. This app allows you to securely access and edit files from a secure server.
i
Cost: Free Category: Business Updated: 20 December 2012 Current version: 1.0.2 Size: 3.7MB Languages: English, French Developer: Workshare Technology Inc Compatible devices: iPhone, iPod Touch and iPad System requirements: iOS 5.0 or later
Cybersecurity: 2013 is already the year of the hack. Emerging, relentless cybersecurity threats pose a significant danger to organisations that are unprepared to detect and deter them, according to a new global survey. Known as advanced persistent
l
companies reporting profitability from environmentally friendly practices: More companies are reporting financial benefits after implementing environmentally friendly business practices, according to a recent report. The 2012 annual report of the UKs Marks & Spencer demonstrates the possibilities for innovation through environmental sustainability practices. Visit http://tinyurl.com/ c9a4dwn
l More
Illustration: Lucas Varela/Dutch Uncle
Going South: Why Britain Will Have A Third World Economy by 2014 By Larry Elliott & Dan Atkinson. Palgrave Macmillan 14.99
The authors seek to explain why, for more than a century, Britain has been in denial about its decline and may well join the developing world if current trends continue. Full of insights about the economics, politics and popular culture of todays Britain, this book aims to ring alarm bells about where Britain is heading before its too late. Here is a synopsis:
Book in brief
1. The UK is in a worse position than other elderly European economies because of an unhealthy balance of payments. 2. Educational performance has been dropping down the OECDs Programme for International Student Assessment tables, while Poland and other eastern European countries have been improving. 3. Former prime ministers Margaret Thatcher and Tony Blair failed to check
national decline in a world where managerial and political elites do not know what to do about financial crises. 4. Swedish social democracy and Freeport Britain, which would involve turning the country into one enormous enterprise zone, are two proposed responses. 5. Both involve a reconfigured relationship between the UK and the institutions of the European Union.
12
13
Update
Getty Images
Earnings uncertainty is key risk for finance executives

Finance executives say the onset of the financial crisis over the past five years has seen a rise in earnings uncertainty for their businesses, which is likely to continue for at least the next three years. Thats the message from the Oliver Wyman 2013 Risk Management Survey, which asked CFOs, corporate treasurers and other senior finance executives how their organisations are addressing risks. More than half of respondents reported that their organisations are exposed to more earnings uncertainty today than five years ago (58 per cent). Furthermore, more than half expect the forecasting of critical variables to become even more difficult in the next three years. Among these critical variables, the largest share of survey respondents (30 per cent) cited macro-economic factors such as GDP growth as the most influential issues driving earnings uncertainty, followed by financial factors, external conditions and commodities. Respondents from publicly traded companies cited commodities as the most influential factor. Those from privately held companies tended to cite financial factors and business operations. The survey also revealed that more than half of finance professionals report that it is more difficult to forecast risk today than it was five years ago. Furthermore, the risks that are hardest to forecast are having the greatest impact on earnings and will continue to influence financial results in the future, finance executives said. They predict the risks with the biggest impact are customer/ satisfaction retention (cited by 44 per cent of respondents), regulation (37 per cent) and GDP growth (35 per cent), followed by political risk (28 per cent), interest rates (21 per cent) and credit risk (21 per cent). l Visit the CGMA Risk and Innovation spotlight: www.cgma.org/innovation For the code and other online ethics resources, visit www.cimaglobal/ethics Tanya Barman, head of ethics, CIMA Disclaimer CIMA does not provide legal, investment, professional or career advice. No responsibility or liability whatsoever is accepted for any error, omission (whether or not arising out of negligence) or for any loss or damage sustained as a result of reliance on information supplied or comments made.
Geoff Anderson explores what businesses can learn from this new economic model
Traditional ways of doing business are being disrupted in a variety of ways, shaped by changes in technology and the rise of peer communities. One of these, collaborative consumption an economic model based on sharing, swapping, bartering, trading or renting access to products as opposed to ownership is reinventing not just what people consume, but how they consume it. Championed by Rachel Botsman and Roo Rogers in their 2010 book Whats Mine Is Yours: The Rise of Collaborative Consumption, the concept made Time Magazines ten ideas that will change the world in the same year. From marketplaces such as eBay and Craigslist to emerging sectors such as social lending site Zopa and carsharing site Zipcar, collaborative consumption has developed into numerous strands. The impact of the financial crisis, which has limited lending and investment opportunities, has also fuelled enthusiasm for peer-to-peer exchanges, whether its space, goods, skills, money or services. The collaborative approach even extends to consumers helping to develop a product or service in its infancy. Starting a new company is very daunting, and in the tech space you need to move quickly before something else comes along and takes away your competitive advantage. PixelPin, a new mobile security business, which I started last year, is using a number of collaborative techniques to move from a standing start a lot quicker than would have been possible if we had adopted traditional business methods. PixelPin won a place into a business accelerator called Wayra, run by Telefonica, along with 15 other companies last June. The months here have felt like running a business inside an MBA course, with the significant help and mentoring we are receiving. We now have a series of mentors who have influential positions in their own companies and who are willing to spend their own time helping us in specialities that we do not have in our team. This collaborative approach works both ways as it gives the mentors and advisers an insight into the start-up world and a chance to use their skills in a completely new environment. The tech jargon of getting a minimal viable product (MVP) to market is all the rage, but we have been able to go one better. We have found a number of well-known businesses that like innovation and have become part of our testing and development regime. PixelPin replaces passwords with pictures, which although more secure and user-friendly than passwords, requires users to understand a completely new concept in authentication, or the login process. These businesses are looking for market differentiators and have put PixelPin in front of their customers from an early stage. Their feedback and professional testing facilities greatly enhanced our product and allowed them to have an input into the look and feel of the product. This has given PixelPin a great way to develop the user interface in an environment we could not afford. This collaborative approach has also given us the chance to discuss how businesses would implement PixelPin before we have designed it, massively reducing wasted development time built on the assumptions of customer requirements. Most businesses like to be innovative, and working with small start-ups is a great way to find innovation. The difficulty for most businesses is dealing with very small companies, but we are proving that it is worth the effort. Geoff Anderson is co-founder of PixelPin
Collaborative consumption
Hot potato This months dilemma:
Our response: By referring to the ethics checklist you need to ensure you have the facts of the case
Illustration: Denis Carrier/Dutch Uncle, Dave Murray/Dutch Uncle
I work in finance for a public unlisted company. The major shareholder is the CEO and he takes responsibility for all decisions. For tax reasons, he is manipulating operations and the transfer of goods, and ultimately how information is shown in order to lower the liability. I am not sure what action to take.
and requirements by law, as well as how things would be seen if they came to light by a third party. Good ethics may be above the law. It may be that your integrity is being undermined (section 110). You need to ensure any financial reporting represents the facts accurately and completely in all material respects (section 320). It also appears that the CEO may be using intimidation, so consider both threats and safeguards in relation to conflict (section 310).
14
Financial Financial Management Management | July/August | April 2012 2013
Financial Management | July/August April 2013 2012
15
The Data Patent grants by country of origin G20 countries
Germany Domestic: 21,789 Foreign: 50,557 Canada Domestic: 2,150 Foreign: 8,467 UK Domestic: 4,938 Foreign: 13,337 France Domestic: 13,616 Foreign: 21,150
Russian Federation Domestic: 20,475 Foreign: 1,702 Italy Domestic: 7,969 Foreign: 8,243 Japan Domestic: 197,594 Foreign: 107,010 China Domestic: 112,347 Foreign: 5,811
US Domestic: 108,626 Foreign: 92,532
Turkey Domestic: 865 Foreign: 362 Saudi Arabia Domestic: 17 Foreign: 211
Mexico Domestic: 245 Foreign: 228
South Korea Domestic: 72,258 Foreign: 25,456 India Domestic: 776 Foreign: 2,101 Indonesia Foreign: 19
Key Patents granted by the domestic office to resident applicants Patents granted to resident applicants by foreign offices
Brazil Domestic (2010): 314 Foreign: 567
South Africa Domestic: 567 Foreign: 552
Australia Domestic: 1,267 Foreign: 4,895
The rise of Chinese innovation

Just how global the rise in patents is becoming can be seen in the rapid increase in patent applications by Chinese companies, reflecting Chinas rapid growth as an economic superpower. Figures published by the World Intellectual Property Organization (WIPO) in December 2012 reveal China moved ahead of the US in the number of patents registered in its own market. Chinas Patent Office has received more applications than any other countrys since 2011, three-quarters of them lodged by Chinese companies.
Argentina Foreign: 104
Source: World Intellectual Property Organization
16
Forum From the blogs

Six months on from the London Games what have the biggest lessons been?
The Institute for Governments new report, Making the Games, identifies 12 lessons, which for me boil down to three key messages: 1. If we all have a common vision and purpose and trust one another, well work well together. Even the politicians stopped fighting. 2. Be disciplined with time and budgets (although Im not convinced that building in more than 2bn of contingency demonstrates this particularly well...) 3. Money invested in planning, safety and assurance is money well spent. An interesting read, whether youre a project manager or a sports fan. Rebecca McCaffry, ACMA, CGMA, innovation specialist at CIMA. More blogs can be found at http://community.cima global.com/blogs
CIMA news
CIMA sees record growth
CIMA, which is already the worlds largest professional body of management accountants, has announced record growth figures. In 2012, more than 29,000 students and 5,700 new members joined the institute as its global footprint continues to expand. A record number of new students from Poland and Russia have chosen to study CIMA, while Bangladesh and Ukraine saw an increase of 303 per cent and 235 per cent respectively. CIMAs core markets in the UK and Sri Lanka grew significantly, while South Africa and Malaysia also saw a record number of students signing up. Andrew Harding FCMA, CGMA, managing director of CIMA, said: We have once again seen exceptional growth figures as ambitious school leavers, graduates and professionals identify CIMA as the global qualification which will best support their career ambitions. We have strengthened
Poll of the month We asked

Should external auditors be automatically rotated?
Yes, frequently (less than every 10 years): 81%
Yes, but infrequently (every 10 years or more ): 3%
No, there shouldnt be forced rotation: 8%
Dont know/cant decide: 8%

Source: Survey on fm-magazine.com, 2013
our global profile through a successful joint venture with the AICPA; a groundbreaking move which has shaken up the accountancy profession. We established the CGMA designation last year in response to a need for skilled people who can bridge the gap between business, strategy and finance, and a global designation to recognise their abilities. We are very proud to now have more than 129,000 CGMA business experts, who are guiding critical business decisions at the worlds top organisations.
Innovation and risk in the spotlight

How do global market leaders get the balance of risk and innovation right? And what role should the finance professional play? CIMA and the AICPA have created a comprehensive roundup of the latest thinking, tools, reports and best practices in risk and innovation to help you answer these questions and navigate this critical space. The roundup, including video and written material, is at: www.cgma.org/innovation.
You asked
Please explain more about the finance lease and its appearance in statements.
A finance lease is capitalised at cost (the present value of future minimum lease payments) in the books of the lessee, and a liability recognised to the extent of this amount (see p375 of CIMA Learning System). The amount of capital due for settlement over the next 12 months is classified as a current liability and the balance as a noncurrent liability. The lease is like a loan from the lessor,
cutting out the middleman. A company may be required to pay the lease amount, either in advance or in arrears, depending on the contract with the lessor. If the payments are made in advance, then the current liability is equal to the lease instalments in the current financial year and the rest goes into non-current liabilities. If the payments are made in arrears, then the current
liability is the next periods lease instalment, less the amount of interest cost in that instalment, and the noncurrent liability is the interest cost, plus the remaining amount of the liability. Send in your own queries to questions@ fm-magazine.com. We will ask a specialist or tutor to provide a response.
18
Opinion
Simon Goodley
Senior business reporter, The Guardian
Strong leadership and good governance can prevent your firm from becoming the star of the next corporate corruption scandal
olonel Pickering once famously asked: Have you no morals, man? Cant afford them, governor, replied Alfred Doolittle. Many readers will, of course, recognise that exchange from George Bernard Shaws Pygmalion, but few will be sad enough to know that the lines have also appeared in a far more obscure script. Back in April 1976, a witty Whitehall official used the quotation to preface a confidential UK Department of Trade paper on the subject of special commissions and allied payments, which took a rather pragmatic view on how capitalisms wheels were being lubricated. The existence of, and need for, special commissions if business is not to go elsewhere has long been recognised, the document explained. A possible reason for [the level of commissions rising as high as 25 per cent of the contract value] lies in the new rich oil markets in the Middle East and elsewhere where bribery has, for centuries, been endemic. Denis Healey, Harold Wilsons defence secretary from 1964 to 1970, put the problem in more direct language. Bribery has always played a role in the sale of weapons, he told The Guardian in 2007. In the Middle East, people couldnt buy weapons unless you bribed them to do so, and that was particularly true in Saudi Arabia. Plus a change. The issue of corrupt payments periodically comes back in vogue and following the 2010 Bribery Act the issue is fashionable once more. Just before Christmas Rolls-Royce, the aero engine group whose reputation appeared so robust that the UK coalition held a cabinet meeting at its Derby HQ in 2011, said it had passed information about bribery and corruption allegations to the Serious Fraud Office. These are only allegations and the claims do seem to relate to the past, as well as involving the companys intermediaries. But intermediaries can do tremendous damage. They are recruited and approved by the company and there is a clear obligation to make suitable appointments and then monitor behaviour. Furthermore, the Bribery Act does not allow companies to explain irregular payments away by simply blaming it on some outside agent. Acting for the company is enough.
So if a company of Rolls-Royces standing can get dragged into these cases, then are any businesses immune? Probably not.
By putting proper structures and leadership in place, corrupt cultures can be changed
ssuming that all large companies have a distribution of wrong uns on their payrolls, then problems are going to occur. The question is: what does a company do about that? Certainly, it needs an ongoing process of training and controls as well as detection through hotlines and, possibly, offers of amnesties. But the corporate structure must also be in place for these tactics to work. Despite numerous management textbooks advising otherwise, certain companies still function in silos, ignoring simple checks by having certain compliance functions whose tentacles dip into all of a businesss distinct divisions. The problem is so current that you will hear senior figures in certain FTSE 100 companies talking about bringing compliance up to the standards of investment banking an industry which would hardly seem like a role model of good governance. Yet, by putting proper structures and strong leadership in place, corrupt cultures can be changed. In 2008, after German electronics giant Siemens was discovered to have been involved in bribery on a global scale, it instituted an amnesty for staff, promising: If you come in and tell us the whole story, we will not fire you. We wont punish you and we will try and help you with the authorities. Around 130 people stepped forward. Now Siemens claims that if it is asked for a bribe, it refuses. It insists that it still gets the deals without resorting to stuffing readies into an envelope. If that seems a nave and optimistic assumption of the exporting process, then the company can at least point to the theatre to demonstrate how happy endings can make money. Take Pygmalion. When Shaw returned to watch the plays 100th performance, he watched in horror as Professor Henry Higgins tossed a bouquet to Eliza Doolittle. My ending makes money, you ought to be grateful, protested the theatres owner, Sir Herbert Beerbohm Tree. Your ending is damnable, replied Shaw. You ought to be shot.
Getty Images
20
21
Exclusive interview
e xc lu s i v e
Sir Terry Leahy

Interview by Lawrie Holmes
Photography by Matthew Stylianou
Sir Terry Leahy pioneered innovative new ideas, such as big data and the Balanced Scorecard, in his quest to drive profitability at Tesco. The result has been the supermarket groups astonishing rise to become the worlds third largest retailer
22
23
Exclusive interview
ig data is all the rage now. Companies are often judged on the quality and breadth of the information they hold, as much as any other aspect of their business. But when Sir Terry Leahy now credited with pioneering the use of research to power Tesco from Britains third biggest retailer to the third largest in the world worth 29bn began his cultural revolution the world was a very different place. The story of how he exploited data while he was Tescos chief executive is an instructive tale of innovation that is valuable to any organisation. Having joined Tesco as a researcher in 1979 after leaving the University of Manchester Institute of Science and Technology with a degree in management, Sir Terry says it was instinctive for him to use data information as the basis for making decisions. I was a little surprised when I came into the business at just how subjective it was how people would make decisions on the basis of no information whatsoever. There was the additional problem of a lack of computing power. Computers werent that powerful and were mainly used for operating things, such as ordering. You had to queue to use them, he says. Then the bar code came along in the 1980s; that revolutionised a lot of things. You were getting the beginnings of a database on products, and then the big breakthrough was when you had enough computing power to gather customer information, as well as product information. Sir Terrys bold stroke was the launch of the Clubcard in 1995 to recognise customer loyalty, by which time hed taken up a place on the board as marketing director. It was an important year for Sir Terry as it was when Tesco overtook its main rival, Sainsburys. Using details garnered from Clubcard users, a vast database of customer behaviour began to emerge at a time when the dominance of supermarkets had diminished other retailers once strong relationship with customers. You had these big retail groups and they didnt know who their customers were, says Sir Terry. You may have been in the place where they spent most of their money in a year and you didnt even know who they were. So that was an important objective to find a way of discovering who the customers were, while also saying thank you for being a customer. The superstars of the retail world who have followed in Sir Terrys wake pay homage to his understanding of the importance of knowledge of the customer base. Nick Robertson, founder and chief executive of online fashion retailer Asos.com, which
has grown into a 2bn business over the past 14 years, considers him an inspiration. If you were a physical store, then the idea of having detailed information on your customers was totally alien, at least it was before the Tesco Clubcard came along, he says. Sir Terrys insistence on a more objective approach can be traced back to his degree, which focused on scientific methodology and psychology. With that background it surprised me that people were saying this is what our customers were thinking without having any evidence to prove thats what they were thinking, he says. Using this information was very empowering. When I became marketing director, I was troubled because I didnt have a power base. The big power bases were finance, retail operations and buying. But I was able to use this research as the voice of the customer and bring it into the business. Frankly, it was the most powerful power base because
probably wasnt that intuitive because you were basing it on all that research youd been eating the whole time. For me, thats a good combination you dont want to be completely research driven, thats rather soulless and I have seen situations where people suspend their judgement and insight and are ruled by data. You dont want to do that. Its got to serve you, not the other way round. Armed with quality information about current customers was one thing, but taking the leap into new territories represented a risk, despite taking up to three years to research the prospects of success. Under Sir Terrys leadership, Tesco launched a global roll-out programme that has resulted in a presence in 14 countries. The rationale? Youre either going forwards or backwards. You cant just plod along. As a broad strategic thrust I went flat out because attack is the best form of defence.
The lesson for anyone in management is that youre using the power of argument, rather than just pure power
it was very hard for other parts of the business to resist or second-guess the voice of the customers. Being able to successfully interpret customers needs is a message that Sir Terry believes is vital for all organisations. Its always difficult for organisations to understand the environment theyre in so bringing in information from the outside world is hugely valuable, he says. I think the other lesson for anyone in management is that youre using the power of argument, rather than just pure power. The debate was based on argument backed by research, rather than who was the most powerful. The timing couldnt have been better for Sir Terry to unleash his plan. At the time, as the third biggest supermarket group in the UK and with a history stretching back to 1919, Tesco was thought to be underperforming. Difficult times are when people will look to new ideas, so that was a moment of opportunity. Its often harder when a business is doing well as people are resistant to new ways of doing things. But understanding how to use data is key, says Sir Terry. Youd consume a lot of data and then make a subjective decision, an intuitive decision. But it
The only risk I tried to stop short of was taking a risk from which the business could not recover
Globally, the strategy has been a massive success, bar one or two setbacks, which Sir Terry believes are inevitable when the growth strategy is pushing in so many directions. There are still question marks over the performance of the Fresh & Wild concept rolled out in the US in 2007, which is currently the subject of a strategic review. There was a risk of jumping into the unknown and I think thats important. The only risk I tried to stop short of was taking a risk from which the business could not recover, says Sir Terry. The role of failure in management is something Sir Terry has spent a lot of time thinking about. Being prepared for failure is very important, he says. I view success and failure as two sides of the same coin, that you couldnt have success without failure. Both were the product of the same ambition trying to do things differently. And you dont have to get everything right all the time. If the main things go right, then its OK. Sir Terrys quest to develop a culture of empowerment chimes with the balance of risk-taking he thinks is appropriate. Its the right culture for encouraging people to take a risk in the business, he says. Thats really important because if people feel theyre going to be scapegoated if something goes wrong they will never take a risk. He also believes strongly in installing core values in an organisation, no matter how many places it operates out of. The important thing is to say whats important and then as you go into new countries and bring in new people therell be a lot theyll identify with anyway and support, and the things they dont identify with you can influence by your behaviour. One of the great strides forward for the group was the early adoption of online retailing. Sir Terry says he thought the internet revolution was going to have big consequences for the group but didnt know how, investing in it after a presentation portraying a busy housewife ordering groceries from the kitchen. That would be a great world to be in. You knew the customers would like it so lets see if we can make it possible, he says. Tesco was a pioneer in these things. The Balanced Scorecard (and steering wheel) can also be considered to have seen an early introduction at Tesco, thanks to Sir Terry. What made it so effective was the ability to link these concepts all the way down to individual I view success and failure as two sides of the same coin, that you couldnt have success without failure
You had these big retail groups and they didnt know who their customers were
24
Having to fight his corner, both publicly and within the group, has been an essential part of the job, although he concedes he has had a particularly good relationship with shareholders compared to peers, which is inevitably due to the trajectory of the groups performance. How he did this so successfully was by harnessing the resources available and delivering a consistent message. A shy person by nature, he says: You dont have to be charismatic to be effective. I think people want to know whether youre authentic. You do have to let people know who you are, which can be painful, and then you have to be consistently like that and then theyll say, I know who that person is and I can rely on them. They dont have to like you, but they stores, says Bernard Marr, chief executive of the Advanced Performance Institute, who worked with Sir Terry in developing the idea across Tesco. The success of Tesco has been down to Terry Leahys ability to set corporate strategy through the Balanced Scorecard, he adds. For Sir Terry, the key was ensuring a sense of harmony across the group. Everybody could see how their contribution made a difference, he says. It also provided a balance so that people never pushed too hard on one side of the business at the expense of others, because in big organisations a lot of the problems arise because youve got conflicting measures going on. Another key area where Tesco has made its mark has been in the supply chain, an area of focus for every major food retailer since the horsemeat scare hit Europe in recent months. During his tenure, Sir Terry sought to improve supply chain efficiency by vigorously pursuing a lean management strategy. Those techniques can be a big part of the solution to the sustainability problem because it addresses the productivity of natural resources and how you can get more consumption out of fewer natural resources. Youve got to decouple consumption from finite natural resources, and lean management techniques are very good at that. Where you find bottlenecks and pinch points, redesigning things and applying reusable supply chains means conservation is a very good management technique. The sustainability gains made by Tesco are often drowned out by the concerns of activists worried by the threat of its size and use of scale for competitive advantage. In some quarters theres some recognition, says Sir Terry. In gongs for the greenest company Tesco does very well. I think ordinary people would be surprised to know that Tesco is a world leader in sustainability.
When people chat to me in business on how to get on I always say, Be yourself, dont try to be like me or anyone else
do need to know who you are. When people chat to me in business on how to get on I always say, Be yourself, dont try to be like me or anybody else. One of the things I learned is that there are only a few things that are important. And so I would be prepared to lose a lot of battles, but I always won the important ones. I was never one to argue all the time, someone who had to have the last word and win every battle that would be exhausting and not the right way. So I used to keep my powder dry for the right moments. Winning the important ones would be about having good information. Id have tested it and experienced it, so it would be the power of the argument. Im pretty determined so I wouldnt yield. As for the innovations Sir Terry has put in place, he says the key for any business is never to define yourself by what youve done in the past. If you can define yourself as serving customers needs and make those changes youve always got a business because youve changed to what they need, he says. You can find lots of successful businesses that started out doing something they stopped doing long ago. I think its very healthy for a business to move on. If we only sold baked beans it would never have been as successful and it wouldnt be successful in the future.
You can find lots of successful businesses that started out doing something they stopped doing long ago
26
27
Marketing
Illustration by AM I Collective
Whats a brand really worth?

Despite a lack of consensus on how to calculate the value of a brand, Charles Orton-Jones highlights how they are increasingly making their way on to the balance sheet and being used to gauge a companys wellbeing
ets be honest. Even marketing professionals have their doubts about the science of branding. Marketing Week columnist Mark Ritson lost his temper recently when looking at the league tables of the most valuable brands. He ranted: Dumb marketers keep banging on about getting marketing into the boardroom. Are they insane? We cant even agree within a $100bn what the value of the worlds biggest brand is. BrandZ says Apple is worth $182bn, while Interbrand claims its only worth $76bn. Clearly, there will always be differences in valuation caused by methodology or base assumptions. But $100bn? Come on! Its a joke. With this in mind, many management accountants may try to give marketers and their brand numerology a wide berth. But alas, this is not an option. For two reasons. First, brands are powerful tools with an astonishingly wide array of corporate applications. Second, brands are creeping onto the balance sheet, thus becoming part of the management accountants domain.
If the first claim was in any doubt, then consider the case of the drug, ibuprofen. Consumers regularly face a choice between generic ibuprofen costing 1 a pack or Nurofen costing 4. The chemical composition of both products is identical. Yet consumers repeatedly and knowingly buy the branded product. Brands can be used as collateral against loans. When Indian tycoon Vijay Mallya needed to raise funds for acquisitions he used his whisky brands Bagpiper and Whyte & Mackay as collateral. He is currently trying to pull off the same trick with his Kingfisher airline brand. Following an administration an insolvent firm can sell its brands, a process requiring a valuation. When Woolworths went bust the administrator used an external valuer to find a price for the brand to ensure a decent return was received from buyer Shop Direct Group. A royalty arrangement can help a firm lower its tax bill. Starbucks UK pays a licensing fee to Starbucks Coffee EMEA BV, a structure (controversially) designed to lower its UK tax liabilities. Brands can be loaned out. Starbucks struck a
28
deal with Kraft to co-create a range of supermarket goods. Kraft brought its knowledge of the grocery market to the deal and Starbucks provided a brand that offered a 20 per cent price premium. The deal ended in legal arbitration, but over a 12-year period Starbucks packaged coffee sales grew from $50m to $500m. Investors are starting to pay attention to brands as indicators of financial health. Research by Millward Brown one of the big three brand valuation agencies showed that shares in its BrandZ portfolio of strongest brands had outperformed the S&P 500 by 37.1 per cent since April 2006 to May 2012. Jim Stengel, former global marketing officer for Procter & Gamble, says his Stengel 50 top brands have outperformed the S&P 500 by 400 per cent since the turn of the millennium. There is also the small matter of IFRS 3 requiring firms to value all acquired assets independently on the balance sheet, including brands. These factors ought to convince you that brands are worth understanding. Now for the tricky part. Putting a sign on a brand. How exactly does one do that? The key document is ISO 10668. This lists the permissible ways in which a brand may be valued. Have a read and youll notice that there are an awful lot of approved methods. The process starts on solid ground. Legal due diligence confirms the legal status of the brand and identifies potential threats. For purely financial reporting purposes the legal due diligence is not compulsory, but for any activity involving a third party it is mandatory. The next stage is behavioural analysis. This looks at the market in which the brand operates, the perception of the brand among stakeholders, customer perceptions and the range of benefits derived by the brand owner.
Investors are starting to pay attention to brands as indicators of financial health
Last... cue drum roll... is the controversial financial analysis the number-crunching bit. There are three ways to perform financial analysis: 1) The market approach benchmarks brands by looking at real-world transactions. Researchers scour the press for brand sales to see what similar brands are fetching. The figure is then tweaked to account for differences between the brands being compared. This technique has the advantage of anchoring valuations in the real world. 2) The cost approach asks the hypothetical question: How much would it cost to build this brand from scratch? 3) The income approach tries to identify the additional income generated by the brand. This can be done in a number of ways. - The price and volume premium method estimates the higher price commanded by a brand, or the extra units sold, because of the strength of the brand, using generic alternatives for comparison. Valuing Nurofen compared to generic ibuprofen
Putting a valuation on brands helps to communicate the vital role they play to cynics in the boardroom
would be particularly susceptible to this approach. - The income-split method identifies the proportion of the economic profit attributable to the brand. This involves discounting the cost of capital employed and factoring in behavioural research. - The multi-period excess earnings method values the brand as the present value of the future residual cash flow after deducting returns for all other assets required to operate the business. - The incremental cash flow method compares the cash flow generated by the brand to the cash flow generated by a similar, but unbranded, product. - Lastly, the popular royalty-relief method, which uses market data to try to calculate what fee would be levied if the brand owner did not in fact own the brand, but licensed it from a third party. So, which is the best? Each valuation firm has its own view. At Brand Finance the relief from royalty method is the most frequently used. Managing director Richard Yoxon says theres a
Brand as a barometer
Do you use data to build your brand or follow your gut?
A mix. When we wanted to launch the Extreme energy drink we thought wed make it stand out by being healthy. Our target market is 18 to 24 year olds, but we are inspiring for ten year olds and up and inspirational for those aged 40 down to 24. When we asked our target market they said they wanted the drink to be as badass as possible, with as many functional ingredients as possible. They werent concerned about it being healthy. We needed to take this on board and mix it in with our own view. The trick is to really understand your consumers. We are continuously using every touchpoint we can to research our customers. We need to know what they think and what they want. Al Gosling, founder and CEO, Extreme Sports Company
31
I was a little surprised when I came into the Does the EE brand team use ISO 10668-approved business how valuations of the brand? subjective it was At EE, we dont pay too much day-to-day attention to brand valuations, the sort accountants need for the balance sheet. We prefer three main ones. There is awareness, both prompted and unprompted. Prompted is when we ask consumers if they can name mobile phone brands, and if they mention EE, thats unprompted. Or we may ask whether they have heard of EE, and if they say Yes, thats the brand with Kevin Bacon, then thats a positive prompted response. We measure consideration. We ask consumers that if they were in the market for a new phone, which brands would be uppermost in their minds? And we measure intent. The million-dollar question: What are you going to buy? Our in-house team uses sub-contractors to gather this information. They share it with the firm and then feed that data to the team developing new propositions to help them understand what the market is thinking. Im delighted to say that EE has achieved 43 per cent spontaneous awareness in two months, which is well ahead of where wed planned to be. Steven Day, chief of brand and communications at EE
Brand valuations
good reason for this: The basic premise is to ask how much youd need to pay to license the brand if you didnt own it. The method has the benefit of being quasi-market. We are benchmarking the brand with comparable real-world examples. It is the most commercial approach. Interbrand broadly prefers the income-split method. The reason is that comparable real-world deals can be hard to find. And even when deals in the same industry are available, who is to say whether the same metrics should apply to another brand? Interbrand is also known for the strength of its behavioural analysis, using experts to identify the position of a brand in a market. Each approach has its merits, argues valuations expert Anastasia Kourovskaia, vice president at global research agency Millward Brown Optimor: If you want a defensible figure to present to the tax authorities, then Brand Finances relief from royalty method is a good one. The taxman cant argue with real-world figures. The cost approach, where you try to work out what it would cost to create a brand from scratch, is useful for new brands. For older brands, such as CocaCola, it is impossible to know what it would take to re-create the brand. Interbrands use of experts seems to me the more difficult method. Experts may disagree. And we know that advertising awards are often given by experts to campaigns, which dont deliver much uplift in sales, whereas campaigns that drive sales may be ignored by experts. Millward Brown Optimors unique selling point is its use of customer surveys when building a val-
uation. We use a battery of questions to identify their opinion of the brand and their relationship to it. Its vital because consumers are the ones who really matter, says Kourovskaia. The method has its critics too. Brian Millar, director of strategy at branding consultants Sense Worldwide, says: Asking consumers can drag you into a false world. People will make up opinions about brands theyve never really thought about. Consensus exists on one point. Putting a valuation on brands helps to communicate the vital role they play to cynics in the boardroom. Management accountants may be included in that roster. Brand Finances Yoxon says: Management accountants need to understand that brands have an impact. It isnt just woolly marketing speak. By putting a value on brands it may be possible to justify increased investment in the brand. For example, if you update your stores you will incur a substantial cost. Carrying out a brand valuation and measuring how customer perceptions translate to the bottom line makes it easier for both marketing and finance departments to commit to that investment. Brand valuation can build a bridge between those departments. If only precise brand valuations could be more readily determined. Mark Ritson proposed one answer: We need the marketing equivalent of a cage fight to work out who is the most accurate valuation firm... wait for an actual acquisition to take place and then compare the price paid with the one predicted by the firms. The winner becomes the industry standard. The losers quit the field. Bring it on!
Top 10 global brands

BRAND BRAND VALUE 2013 $87,304bn $58,771bn $52,132bn $45,535bn $42,303bn $37,721bn $37,161bn $36,788bn $34,205bn $30,729bn BRAND RATING 2013 AAA AAA AAA+ AAAAA+ AA+ AA AAAAAA+ AA+ BRAND VALUE 2012 $70,605bn $38,197bn $47,463bn $45,812bn $38,319bn $39,135bn $33,214bn $28,665bn $31,082bn $27,616bn BRAND RATING 2012 AAA+ AAAAAA+ AAA+ AA AA+ AA+ AA+ AAA+ AA APPLE SAMSUNG GOOGLE MICROSOFT WALMART IBM GENERAL ELECTRIC AMAZON COCA-COLA VERIZON
Brand Finance Global 500 (2013)
32
33
Q&A
Jasmin Harvey, FCMA, CGMA, manager, corporate governance implementation, Qantas

What is it like working for Qantas? The Qantas Group is a dynamic and fascinating business I am learning every day. Its a complex business with a premium airline, a low-fare airline Group (Jetstar Group) with operations in Melbourne, Vietnam, Singapore, Japan and soon Hong Kong, a Loyalty (frequent flyer) business and a freight business. This complexity, combined with the uncertainty of operating in the global aviation market, means that no two days are the same. Its a risk and accounting professionals dream in terms of career development and continuous learning. How is the company performing, given the strength of the Australian economy? The group operates as a global business and is impacted by global demand. Our domestic business is doing well, based on the strong domestic economy, despite a tough competitive environment. We recently embarked on a five-year transformation programme of our international business, which has suffered due to global economic conditions and, more importantly, a permanent shift in the competitive landscape over the past few years with the emergence of Middle Eastern and Asian carriers. Our Loyalty business and Jetstar continue to go from strength to strength. How have attitudes to risk in the airline industry changed since you have been working there? I began working for Qantas just before the global financial crisis of 2008. The crisis, combined with the inherent volatility of the airline industry, means that the attitude to risk has always been on the downside. The number of shocks the airline industry has faced 9/11, SARS, bird flu, volcanic ash clouds, record fuel prices and the financial crisis have only reinforced this thinking. More recently, in order to respond effectively to the competitive environment, the attitude to risk has changed so that taking on measured risk to grow and transform is not only seen as a good Interview by Lawrie Holmes thing, it is critical to survival. This is not to say that the attitude to ensuring the highest standards of safety has changed safety will always be the number one priority at Qantas (and other airlines around the world). What areas of sustainability is the airline industry improving in? A key priority is the reduction of carbon emissions resulting from fuel burn. In 2009, the International Air Transport Association (IATA) set ambitious targets, including improving fuel efficiency by an average of 1.5 per cent per year to 2020, to achieve carbon-neutral growth from 2020 and to see a 50 per cent reduction in carbon emissions by 2050. The Qantas Group has set improvement goals consistent with those targets. Fuel optimisation and efficiency initiatives have contributed significant savings, but fleet renewal with technologically advanced aircraft and the development of a commercial sustainable aviation fuel industry will bring the greatest savings. Other environmental impacts the industry is focusing on are reducing resource consumption, such as water, the amount of waste sent to landfill and community impacts, such as noise. With high capital costs and thin margins, the aviation industry has always focused on resource efficiency, and with the emergence of sustainability as a global imperative there is an even greater incentive to improve. Enhancing the customer experience through investment in innovative technology (for example, online and mobile check-in, in-flight entertainment, electronic bag tagging), making flying more comfortable and rewarding passengers have emerged in response to intense global competition. Global safety, health and security standards have improved significantly to make air transport the safest and most efficient form of transportation. How and when did you decide to become a management accountant? After initially studying to become a chartered accountant and working as a tax specialist
High-flyer
34
Q&A
exciting, while the time I spent managing CIMAs research function taught me the importance of research and development, and bringing new insights and ideas to the profession. I sit on CIMAs Research and Development Group and chair the Research Advisory Group. I would encourage all members to read CIMAs research reports and other technical outputs as part of their CPD activities (see http://tinyurl.com/agd56mj) How do you see your career progressing in the next few years? I am lucky that Qantas has an internal culture of providing leadership opportunities in areas where you may not have worked before, based on your capabilities and transferable skills. I am also keen to work overseas again at some point. at Deloitte, I decided I wanted to work in business. While it was an excellent grounding for a professional services role, my chartered accountancy background did not equip me with the range of skills I needed to work in business. When I moved to London from Australia in 2003, I came across CIMA and its qualification. An opportunity arose to join CIMA as an employee (in its technical department, given my accounting background) so I decided that this was a great opportunity to study for the qualification as well. What has been your career so far and how did you end up in the airline industry? At Deloitte I worked in the expatriate tax team in Sydney, which included a secondment to the Toronto office. I then worked in various technical accounting/policy roles, including CIMA, and led a project in Mumbai with the Indian Institute of Bankers while I was working for the Securities Institute of Australia. When I returned to Australia in 2007 after five years in London, an opportunity came up to join the Qantas Group as a sustainability reporting manager. I am currently leading a project to implement an enhanced corporate governance framework across the group as it diversifies, using a range of business models and new markets, particularly in Asia. What are your career highlights so far? Transforming Qantass sustainability reporting framework from basic to best practice is one of the things Im most proud of. This was recognised externally with first-time listings on sustainability indices such as FTSE4Good and the Dow Jones Sustainability Index, as well as winning a prestigious Australasian Investor Relations Award for best ESG (Environment, Social, Governance) Disclosure in 2010. What I am doing at present strengthening the governance framework at Qantas is also very Why did you decide to study for the CIMA qualification and how has the qualification helped you? I knew that to be a leader I had to increase my strategic orientation, but also continue to build on
Career Ladder
2012: Manager, corporate governance implementation, Qantas Group. 2011: Manager, group audit and risk, Qantas Group. 2009: Role expanded to include risk management and sustainability strategy development for the Qantas Group. 2008: Joined Qantas Airways as sustainability reporting manager. 2004: Various positions within CIMAs technical department. 2003: Moved to London and joined CIMA as a project manager in the technical department. 2001: Joined the Securities Institute of Australia (now FINSIA) as a technical editor in accounting and finance. 2000: Secondment to Deloitte & Touche, Toronto. 1999: Joined Deloitte (Expatriate Tax) as tax analyst as part of its graduate programme. 1998: Graduated from Australian National University with economics/commerce degrees.
Taking on measured risk to grow and transform is not only seen as a good thing, it is critical to survival
my financial skills, and the CIMA qualification ticked both these boxes. When evaluating business issues or developing solutions, the CIMA qualification makes me think strategically, but also through a strong financial and risk lens. And it continues to help me think globally. Its important to understand developments across industries and markets in order to add fresh insights and challenge the way we do things at Qantas. What advice would you give to todays CIMA students? Be proactive and keep your eyes open for opportunities. Seek out a couple of good mentors to help you work through career options as the diversity of opportunities out there today can be overwhelming and it is often easy to take the safest route. Sometimes, taking a risk with your career or taking the road less travelled will lead you to where you want to get to. I am a big advocate for working overseas this provides both personal and professional growth and gives you excellent life experience.
35
Prime number
$181.62bn
Top 5 countries, ranked by B2C e-commerce sales, 2011-2013 (billions)

Key 2013 2012 2011
$141.53bn
$124.76bn
$109.03bn
$110.04bn
$56.69bn
2 China
$384.80bn
3 UK
$343.43bn
$301.69bn
$140.35bn $127.82bn $112.78bn
1 US
4 Japan
$53bn
$47bn
$38.08bn
5 Germany
Booming e-commerce
The growth in online shopping in China in 2011 (to $124.2bn), according to Chinas Ministry of Commerce: Amount Chinas largest online exchange Alibaba Group delivered in sales in the first 11 months of 2012: Source for main illustration: eMarketer
In 2012, B2C e-commerce sales grew 21.1 per cent to top $1trn for the first time, according to new global estimates by eMarketer. This year, sales will grow 18.3 per cent to $1.298trn worldwide, eMarketer estimates, as Asia-Pacific surpasses North America to become the worlds number one market for B2C e-commerce sales. Sales in North America are expected to grow 12.2 per cent this year to $409.05bn, but Asia-Pacific sales are expected to grow by 30 per cent to more than $433bn. Three Asia-Pacific markets China, India and Indonesia will see faster B2C e-commerce sales growth than all other markets worldwide this year.
Getty Images
53.7%
$161bn
36
37
The list
Choose factoring for credit support
Factoring provides the cash flow benefits for invoice discounting, but adds extra credit functions by effectively outsourcing company receivables. Sharp says: This often results in faster customer payments, which reduces the borrowing period and means lower discount costs. Factoring provides expertise and local knowledge at both the debtor and creditor end of a transaction. This is useful for exporters as the factoring company will generally undertake to collect the outstanding debts on an exporters behalf. Either they will have an affiliated company in the same country as the customer or they will have a team of multilingual export credit controllers in their own organisation. Thus, customers will be contacted by people speaking their own language, and who understand the local culture and legal framework.
and Leasing Association (FLA) show that plant and machinery leasing jumped 15 per cent, commercial vehicle finance 10 per cent and business equipment finance 4 per cent. But the biggest jump 28 per cent was for leasing IT equipment. Julian Rose, head of asset finance at the FLA, says that leasing firms are now helping more than 20,000 UK businesses invest each month. The FLA points out that because leasing finance is normally secured on the asset being financed it removes the need to offer up collateral for a conventional bank loan. It is also secure for the user because finance cannot be recalled during the life of the agreement.
She says: To attract angel finance you have to show you have identified a real market need. You must show you understand the market and how you will build scale in it. Typically, angels will be looking for a ten times return on the money they put in, although 55 per cent of deals fail.
Access peer-topeer lending
Dip into the pension fund
3
Illustration by Borja Bonaque
Auction invoices to speed cash flow
Seek invoice discounting
ways to... find alternatives to bank finance Mainstream banks are limiting the amount they lend to small and mediumsized enterprises as they face increasing pressure on their balance sheets. But there are plenty of alternatives for SMEs seeking cash, says Peter Bartram
There has been a big increase in the number of SMEs turning to invoice discounting as a way of improving cash flow. The latest figures from the Asset Based Finance Association (ABFA) for Q3 2012 show that more than 43,500 firms are using asset finance. Cumulatively, they enjoyed a 7 per cent jump in turnover, which suggests that when a company has funds it is able to grow. Invoice discounting is well suited to sectors such as staffing, construction, manufacturing and professional services, says Kate Sharp, chief executive of ABFA. However, its less suitable for firms with complex sales contracts. Invoice discounting better suits companies that have more predictable sales levels. This is because SMEs with volatile or highly fluctuating sales, or seasonal peaks, end up with inconsistent or lumpy funding, which can cause internal problems for the firm.
Sometimes banks wont be willing to discount invoices from foreign debtors. Or perhaps the company wont want to discount all its invoices. An alternative is to auction selected invoices through a service, such as that provided by MarketInvoice. Predator Equipment, a company that manufactures trailers, has auctioned 17 invoices worth more than 500,000 as a way of financing export orders. When the company won an order from Scandinavia, the customer wanted 30-day payment terms, but Predators own suppliers demanded payment in 14 days. Eamon McVeigh, Predators founder, says: The auction only takes a few hours, with bids competing in terms of advances and fees. MarketInvoice only uses trusted investors, so advances come through within 24 hours.
This is a perfectly legal way of using a companys pension fund to finance some of its capital assets. Adam Tavener, chairman of Clifton Asset Management, explains: Many SME owners or directors hold a variety of pension assets and these funds can often be consolidated into a SIPP (self-invested personal pension) or SSAS (small self-administered pension) and invested in their business. This can include funding through the purchase or lease-back by the pension scheme of independently valued intellectual property held within the company. When the directors of car dealer Express Garage found they were paying 60,000 a year in interest on loans and overdrafts, they used the pension fund to buy their premises freehold. The reduced mortgage payments now go straight into the pension fund and the business has cut its costs.
This is one of the fastest-growing sources of new funding in the country. Companies such as Funding Circle, ThinCats and Zopa all offer business funding services. Peer-to-peer lending has received a boost since Andrew Haldane, the Bank of Englands director of financial stability, named it as one of a diverse eco-system of new funding sources. Funding Circle has already lent more than 70m to 1,400 businesses. James Meekings, co-founder of Funding Circle, says around 45 per cent of companies are looking for growth capital, while 35 per cent need working capital. The remainder have a variety of needs. One of the primary reasons why people come to us is because they need independence from their bank, he says.
Government schemes
Turn to a business angel
Use more leasing
All kinds of business leasing showed strong growth in 2012. The most recent year-on-year figures from the Finance
There are around 18,000 in the UK and the average size of investment from an individual angel is 35,000. But angels also form consortia to fund larger projects. Typically, angels will keep their money in a company for between five and eight years. It is patient capital, says Jenny Tooth, chief executive of the UK Business Angels Association.
The most significant, potentially, is the new Business Bank, which may support up to 10bn of new business lending. The bank wont deal with clients directly, but it will facilitate more lending through existing banks and institutions. One government scheme that is already up and running is the Business Finance Partnership, which plans to generate 110m more lending to SMEs. The money is being channelled through existing lenders. These include Boost & Co, a new fund management company, which is making loans of between 1m and 8m to small, innovative companies, and Credit Asset Management, which is providing asset finance and professions loans. Peter Bartram is the author of The Perfect Project Manager (Random House Business Books)
Study notes
In association with
39
Notes
Study
Paper F2 Financial Management p44 Paper F1 Financial Operations p47
Paper E3 Enterprise Strategy

The sheer rate of change in business is exacerbating the shortcomings of older environmental analysis methods such as Pest. Firms are therefore adopting a more responsive approach: corporate foresight By Ben Dickson-Green Content specialist, Kaplan Publishing
nvironmental analysis is the detailed evaluation of external forces and conditions that affect an organisation now or may do so in the future. It is an extremely important topic, not only in professional accountancy exams such as E2 and E3, but also in the day-to-day running of most suc cessful organisations. So why is understanding the environment through careful analysis so crucial and how should it be done? Consider a company, ABC, which retails highquality clothing for adults via a UK-wide chain of high-street stores. Environmental analysis would be important to this business for a number of purposes, including the following: l Identifying threats. Environmental analysis will help ABC to identify potential problems that it may have to face. For instance, a shift in customer buying habits towards online purchasing is likely to lead to a fall in demand for its products. ABC could therefore take measures, such as offering its own website to tap into this area of the market, to manage the risk. l Determining opportunities. An analysis of ABCs environment will help the firm to i dentify potential areas for growth and development. The
Big high-street names such as HMV, Jessops and Blockbuster UK suffered because they became irrelevant to their customers
company may identify a growing trend towards socially responsible shopping in the clothing market and it could therefore consider offering garments that are made using ethically sourced materials by suppliers following globally recognised employment standards. Alternatively, ABC may see a growth opportunity beyond its core business, such as the market for childrens wear. l Assessing the competition. Environmental analysis forces firms such as ABC to e xamine the actions of their rivals. Many traditional clothing retailers in the UK have been put under pressure by the big supermarket chains, which tend to offer clothing at relatively low prices. Understanding how these competitors attract custom may help ABC to take measures that will help it to maintain its own customer base. l Identifying strengths and weaknesses. ABC may have a well-known, recognisable brand owing to the companys heavy presence on the high street. Environmental analysis can help to put this strength in context ABC is likely to need a strong brand name if it is planning to expand into the online channel. If the c ompany has any weaknesses, such as a poor cash position, the directors will be aware that this might restrict it from taking advantage of any online expansion. l Meeting stakeholder needs. Environmental analysis will help the company to gain a better understanding of its stakeholders expectations. For instance, it will allow ABC to understand the customers needs in more detail. If the cheaper clothing offered by supermarkets is selling well, this may indicate that ABCs market is price sensitive, with customers willing to purchase lowerquality garments in order to achieve discounts. ABC may therefore need to review its pricing strategy in order to keep attracting custom.
Environmental analysis: The challenges

Although environmental analysis is a crucial part of any organisations strategic management process, it has become more difficult to do as
Study notes
41

thepace of change in the global economy has increased over the past decade. The business environment has become more volatile for a number of reasons: l Globalisation has led to problems for organisations all around the world. ABC, for instance, is likely to feel the impact not only of fluctuating demand in its home market, but also of issues affecting its suppliers overseas e.g. regulatory changes in their jurisdictions. l Continuing weakness in the global economy has kept demand unpredictable in many markets while also causing ongoing problems for businesses in obtaining credit, which could affect ABCs cash position in future. l Changing technology is leading to the development of new products and services and/or altering how existing ones are delivered. The emergence of sophisticated online clothing retail websites is likely to reduce demand for ABCs products and so harm its high-street sales. l The development of high-growth emerging economies around the world e.g. those of Brazil, Russia, India and China means that organisations looking to expand might need to consider how to tap into these new markets. In light of all these issues, environmental ana lysis has never been so important. It can be argued that many high-profile corporate failures in the past few years have been the consequence, at least in part, of a failure by the businesses concerned to understand the changing environment and the effect this would have on their operations. Big high-street names such as HMV, Jessops and Blockbuster UK suffered because they became irrelevant to their customers, who were able to buy the same products online at lower cost. These examples highlight how important an up-to-date environmental analysis is to any org anisation, despite the potentially high cost of conducting the process. Any failure by a business to keep track of the changes in its market may jeopardise its survival in the long term. Any failure by abusiness to keeptrack of thechanges initsmarket mayjeopardise its survival in the long term a list of issues that it needs to consider when forming its strategy. Among the issues falling under the economic heading, for instance, ABC might identify that its customers disposable incomes have fallen as a result of the weakness of the UK economy. This could indicate that the business will see a decline in sales as consumers become less able to afford its high-quality clothing and turn instead to cheaper online or supermarket alternatives. Pest analysis is an excellent way to gain an understanding of the main environmental factors that may affect the organisation, but it does suffer from the following key problems: l Given the fast-changing nature of the market, the issues identified by a formal Pest analysis may quickly become irrelevant. l The process is prone to bias. One manager may think that certain issues are the most important to the business and so will include these in their ana l ysis. Another may disagree and highlight a different set of issues. l The analysis may be incomplete. It can be very difficult for managers to identify every one of the issues that currently affect the organisation or may do so in future. This effect is referred to as bounded rationality. Organisations have therefore started to look at other possible ways of analysing their environment. One such approach is known as corporate foresight. This is an attempt by managers to identify environmental changes as early as possible, appraise them, fully understand their potential consequences and make plans that will allow them to respond to these changes effectively. Rather than relying on one method, foresight uses a range of techniques to model future environmental changes. These include: l Issues analysis where potentially significant events are analysed in terms of their probability and impact. This could help ABCs managers to identify and prioritise the key environmental changes that they need to consider. The company may decide to spend more of its planning time on considering risks with a high probability of occurring and a big impact on the business (such as the loss of customers to supermarkets) and less time on considering issues with a small impact and lower probability of occurring (such as problems with renewing leases on some stores).
How to conduct an analysis
Businesses can use a number of different methods when trying to analyse their environment. One of the most common tools is a political, economic, social and technological (Pest) analysis of the macro-environment. This gives the organisation
42
Study notes

Scenario planning where the organisation considers a series of possible futures based on changes that could occur in the market in the coming years. For instance, ABC may develop a detailed scenario where, within five years, most clothing purchases are being made online, rather than on the high street. The company could then make plans that would prepare it for such a situation if it were to occur. l The Delphi method where the organisation interrogates a group of experts on a one-to-one basis using questionnaires. Once their replies are collated, they can be used to create a new round of questions that can be sent back out to the experts. ABC, for example, could ask various industry experts about whether they feel that the demand for high-quality apparel will be largely replaced by demand for cheaper, more disposable garments. If the first round of questionnaires indicates that the experts feel this change is likely to happen, ABC could ask them further questions on how they think this would affect the selling price of the garments and the total size of the clothing market. Knowing the answers to these questions would improve ABCs foresight and enable its managers to formulate detailed plans to deal with this potential shift in the market. Whichever combination of techniques is used, developing foresight would clearly offer a number of benefits to an organisation such as ABC. In their book Research Foresight: Creating the Future , (Pinter Publishers, 1989) John Irvine and Ben Martin suggest that developing foresight confers five key advantages (which they refer to as the 5Cs) to an organisation: l Communication. Foresight involves getting a wide range of people involved in the environmental analysis. This can include everyone from industry experts to individual members of staff from various departments in the organisation. This will improve communication in the analysis process and promote the sharing of ideas, thereby increasing the likelihood that the analysis will be comprehensive. l Concentration. A focus on foresight will help to ensure that the organisation is always looking to the future and is well prepared to deal with any problems or opportunities that may arise. l Co-ordination. Developing an organisations foresight will allow all departments to harmonise
l
While corporate foresight isnt a crystal ball, it does offer a detailed picture of possible futures that can help a business to adapt to changes in its environment
their development plans. In ABC, for example, foresight will mean that its management team is aware that the organisation is facing a big threat from the supermarkets, which are able to compete strongly on price. All departments will be able to work together, improving the companys chances of dealing with this threat effectively. l Consensus. (This is linked to co-ordination.) Foresight will enable all departments to agree on what the organisations priorities and plans should be in order to address the issues that have been identified. l Commitment. The technique ensures that responsibility is assigned for making the changes that will help the company to deal with the identified issues. For example, ABCs IT department will know that it is charged with developing a webbased platform that will enable consumers to buy the companys products online, while the marketing department will need to consider ways to promote this service. Environmental analysis is a crucial part of any organisations strategic process. But the increasing complexity of the global market means that analysing the organisational environment may well become even more challenging. While corporate foresight isnt a crystal ball, it does offer a detailed picture of possible futures that can help a business to adapt to changes in its environment and thereby significantly reduce its chances of being left behind by the market.
Further reading CIMA Official Study Text Enterprise Strategy (2012-13 edition), CIMA Publishing, 2012.
Getty Images
44
Study notes
Paper F2 Financial Management

When it comes to tackling the written section of theanalysis and interpretation question, too many F2 candidates deny themselves easy marks by ignoring or forgetting the clear prompts provided By Sally Baker Senior lecturer, Kaplan Financial
T
Report
To: From: Subject:
he F2 paper always contains a 25-mark question requiring an analysis and interpretation. Jayne Howsons article in Marchs Study Notes focused on the typical ratio calculations called for by this question. Now its time to focus on the written element of the answer. The typical requirement is to analyse the fin ancial performance and financial position of the company in the scenario for 20 marks, with five marks given for the limitations of ratio analysis or extra information required. Sometimes the requirement is preceded with prepare a report. The number of candidates who do not follow this basic instruction always surprises me if its required, do it. You do not want to waste time producing a lengthy introduction, but at the same time you will be given credit for producing a report format, so dont let this easy mark slip through your fingers. An appropriate format would be as follows:
When practising this type of question, try writing your answer, going for a tea break and coming back after a while to read it. Does it say what you had in mind?
Introduction
As requested, I have analysed the financial performance and position of ABC.
The mark allocations are there to guide you on how much time to spend on the question and,
therefore, on how much you are expected to write. The requirement above is generally for 20 marks, of which up to eight are available for the ratio calculations. This means that there are 12 marks for the writing. On the whole, one mark will be awarded for each relevant point you make. For the maximum score, your answer must address the companys financial performance and its financial position. So, if you can make four or five good points on each of performance and position, youll be doing well. Construct your answer to fit in with this marking guide. Use headings that link to the requirement e.g. Financial performance, Financial position and Recommendation (if required). This will not only help to keep you focused and on track, it will also help the marker. Start a new paragraph for each point you are making. Use no more than three sentences per paragraph and leave a line space between each paragraph. This helps you to focus on making a new point each time rather than simply repeating the same one over and over another common error. It will also help your marker, as there is nothing worse for them than trying to decipher the different points being made if the answer is written as one long essay. When practising this type of question, try writing your answer, going for a tea break and coming back after a while to read it. Does it say what you had in mind? I often find that students know what they are trying to explain, but cant get this down on paper. If the meaning is not clear to the marker, they cannot give you credit and, unfortunately,
Getty Images
46
Study notes
Study notes
47
Paper F2 Financial Management

you wont be sitting with them to explain what you actually meant. In one of her post-exam guides, the examiner makes the key point about scoring well on these questions: Having said this many times in articles and presentations, I feel the need to reiterate a key consideration to passing the financial ana lysis question: please, please read the scenario and ensure that your answer is consistent with the scenario given. The information provided is there specifically to help you. Use the reading time to highlight the key points and consider how these will affect the ratios and financial results. In the exam time, after you have calculated the ratios, take a few minutes to consider how a movement or difference can be linked back to the information in the question. You can then use this as the basis of your answer. It is important that you say more than merely that the ratio has gone up/down or is higher/lower. You need to explain why the ratios have changed and this reason should link back to the scenario. Consider the following opening sentences from question 7 in the September 2011 F2 paper (bit.ly/ F2Sep2011): LKJ has expanded during the last year and from 1 October 2010 has been supplying a new range of products, some of which are simply cheaper versions of existing products and some of which are completely new. This has resulted in LKJ increasing its market share and creating a more mixed customer base. From these two sentences alone, the following thought process can occur: Scenario Thought LKJ has expanded Have revenue and profit risen? Financed how? New range of products Sales mix has changed Cheaper versions Lower prices? Mixed customer base Impact on receivables Calculating the above ratios using the figures in the scenario gives the following information: Ratio 2011 2010 Gross profit margin 21.7% 25.6% : [debt + equity]) 13.4% Gearing (debt 5.4% Receivables days 65 days 47 days On the basis of all this information, you can make the following comments in your report:
Paper F1 Financial Operations

Financial performance
The statement of comprehensive income shows that LKJs revenue has increased substantially and its profit has doubled from last year. This is because of the firms expansion and it indicates an improvement in financial performance. But the gross profit margin has fallen, which is probably the result of the lower prices on the cheaper versions of LKJs products. The new products will have altered the sales mix, which will also have affected the gross margin. In particular, the firm may be selling these items at a discount to establish them in the market.
Students are often confounded by the large amount of detail provided by questions on single-company financial statements. Using a step-by-step process should make answering them a less daunting task By Jo Amos F1 tutor and marker
Financial position
Receivables days have increased significantly. This is probably a result of the more mixed customer base. The company may also have deliberately offered extended credit terms in order to attract more customers and increase its market share. LKJs gearing ratio has increased, but seems tostill be at a very moderate level. Both debt and equity financing have been raised to fund the expansion. Long-term borrowings have more than trebled, but given the moderate level of gearing and increased profits, this does not appear to be a cause for concern. This is not the answer to the whole question, of course, but I hope that this gives you ideas on how to answer similar questions. Kaplans free master class (bit.ly/BitesizeVideos) will take you through this question in greater detail and provide more insight into how to answer it effectively. Lastly, it is worth noting that every exam question has asked candidates to comment on either the limitations of ratio analysis or the extra information that may be required before further conclusions can be reached, typically for five marks. Ensure that you are prepared to do this. Candidates often either simply forget to answer this part of the question or run out of time.
uestions about single-company financial statements have been a standard feature of F1 papers since they were introduced in May 2010. They also appeared regularly in the P7 exam under the previous syllabus. The current syllabus states that section C of the F1 paper will be worth 50 marks and consist of one or two questions. Until now, it has always comprised two 25-mark questions, one of which has required students to produce a set of financial statements for a single company. This question provides candidates with a trial balance and several notes, usually between seven and 12 (depending on the detail), and requires them to prepare the key financial statements: the
statement of comprehensive income, the statement of changes in equity and the statement of financial position. Seeing that this type of question has appeared on the exam paper for six regular sittings under the current syllabus, Im disappointed that the general quality of the answers has remained poor. This topic is largely straightforward, providing that you have done enough revision.
Where to start
Never calculate a figure and simply put it into the statement without showing your workings
The most common complaint I hear about this type of question is: I dont know where to start. Candidates feel overwhelmed by the volume of information they see in the scenario. Here are a few tips on how to approach it: l Read the requirements. Which financial statements are you being asked to prepare? l Draw up a skeleton of these statements with the main headings and full titles. Do this as quickly as possible you cant waste half an hour writing up beautifully presented statements. Simply ensure that the key headings are down on paper. For the statement of financial position I would head up non-current assets, current assets,
Global contact details

CIMA corporate centre 26 Chapter Street, LondonSW1P 4NP T: +44 (0)20 8849 2251 E: cima.contact@ cimaglobal.com www.cimaglobal.com CIMA Australia 5 Hunter Street,Sydney, NSW2000 T: +61 (0)2 9376 9902 E: sydney@cimaglobal.com CIMA Bangladesh Suite 309, RM Center, (3rd Floor),101 Gulshan Avenue, Dhaka-1212 T: +8802 881 5724 E: zareef.matin@ cimaglobal.com CIMA Botswana Plot 50374 , Block 3, 1st Floor, Southern Wing, Fairgrounds Financial Centre, Gaborone T: +267 395 2362 E: gaborone@cimaglobal.com CIMA China: head office Unit 1508A, 15th Floor, Azia Center, 1233 Lujiazui Ring Road, Pudong, Shanghai 200120 T: +86 (0)21 6160 1558 E: infochina@cimaglobal.com CIMA China: Beijing Room 605, 6/F Guangming Hotel, 42 Liangmaqiao Road, Chaoyang District, Beijing 100004 T: +86 (0)10 8441 8811 E: beijing@cimaglobal.com CIMA China: Chongqing Room 2107, Tower 4, Chongqing Tiandi, No 56, Ruitian Road, Hua Long Qiao, Yuzhong District, Chongqing 400010 T: +86 (0)23 6371 3538 E: infochina@cimaglobal.com CIMA China: Shenzhen Room 1121, Tower A, International Chamber of Commerce, Fuhua Yi Lu, Futian District, Shenzhen 518048 T: +86 (0)755 8923 1445 E: shenzhen@cimaglobal.com CIMA Ghana 3rd Floor, Ayele Building, IPS/Attraco Road, Madina, Accra T: +233 (0)30 2543283 E: accra@cimaglobal.com CIMA Hong Kong Suite 2005, 20th Floor, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong T: +852 (0)2511 2003 E: hongkong@cimaglobal.com CIMA India Unit 1-A-1, 3rd Floor, Vibgyor
Ratio Gearing Gross profit margin Gross profit margin Receivables days
Further reading CIMA Official Study Text Financial Management (2012-13 edition), CIMA Publishing, 2012.
Towers, C-62, G Block, Bandra Kurla Complex, Bandra (East), Mumbai 400051 T: +91 (0) 22 4237 0100 E: india@cimaglobal.com CIMA Ireland 5th Floor, Block E, Iveagh Court, Harcourt Road, Dublin 2 T: +353 (0)1 643 0400 E: cima.ireland@ cimaglobal.com CIMA Malaysia: head office CIMA Malaysia, Lots 1.05, Level 1, KPMG Tower, 8First Avenue, Bandar Utama, 47800 Petaling Jaya, SelangorDarul Ehsan T: +60 (0)3 77 230230/232 E: kualalumpur@ cimaglobal.com CIMA Malaysia: Sarawak Sublot 315, 1st Floor, 21 Jalan Bukit Mata, 93100 Kuching, Sarawak T: +6082 233136 E: doreen.tan@cimaglobal.com CIMA Malaysia: Penang Suite 12-04A, 12th Floor, Menara Boustead Penang, 39 Jalan Sultan Ahmad Shah, 10050 Penang T: +60 (0)4 226 7488/8488 E: penang@cimaglobal.com CIMA Middle East Office E01, 1st Floor, Block 3, PO Box 502221, Dubai Knowledge Village,
Al Sofouh Road, Dubai, United Arab Emirates T: +9714 4347370 E: middleeast@cimaglobal. com CIMA Nigeria Landmark Virtual Office, 5thFloor, Mulliner Towers, 39Alfred Rewane Road, Ikoyi, Lagos T: +234 1 463 8353 (ext 518) E: lagos@cimaglobal.com CIMA Pakistan 201, 2nd Floor, Business Arcade, Plot 27-A, Block 6, PECHS, Shahra-e-faisal, Karachi T: +92 21 3432 2387/89 E: pakistan@cimaglobal.com CIMA Pakistan: Islamabad 1st Floor, Rehman Chambers, Fazal-e-Haq Road, Blue Area, Islamabad T: + 92 51 260 5701-6 CIMA Pakistan: Lahore Flat 1, 2, 1st Floor, Front Block 3, Awami Complex at 1-4, Usman Block, New Garden Town, Lahore T: +92 42 3594 0311-16 CIMA Poland Warsaw Financial Centre, 11th Floor, ul Emilii Plater 53, 00-113Warsaw T: +48 22 528 6651 E: poland@cimaglobal.com CIMA Russia Office 4009, 4th Floor,
Moscow 105064 T: +7495 967 9328 E: russia@cimaglobal.com CIMA Singapore 3 Phillip Street, Commerce Point, Level 19, Singapore 048693 T: +65 68248252 E: singapore@ cimaglobal.com CIMA South Africa 1st Floor, 198 Oxford Road, Illovo 2196 T: +27 11 788 8723 E: johannesburg@ cimaglobal.com CIMA Sri Lanka 356 Elvitigala, Mawatha, Colombo 5 T: +94 (0)11 250 3880 E: colombo@cimaglobal.com CIMA Sri Lanka: Kandy 229 Peradeniya Road,Kandy T: +94 (0)81 222 7883 E: kandy@cimaglobal.com CIMA UK 26 Chapter Street, LondonSW1P 4NP T: +44 (0)20 8849 2251 E: cima.contact@ cimaglobal.com CIMA Zambia 6053 Sibweni Road, Northmead, Lusaka T: +260 (211) 290219 E: lusaka@cimaglobal.com
48
Study notes
Study notes
49
Paper F1 Financial Operations

equity, non-current liabilities and current liabilities. You may also want to fill in items such as property, plant and equipment; inventory; receivables; and payables, because these generally feature in most questions. l Ensure that all titles state three things: the name of the company, the name of the statement and the date. This question often awards marks for presentation and these are easy to lose. Dont forget that the statement of comprehensive income should state year ended and the statement of financial position should state as at l Prepare a page of notes on a separate piece of paper to show all your workings and produce a table for your first working for the three key expense categories: cost of sales (anything to do with production), administration expenses (other expenses that are neither cost of sales nor dis tribution), and distribution (transport and selling) costs. All expenses on the face of the statement of comprehensive income should fall into one of these categories unless you can identify them asafinance cost (generally interest), taxation ora material item (an unusual and sizable cost). Often the question will tell you the category into which expenses should go. Typical mistakes that cost marks
Failing to draw up correct statement formats e.g. by showingall workings on the face of the statement instead ofsummarising cost of sales and showing the workings inthenotes. Failing to use correct statement titles containing the three key elements: company name, statement name and date (showing year ended or as at appropriately). Failing to show any workings for the figures that you have calculated e.g. workings for the elements in the cost of sales,non-current asset total or taxation. Failing to follow instructions. If the question asks you to treat an item as a cost of sale, for example, dont put it in theadministration expenses. Failing to carry your own figures into the retained earningsor revaluation reserve column in the statement ofchanges in equity and then transferring your own figuresto equity inthe statement of financial position. Failing to complete the question as a result of poor time management. Remember: the more you practise this type ofquestion, the easier it will become. Your speed will improve, too. Always keep one eye on the clock and dont exceed your time allocation.
Exam notice
Visit www.cimaglobal.com regularly for updates
March 2013 exams
The results for Marchs T4 part B Case Study and resit exams were sent out on 22 March.
Going to the exam
Script and administrative review services
A script review service is available for Marchs three Strategy exams and the T4 part B Case Study. The service is available only if you received between 40 and 49 marks (between 20 and 24 credits in T4 part B) in the exam for which you want a script review. An administrative review service is available for all March Operations, Management and Strategy exams. Information about these services and how to apply for them can be found at www.cimaglobal.com/scriptreview.
As well as your admission advice, you will also need to take another identi fication document to the exam hall a passport or driving licence, for example showing your photograph, name andsignature.
in the February 2013 issue of Velocity at www.cimaglobal.com/velocity.
Past question papers and modelanswers
May 2013 exams
What to do next
Now that you have prepared your basic pro formas to answer the question, you can get on with actually filling in some of the figures. Id suggest taking the following steps: l Read the notes to the question to identify which items in the trial balance need to be changed. You could even do this during the reading time. l Enter the easy figures from the trial balance (where you arent required to make any changes). These will often be items such as loans, revenue, receivables and payables, but be sure to read the notes first, because every question is different. Tick each item off on the trial balance as you write it into the statements so that you know that the item has been handled correctly. l Deal with the unticked items on the trial balance, which should represent the items where changes are required as per the notes to the question. Work through each note, ensuring that you show any workings clearly in your own notes. l Never calculate a figure and simply put it into
Dont give up if you cannot deal with one of the notes. Accept that you have lost marks for that part of the question and keep going
the statement without showing your workings. If the figure is wrong, you will lose all of the marks that could have been awarded when you may have made only one small mistake. l The final step involves the totalling of all financial statements. Start by totalling up the statement of comprehensive income to find out the profit, which can be transferred to the retained earnings column of the statement of changes in equity. Once you have totalled the balances carried forward in the statement of changes in equity, the totals can be transferred to the statement of financial position. Do this even if you think your figures are wrong, as youll normally gain marks for transferring your own figures. Lastly, complete the total of the statement of financial position assets, equity and liabilities. Do not expect it to balance. Remember: dont give up if you cannot deal with one of the notes. Accept that you have lost marks for that part of the question and keep going. To help with your exam preparation, I have p roduced a worked example to the question on single-company accounts from the November 2012 F1 paper. You can find this on CIMA Global at http://tinyurl.com/aovm32v.
The next exams will be held on 21, 22 and 23 May. The deadline for online entries has passed.
The pre-seen material for Mays T4 partB Case Study is available to download from www.cimaglobal.com/t4preseen. The pre-seen material for the E3, F3 and P3 exams will be available to be downloaded from www.cimaglobal.com/ strategicpreseen from mid-April. Its your responsibility to download this material and familiarise yourself with it. A clean copy of the pre-seen material and further unseen material will be provided in the exams. Youcannot take any notes with you into the exam hall.
Pre-seen material for papers at Strategic level and T4 part B
Past question papers and model answers are available to download free from the relevant Study resources pages of CIMAs website at www.cimaglobal.com/ students/2010-professional-qualification/. The model answers for March 2013 will be available by the end of April.
Post-exam guides
Cancellations and changes
Absence from the Strategic level exams
CIMA does not accept cancellations and will not refund fees. In order to change papers or exam centres, you will need to email cima.contact@cimaglobal.com and pay the relevant fee.
Admission advice
You must print off your admission advice online by logging into your My CIMA account from mid-April. This shows the exact details of your exam centre and the exams you have entered. You must take the admission advice with you to each exam and keep it safely afterwards, as it contains your candidate numbers.
You should apply to the examinations and assessment oversight panel (EAOP) if you have missed one or more of your Strategic level exams on the first sitting, through illness or any other mitigating circumstances. The EAOP will assess your case and decide whether your results should be voided. For details, visit www.cimaglobal.com/exams.
Post-exam guides are also available to download from the relevant Study resources pages of CIMAs website. These are essential reading for unsuccessful candidates and those studying a new subject. They contain: l The exam questions. l The rationale for each question. l Suggested approaches to answering each question. l The outline marking scheme. l The examiners comments.
CIMAsphere
Visit www.cimaglobal.com/sphere, the institutes online community, to ask ques tions, find a study buddy, share information and seek expertise and support among CIMA students, members and alumni. You can also read useful blogs on studying and the exams.
Live ask-a-tutor sessions
Check www.cimaglobal.com/sphere for information about the live ask-a-tutor s essions being held for some subjects in the run-up to the May exams.
CIMAstudy.com
Index of technical articles
Exam rules and regulations
You must download and read the exam rules and regulations from the institutes website when you download your admission advice.
For your reference, and to help you prepare for the exams, see the index of all CIMA technical articles published last year. This includes articles published in Financial Management, in Velocity and on the CIMA website. It is available
Visit www.cimastudy.com for details about the institutes online learning resource for Certificate, Operations, Management and Strategy students, which can be used for self-study or as partof a blended approach.
Queries
Visit www.cimaglobal.com/students/ exams or get in touch with CIMA Contact (cima.contact@cimaglobal.com) or your local office (see panel, page 47).
Further reading CIMA Official Study Text Financial Operations (2012-13 edition), CIMA Publishing, 2012.
Code of ethics CIMA members and students are required to comply with the CIMA code of ethics. Ensure that you are familiar with the code and how to apply it. Further resources are available at www.cimaglobal.com/ethics. Also see this months Hot Potato, page 12.
50
Technical notes
Notes
Te c h n i c a l
Finance: Driving change in social housing p54
Risks in the UK governments fiscal strategy time for a Plan B?

Opinion is divided over how the UK government should go about reducing the budget deficit and overall debt. Is it time to slow down the fiscal retrenchment, or to increase public-sector infrastructure investments to boost the economy?
By Professor David T Llewellyn of Loughborough University
t is universally agreed that the UK needs to reduce its budget deficit and lower government debt to GDP ratio. Both are unsustainable and, unless corrected, will damage the economy in the long run. The debate is not about the need for fiscal adjustment, but about the timing, speed and method of adjustment. And this debate is not just between politicians of different hues; economists and analysts are also divided. Fiscal retrenchment When it came to power early in 2010, the UKs coalition government inherited one of the largest structural budget deficits in the industrialised world and immediately committed itself to two rules that serve as the centrepiece of its fiscal strategy: public sector net debt to be declining as a percentage of GDP and, over a rolling period of five years, a balanced structural current budget position to be put in place. To date, neither have been achieved.
There are several reasons for this. First, the government has been deleveraging at the same time as the personal sector and the banking sector. Never before in the UK has there been a protracted period of simultaneous deleveraging in this way. This, of course, is a legacy of the crisis and the debt accumulation in the years leading up to it. Second, a false comparison was drawn with Canada and Sweden which, in the 1990s, adopted successful fiscal retrenchments that had a negative impact on growth for only a short period. The problem with this comparison is that those two countries applied the policy at a time when other countries were not, and when the world economy was growing strongly. That is not the case now. Third, with the combination of a sovereign debt, and a euro and banking crisis, the European economy has been weaker than originally envisaged, which in turn has weakened the UK economy and made it more difficult to achieve the fiscal targets. Lastly, externally generated inflation has been much higher than forecast at the time, which has had a massive impact on consumers real incomes and expenditure. The main issue is whether, as the circumstances have changed, the UK government should slow down its fiscal retrenchment. Recent trends and their long-term impact Will the recent recession have a lasting and negative impact on both the level and future rate of growth of maximum potential output in the economy? By definition, the actual level of output will always be equal to, or usually somewhere below, the full capacity of the economy. The major determinant of the growth of the economys productive potential is the trend growth in labour productivity. A serious possibility is that the prolonged recession could have negatively affected the level of productive capacity, and even its future rate
52
Technical notes
Technical notes
53
l T he
structural budget deficit (i.e. abstracting from the economic cycle) will be higher than originally thought. Partly because of this, fiscal austerity would be deeper and last longer than in the governments current plan. In other words, if the coalition government sticks to its present fiscal strategy, more cuts would be needed as the long-term sustainable level of deficits and debt would be lower. Plan B? Because of all this, there have been increasing calls for the government to moderate its fiscal plans, at least with respect to timing, as all governments should respond to changed circumstances. It might be necessary to look again at some of the assumptions and conditions at the time the policy was established in early 2010. The most common elements suggested for a new strategy are: slower fiscal retrenchment; a credible plan for a prolonged period of fiscal retrenchment; an increase in public-sector infrastructure investment; and a cut in social security entitlements and fiscal transfers. Taking the last two together, this would imply a restructuring of spending from current to capital. There would be several political problems: it could be seen as a failure and credibility could be lost; it would be seen as a capitulation to the ideas proposed by the Labour opposition; and the Liberal Democrats would certainly strongly resist cuts in entitlements. This is all about the structure and timing of fiscal retrenchment so as to minimise the impact on the economy. There would still be a pre-commitment to addressing the debt and deficit problems. The new pre-commitment strategy would, of course, need to be credible, precise and monitored (a new role for the Office of Budget Responsibility?). There are several reasons why such an alternative strategy has been recommended (by none other than the IMF for one). A central factor is that the current strategy is simply not working as originally envisaged, with the costs to the economy being greater than initially thought. This is partly, as noted earlier, because circumstances have changed. Furthermore, there is a danger of an austerity trap emerging (i.e. if fiscal contraction weakens the economy it becomes yet more difficult to achieve the fiscal targets because tax receipts are lower and social security payments are higher; we begin to chase our tail); cuts in government spending to lower the deficit; the GDP ratio has the effect of lowering GDP, which in turn (at least partly) offsets the decline in the ratio. Some
analysts also question the wisdom of public-sector deleveraging when other sectors are doing so at the same time. There is a further consideration: real interest rates are now negative and lower than at virtually any time in the recent past. If the real cost of borrowing is negative the government could borrow in order to finance real capital projects, yielding positive real rates of return for generations. This could be the opportunity of a lifetime to cash in on exceptionally low real rates of interest to finance long-term infrastructure capital investment. Policy is always about balancing risks Economic policy is always about balancing risks in an uncertain environment, and there is an especially high degree of uncertainty at the moment, which is likely to persist. That said, the main risk in maintaining the status quo with regard to fiscal policy is that the recession returns with an enhanced risk of long-term damage to the productive capacity of the economy. If an alternative strategy is adopted, however, the risk is that the government loses its credibility with regard to serious fiscal retrenchment, interest rates might rise (though some question whether this really matters), and the debt to GDP ratio would rise further and stay higher for longer. There seem to be problems for every solution. My own judgement is that, on balance, the risks of not adjusting fiscal strategy are probably greater than the risks of making limited changes to the overall thrust of fiscal policy. But, in a situation of great uncertainty, it is a genuinely difficult call to make. This means that the UK economy, government policy management and business face formidable challenges in the years ahead as the economy is forced to adjust to more sustainable structures, not the least of which will be the balance between the public and private sectors. However, many parts of the economy, such as the labour market, have become more flexible and more adapted to meeting the challenge. So there are silver linings... The risks of not adjusting fiscal strategy are probably greater than the risks of making limited changes Professor David T Llewellyn is professor of money and banking at Loughborough University School of Business and Economics and the Vienna University of Economics & Business. He is also vice chair of the Board of the Banking Stakeholder Group at the European Banking Authority. Professor Llewellyn can be contacted at d.t.llewellyn@lboro.ac.uk
of growth. In the former case, the loss of output is permanent and never regained. In the latter case, the trend growth of the economy in the future will also be slower than in the past. The output/employment conundrum The conundrum that is making it difficult to interpret recent trends is that, compared with past recessions, employment has continued to rise. While public-sector employment has fallen by 400,000, private-sector employment has risen by more than 600,000 since mid-2010. At 29.5 million, total employment is within 100,000 of the pre-crisis peak. By definition, this means that productivity has fallen. The key issue is whether this is temporary or permanent. There are four possible explanations for this. First, it may simply reflect the hoarding of labour by firms in order to avoid the costs of recruitment when output picks up, and in order to retain key skills. Furthermore, in some areas of the economy the real cost of hoarding has decreased due to lower real wages. If this is the case, productivity will rise sharply when a sustained upturn occurs. A second possibility is that the composition of employment has changed as more workers have
By definition, this means that productivity has declined. The key issue is whether this is temporary or permanent
moved to part-time and self-employed status. In other words, while the numbers employed have held up, on average people are working less. A third possibility is that the output data published by the Office of National Statistics is wrong. The final possibility, and by far the most serious, is that the level (and possibly future growth) of productivity has been permanently lowered as a result of the recession. There are several explanations for this: a smaller capital stock as a result of weak investment; structural change in the economy from high productivity sectors (such as financial services) to lower productivity sectors; a loss of skills that will be difficult to regain; banks being either less willing or able to finance new, dynamic and innovative companies, most especially in the SME sector; and banks generally being permanently less able to expand lending at the same rate as they did in the past. There are serious implications if there has been a fall in productive potential and its future rate of growth: l E xcess capacity will be lower at each level of output than in the past, which in turn has implications for future inflation. l T he standard of living will be lower and grow at a slower rate compared with earlier trends.
Getty images
54
Technical notes
Technical notes
55
Finance: Driving change in social housing

Helping UK housing associations to perform a delicate balancing act By Paul Clarke, Develin Consulting, and Alan Penrhyn-Lowe, director of financial services, Network Housing Group
n the UK, housing associations are private, non-profit making organisations that provide low-cost social housing for people in need of a home. There is massive change under way in the sector as government spending cuts come into force. This article is about how finance staff can step beyond their traditional accounting roles and become proactive drivers of change, an evolution that will be necessary if housing associations are to survive the changes intact. It is a personal reflection from the director of financial services at the Network Housing Group (NHG), based in north London, who is championing the sort of changes needed, and a management consultancy (Develin Consulting) that is helping to equip NHGs finance staff for the task ahead.
A double whammy There is a significant shortage of goodquality social housing. Housing associations (HAs) do much of the building and have traditionally funded it through capital grants from the UK government, the financial markets and their own trading surpluses. However, capital grants are being reduced. To compensate, HAs have been given permission by the government to lift the rent they charge on new properties and those that have been
recently occupied to what is known as an affordable rent (80 per cent of the open market rent for the property). Unfortunately, feedback suggests that fewer tenants are likely to be able to afford this increase than was first assumed. Also, a significant number of tenants receive benefits, which from April 2013 are being capped. A family might, for example, receive 200 per week less. Those HAs affected may have little choice other than to reduce rent levels significantly, or risk having to evict tenants who can no longer afford these units. As a result, trading surpluses will be squeezed.
Strategy for survival Survival for HAs depends on solving two problems: how to pare costs down while keeping essential services to the customer intact, and how to increase revenue without driving up costs. These problems are not new. Commercial organisations have defined and refined techniques based around improving the efficiency and capacity of business processes under banners such as value chain analysis, kaizen and lean. Each method brings its own language, approach and set of priorities, and each requires an investment in the time required from staff.
But experience of championing change in commercial organisations tells us that, before reaching out for a toolkit, HAs must understand that long term, permanent change is more about influencing culture than it is about redesigning the mechanics of a process. There are activities in the business that, in an ideal world, you would want to reduce. Staff know what these are because they are often a source of frustration and slow things down. It might be finding out why a contractor didnt turn up to fix a leaky tap for a tenant, not to mention handling the initial complaint from the tenant and the resched-
uling of the visit. It might be searching for expenses that have been given the wrong budget code, or scheduling an emergency salary payment for a new member of staff who was omitted from the payroll. For the want of a name we call these diversionary activities. They are always urgent and they always divert people away from doing other, probably better things. The time spent on diversionary activities is typically about 30 per cent, and is often substantially more. In other words, 30 per cent of the pay budget is to pay for failure.
They drive up non-pay costs as well. Temporary staff, contractors, consultants and lawyers are often there to fix problems and act as an additional resource to help staff struggling to get everything done. And, of course, if these activities come first, then other activities involved in providing essential services to customers get delayed. Customers always feel the effect when diversionary activities are prevalent. No matter what toolkit is used to expose these activities, the resolve to change processes so that they happen less has to come from within. Nothing will change, unless those working within
Getty Images
56
Technical notes
the critical processes can see what a difference that they personally might make by changing what they do by stopping certain activities, possibly at a personal cost to themselves. Its all about education and keeping it simple Within the NHG we have a wide range of tenants, some of whom are housed in Londons most deprived areas. We also have our fair share of dysfunctional processes and diversionary activity. But we also have more than our fair share of excellent, committed, hard-working people juggling multiple demands upon their time. We have to change what we do to stay ahead of the reforms, but any attempt to shoehorn a change technique into already punishing schedules will never work. It has to involve educating people in such a way that they want to find the time to get involved. The education has started by placing the work ahead under the banner understanding our costs. This is meant to say that there is no set agenda about how the organisation should change, but that we want a better understanding of costs to act as a catalyst for change. We have a database of all the key services and component activities that operate across the group, which tells us the time that each activity takes and the costs involved. We have built an app, available to anyone who wants it, which spells out what things cost and why. And we publish a set of did you know facts did you know that it costs xx every time a repair appointment is missed, or yy to schedule a new one? We had no idea how much it truly cost before to provide services to meet our social purpose. We use the mantra value for money, but at what cost? We can now see what value we are adding and where costs look too high. Everything can be challenged and the finance team is in the guiding seat. We want a reaction: Ouch, it costs how much? And we want people to feel that high costs matter to the business and to them personally. In other words, it is no longer OK to sit by and do nothing. Finance bares all and shows the way To turn interest into action, some evangelical leadership is needed from within finance. This isnt something that we are comfortable with. Nevertheless, accountants are opening up the workings within our own processes for all to see. And we are demonstrating to everyone that, by using a few of the principles from lean and kaizen, we can not only fix our own processes, but we can step up as leaders to help others to fix theirs. A set of young leaders in finance who contributed to improving our first process in the list (month-end closure) will be leading their own reviews within the next two processes in the list (both outside finance), taking one apiece. In turn, they will be training others to do the same.
A 1 per cent improvement in one area can be transformed into a sizeable margin if applied to ten
The power of marginal gains What gains are we going to realise? Big projects will be needed to materially impact the cost and efficiency of some processes. But the real prize is in having people look afresh for the small changes that help to free up time. It may be an arm here and a leg there, but it means that the processes in which those people work speed up and cost less. Time that is freed up is an invaluable resource. If managed well, it represents a potential resource for activities that help to build future business and accommodate increased levels of current business. If anyone is in any doubt about the power of marginal gains they need look no further than the performance of British Cycling. Central to its success was the belief of British Cyclings director of performance, Sir David Brailsford, that a 1 per cent improvement in one area can be translated into a sizeable margin if applied to ten. We dont train accountants in this sort of leadership but given half a chance they can become powerful advocates for change. They understand better than most how the whole organisation works, they understand the numbers and are practised at guiding business leaders through complex financial matters. But they are also buried so deep in the repetitive financial routines that it is hard for them to lift their heads to take a look around. Its another reason for starting in finance. If time can be freed there it can be put to invaluable use by driving change elsewhere in the business. In order to survive, HAs must do more than simply scan through a trial balance and freeze or cut back on certain expenses. Its about everyone understanding the activity and cost structures of all the services that engage with tenants and understanding how resources are going to be driven in the future. It takes time. NHG is well on the way but there is still a huge amount to do. Hopefully, we can serve as a good example within our sector and elsewhere of how it can be done. We have gone through the learning curve. We are tackling the big issues, as we must focus our time on getting the biggest bang for our buck. We have already used data in earnest to solve bids, business reviews and benchmarking and budgets. Now we must focus on overheads, which are historically high in this type of business, and target duplication of effort and process improvement. Process mapping is key, getting people involved in telling their story about what they have to do to get things done and engaging them in finding fixes. Paul Clarke, Develin Consulting (paul.clarke@ develin.co.uk), and Alan Penrhyn-Lowe, director of financial services, Network Housing Group (alan.penrhyn-lowe@networkhg.org.uk).
59
What you learn on the
Fraud and corruption risk in business Mastercourse

Dr Stephen Hill is the managing director of Snowdrop Consulting, a company specialising in fraud risk management, prevention/awareness and data security. He is a trustee director of the ICAEW Fraud Advisory Panel and chairs the Cybercrime Working Group. Here, he explains what the course is about
his one-day course will offer attendees a full understanding of the threats posed by various types of fraud, how to recognise where the threats may be and how to respond to them. It is aimed at financial staff, from book-keepers to finance directors and other managers in any organisation that could become a victim of fraud. As it affects business and government entities of all shapes and sizes, it makes prevention and detection everyones business. Although the course is aimed at a broad level of understanding of the issues, the work involved takes it up to an advanced level in the latter stages of the day. The key areas covered include: l How to identify fraud. l Recent developments in fraudulent practice. l Practical risk assessment techniques. l The Fraud Act 2006. l How to respond to fraud. l A police perspective on investigation and reporting. We begin by looking at everyday tasks that could be targeted by fraudsters. Action Fraud, the UKs national fraud and internet crime reporting centre, recently ran a series of polls looking at fraud and exposure, and delegates will be questioned along the same lines, looking at areas such as online banking, mobile security and bank statement reconciliation. In order to give a sense of how destructive this kind of fraud is we consider figures from the National Fraud Authority (NFA), which says fraud costs the UK economy around 73bn a year. We also explain that, according to the NFAs 2012 poll, a larger percentage of frauds now take place in the pri-
Visit www.cimamaster courses.com for more details about this and all CIMA Mastercourses.
vate sector, not the public sector, despite perceptions that welfare fraud, tax evasion and MPs expenses are the most common type of offence. We also explain that it is not a victimless activity (with the bank reimbursing claimants) as the proceeds are often used to fund terrorism and other illegal activities. We consider the fraud triangle an academic model (Donald R. Cressey) that identifies three key areas when it comes to fraud: opportunity, pressure and rationalisation. Opportunity relates to possible exposure; for example, unencrypted USB sticks or a photocopiers internal memory, where sensitive documents have been copied and then become available to fraudsters or potential fraudsters to take advantage and commit associated crimes. Pressure relates to the weak position individuals may find themselves in if they are financially challenged and need to remedy the situation. It means they might take advantage of circumstances to commit a fraud. Rationalisation refers to the mind-set of a fraudster who believes they are doing nothing wrong in re-appropriating resources, especially if they think their seniors are engaged in fraudulent activity. We will use real-life case studies and scenarios to illustrate how such situa-
tions were able to develop, identify the key corporate frauds that affect the financial sector and look at how these could impact upon the organisations represented by the attendees. These include US telecoms company WorldCom, which collapsed after numerous frauds were discovered, and rogue trader Nick Leeson, who brought down Barings bank. We ask questions such as: Is your corporate identity safe? On staff fraud who is working for you? And on cybercrime is your data exposed? We then consider the practical steps that your business can take to reduce the risk of fraud and corruption and ensure, for example, that your systems and controls are robust enough to deter/identify a fraud, and that your data is secure. Key to this is recognition that up to two-thirds of frauds are committed by senior management, according to the Association of Certified Fraud Examiners. We set the scene with the video, Tone at the Top, in which management is reminded of its responsibilities to lead from the front in the fight against fraud. Fraud response planning is also looked at in detail. We promote the idea of a simplistic plan that is easy to follow and whether a response should result in no action, or pursuing a civil or criminal action. This will take in the area of interacting with the police, which will mean using the Action Fraud portal and working with local police. We also include a summary of key points in the Fraud Act 2006, such as abusing a position of trust and failing to disclose information. The course ends by looking at the mindset of fraudsters and their motivations, which they have explained to academics in a video called Learning from the Fraudsters. We then return to the issues covered in the fraud triangle and relate these to circumstances in the attendees organisation and how they should examine them when they return to work.
Getty Images
60
CIMA global events Past events CIMA Irelands insightful thought leadership conference
CIMA Global Business Challenge winner secures top job
February, UK Adam Broadbent, team leader of 2012 CIMA Global Business Challenge winners The Indivisibles, believes the victory in the CIMA student competition has played a direct role in helping him secure a top position at proprietary trading company MET Group. He joins the business as an executive assistant to the CEO. Its going to be a very varied role, he said. There will be a lot on the numbers side of things, but also strategic planning, action plans for companies, how we go about marketing and developing frameworks. From MET Groups perspective, winning the competition proved I could go to the limit and deliver what has been described as outstanding execution. It proved the skills I had tried to show during the internship. Speaking of the Global Business Challenge, he says: There was a very high standard of competition. Its real teamwork in the real world. We dont really get challenged like that at university. Learning those skills and that approach to teamwork and group work is really important. Competitions such as the Global Business Challenge really allow us to develop those skills. Adam added that he is thoroughly impressed with the Global Business Challenges potential for developing business talent and is keen to be a judge himself one day. I hope in the future I can be one of the judges at the Global Business Challenge final and help inspire the next generation of students. At the UK and global finals all the judges were industry leaders, but were incredibly humble and willing to engage and chat, to help and support. To hear more of Adams story, visit http://tinyurl.com/bu934dy
Delegates representing the corporate, financial, public and academic sectors attended CIMA Irelands inaugural CGMA thought leadership conference Integrating Risk into Performance Reporting, sponsored by Deloitte. Chaired by Alan Flanagan, chairman of CIMA Ireland, and Brian Duffy, board member, CIMA Ireland, the conference explored the interface between performance management, risk management, company strategy and enterprise governance. The keynote speaker at the event was Regine Slagmulder, professor of accounting and control at Vlerick Business School, Belgium, and author of the CGMA Integrating Risk into Performance report.
CIMA Canada honoured for youth programme

February, Canada CIMA Canada has been honoured for a fourth time by the International Cricket Council (ICC), in recognition of its work to engage youths from diverse communities through cricket and install in them key business and life skills. The CIMA cricket programme, known as the CIMA Mayors Trophy, received the ICCs Americas region award in 2005, and both the Americas and the world awards for Best Promotional Cricket Programme in 2006. Now, the inaugural CIBC Trophy, the CIMA Mayors School cricket tournament, has been awarded the Americas Best Junior Participation Initiative. The tournament saw 40 school teams participate in the event, which was organised in partnership with the City of Toronto. Amal Ratnayake, head of CIMA Canada, said: I am delighted the ICC has chosen once again to recognise CIMAs contribution to both education and cricket. CIMA is not just about helping business to succeed, it is about helping people succeed. One of the ways we can do this is to instil in young people key business skills, such as teamwork, leadership and perseverance, as well as an understanding of other cultures.
61
Coming events
UK Valuation of a business and how to exit 11 April, 6.30pm for 7pm Thistle Hotel Haydock WA11 9SG This event will look at all aspects of a corporate sale, including valuation, grooming the company for sale, the sales process itself and the legal documentation involved. It will also cover the potential for a corporate sale to the management team through a management buyout. Contact Anna Willis at region.six@cimaglobal.com Graphs that influence and impress 16 April, 6pm for 6.30pm Holiday Inn, Deane Gate Avenue, Taunton TA1 2UA Has anyone congratulated you on your graphs? If not, then this one-hour talk will change that. Contact Suzanne Allen on +44 (0)11 7960 9734 or email region.two@cimaglobal.com South East England student conference 16 April, 12.45pm for 1.15pm Fairfield Halls, Park Lane, Croydon CR9 1DG This half-day conference will help students at all levels studying towards the May 2013 exams, from planning your revision effectively to exam techniques on the day itself, while maintaining a study/ life balance. Attend this event to understand what examiners are looking for and how to avoid making mistakes in the exam hall. To book a place at this event go to www.cimaglobal.com/ southeastengland Warwick Manufacturing Group: from auto to nano three decades of innovating for British business 17 April, 6.30 pm for 7pm International Digital Laboratory, University of Warwick, Coventry CV4 7AL We are pleased to have Professor Lord Bhattacharyya, chairman and founder of Warwick Manufacturing Group, speaking at this event. Contact Julie Witts at region. four@cimaglobal.com or go to www.cimaglobal.com/ westmidlands Ethics in a downturn economy 18 April, 9am for 9.30am The Midland Hotel, Manchester M60 2DS The ethical culture of organisations is of growing importance and corporate conduct is in the spotlight. Find out how you can be your organisations ethical conscience, as well as hear from a range of speakers about the current ethical issues facing businesses today. Contact Anna Willis at region.six@cimaglobal.com Management accountant to finance director leadership and management skills 18 April, 9am to 5pm London 599 +VAT (539 +VAT for CIMA members) Part of a series of five one-day workshops to help you progress into senior roles by developing personal and management skills. To book a place at this event call 0845 026 4722, email mastercourses@cimaglobal. com or visit www. cimamastercourses.com/ MAFC Budget update (joint event with AAT) 18 April, 6pm for 6.30pm Future Hotel Cardiff Bay, Hemingway Road, Cardiff CF10 4AU Steve Theaker, the singing accountant, will be singing us an overview on the budget. Contact Suzanne Allen on +44 (0)11 7960 9734 or email region.two@cimaglobal.com VAT refresher and update 23 April, 9am to 5pm Birmingham 599 +VAT (539 +VAT for CIMA members) This Mastercourse will ensure you have a sound understanding of the fundamentals of VAT and how the tax applies in business. To book a place at this event call 0845 026 4722, email mastercourses@cimaglobal. com or visit www. cimamastercourses.com/ VRAU Technical update: accounting standards 23 April, 6.30pm for 7pm First Intuition, City Point, Temple Gate, Bristol BS1 6PL The talk will cover IFRS9 (the new standard on accounting for financial instruments), IFRS10 IFRS12 (the new standards covering group accounting) and recent amendments to key accounting standards, such as retirement benefits. Contact Suzanne Allen on +44 (0)11 7960 9734 or email region.two@cimaglobal.com Unlocking business intelligence joint event with IoD 24 April, 6.30pm for 7pm Ashley Conference Centre, Staffordshire University, Leek Road, Stoke-on-Trent, ST4 2DF Contact Julie Witts at region. four@cimaglobal.com or go to www.cimaglobal. com/westmidlands Developing your thinking style 9 May, 6.30pm for 7pm Britannia Daresbury Park, Warrington WA4 4BB How do you think and why do you think that way? The way you think directly influences your behaviour and the person you are. Making changes to your thinking style could make all the difference to your personal and professional lives. Contact Anna Willis at region.six@cimaglobal.com
Visit www.cimaglobal.com/events for updates and a full list of events, which are free unless otherwise stated. CIMA Mastercourses your catalyst for business change: visit www.cimamastercourses.com or call 0845 026 4722. To submit an event for this page, email ben.jackson@cimaglobal.com
63
The Institute
View from Professional Standards
f you type whistleblower into Google and search for news youll find a whole host of stories from around the globe, from sex scandals in China to posthumous trials of whistleblowers in Russia, to poor hospital treatment in the UK. The three may seem completely unrelated, but they are all invaluable public interest cases. Those who blew the whistle have done so to hold their organisations to account by bringing their issues into the public domain for discussion and debate, which you would hope would raise awareness and affect change in an organisation. Whatever your thoughts on the individual cases, speaking up is a key driver in ensuring that the principles of accountability and integrity are upheld within an organisation, whatever the role of the individual. The extent of wrongdoing hopefully shouldnt escalate to the point it did in say, Olympus, when Michael Woodford as CEO had to out his board when he discovered fraud. This is why more and more organisations are adopting a culture where malpractice in the workplace can be reported, with some, including CIMA, adopting specific whistleblowing policies for employees to ensure those considering reporting an issue have examined their options carefully and are supported throughout the process. A survey carried out among readers of FM (results published in the Feb 2013 issue) showed that 63 per cent of respondents felt whistleblowers can only rely on an external independent line for full protection, which reflects the alienation from colleagues an employee can feel when faced with misconduct in the workplace. The heavy
C
burden of the knowledge of malpractice is, in itself, a weighty position for any employee to find themselves in, but coupled with the turmoil of feeling isolated, with no way to share the burden, can make for a very unpleasant working day. There are a number of services provided to whistleblowers: ensuring confidential advice is given to alleviate some of that pressure, and in different countries there will be different routes and legal protection. CIMA provides an ethics checklist to help you figure out the next steps, as well as our Code of Ethics helpline and Global Guidance line. Although these are not replacements for technical or legal advice, they may help steer you in the right direction. For those in the UK our legal helpline, Law Express, can help advise you on the Public Interest Disclosure Act, which offers protection under UK law. Find out more by visiting: www.cima global.com/ethics
CIMA appoints new director of learning
IMA has announced the appointment of Peter Stewart as its new director of learning. He will be based at CIMAs corporate centre in London and will lead the learning directorate, focusing on driving student exam progression, building CPD programmes and strengthening partnerships with tuition providers. Stewart is currently the director of corporate business at the London School of Business and Finance, where he leads the development and delivery of training courses for accountancy qualifications and is responsible for the recruitment, training and development of LSBFs accountancy tutors. Before this, he spent 15 years at tuition provider BPP, initially as an accounting tutor and later as accountancy courses director and head of consulting at ACCA (Association of Chartered Certified Accountants). CIMA chief executive Charles Tilley said: Peter joins the institute at an exciting time. We have celebrated the first anniversary of the CGMA designation, elevating the profession of management accounting on a truly global scale, and delivered record numbers of new members and students. With 203,000 members and students around the world, he will play an active role in helping CIMA students progress through the qualification and on developing our CPD offering.
Presidential engagements
23 April Appointments Committee 2 May Honorary Officer meeting
65
CIMA CEO column
Firms are failing to manage and harness the skills of their workforce
deas can be replicated. Markets can be undercut. To thrive in the long term, it is becoming increasingly evident that two of the most critical factors determining a companys fate in our current business environment are the quality of its human capital and the way it manages its talent pipeline. Unsurprisingly, talent management is one of the key focuses for leading organisations. A recent study by the Boston Consulting Group produced some telling data. The research found that companies that are highly skilled in core HR practices achieve up to 3.5 times the revenue growth, and as much as twice the profit margin of less capable companies. CIMAs own research supports these findings. A CIMA/AICPA survey of more than 300 senior executives found that 43 per cent partially attributed missed financial targets to ineffective human capital management. The survey, carried out on our behalf by the Economist Intelligence Unit, also found that in 40 per cent of cases the same problem had also reduced their companys ability to innovate. This suggests that many firms are failing to effectively manage and harness the skills and experience of their workforce. Interestingly, North American firms generally reported more difficulties as a result of poor talent management than their European and Asia-Pacific counterparts. Our research found that only 16 per cent of the North American executives we surveyed said their organisations have personal development programmes in place. This compared with 45 per cent in Europe and 35 per cent in the Asia-Pacific region. Our report concludes that while most companies understand the importance of human capital, they do not appear to have the right systems, processes and information in place to manage their talent effectively. Of those surveyed, just 41 per cent said they were confident that their human capital strategy is truly embedded in their organisations strategy. This is a concern.
Digging into the data, some of the shortcomings seem to be systemic, or a fallout of organisational structures. Problems range from an incoherent strategy as a result of different views at C-level on critical aspects of talent management to a lack of trusted and useful information and insight. Worryingly, only 12 per cent of CEOs said they were confident about the quality of metrics that senior management receives on human capital. The message to business leaders is clear. To stay competitive and grow in todays fast-moving, volatile business environment, they must reconnect human capital to the growth agenda. Our report recommends four steps organisations can take to maximise growth from talent. The first is to embed a human capital strategy within the wider business strategy. The second is to collect and collate the right information and translate it into actionable insight. The third is to ensure there is clarity on responsibility, accountability and ownership for human capital performance management. The final step is to structure the organisation in a way that encourages collaboration and partnering. Above all, our research highlights that in todays business environment, the CFO generally has the mandate to work with the HR director to manage human capital performance and, in particular, performance analysis. This is good news for chartered global management accountants. Firms should use our members skills in uniting financial facts with human capital metrics and KPIs to provide relevant, accurate insight from a base of independence and objectivity. Given the lack of confidence in the current data, many HR directors would clearly welcome and benefit from closer partnering and support. If harnessed fully, the talents of CGMA business experts can be utilised to unblock the talent pipeline of the whole organisation and channel ideas and insights into areas where they will be the most effective. Charles Tilley, fcma, cgma Chief executive, CIMA
If harnessed fully, the talents of CGMA business experts can be utilised to unblock the talent pipeline of the whole organisation
i
Charles Tilley writes a regular column for CGMA Magazine, entitled Oneto-one: Top tips from the boardroom. For his latest column, visit http://tinyurl. com/d4xtq4n
Illustration: Masao Yamazaki/Dutch Uncle
66
CIMA and an entrepreneur answer your questions This month...

Since the banking crisis, many companies are aiming to become debt free. But debt is a cheap form of finance, so what should I recommend to my CEO?
CIMA versus David Soskin

A. CIMA
The tax benefits of debt interest payments, according to the theory at least, make debt a relatively cheap form of finance. So if your organisation is profit making, and those profits are taxable and your tax jurisdiction treats interest paid on debt financing as tax deductible, then debt is probably significantly cheaper than raising equity finance. However, the 2008 financial crisis and ensuing period of slow growth have left many banks unwilling to lend, while some companies are averse to borrowing and dont want to depend on the banks for financing new projects. Indeed, many are now hoarding hefty cash reserves. For some, this is not a new phenomenon. Mastercard, Amazon and Apple have all famously issued zero debt, but in 2012 several previously indebted companies followed suit. In the UK, building giant Persimmon announced its intention to remain largely debt free, in the medium term at least. But moving away from having incurred debt from borrowed capital towards becoming debt free is challenging. Your CEO and CFO need to have a detailed knowledge of the companys finances. Without a thorough understanding of costs and expenditure, as well as the businesss real profitability, the liquidity risk will be high. They must also ensure your organisation has and is using an operations budget, implemented alongside a comprehensive cash flow management strategy. The process will require a holistic operational rethink if the company is going to pay off existing debt by reducing costs and increasing cash flow. Despite these challenges it is worth remembering that during periods of slow economic growth, the less debt an organisation holds the more likely it is to survive the storm. And when economic growth kick-starts, debt-free organisations will be optimally placed to exploit new opportunities. Gillian Lees is a senior innovation manager at CIMA Do you have a question youd like to pose to CIMA and a top entrepreneur? Tell us at questions@ fm-magazine.com
A. David Soskin
Interest rates are low because of the low confidence that both businesses and consumers have in the economy. The government believes that low interest rates are a good thing as they enable companies to borrow more easily, despite the fact that it was over-leveraging by business, consumers and, above all, government policy itself that got the UK into its current mess. As the economy continues to stumble, it would appear that we are in a low-interest regime for a long time to come. But in this gloomy environment, fortune can favour the brave. It really depends on the prognosis for your company. If you have opportunities to grow profitably for example, by expanding the sales force, accelerating R&D
David Soskin is the former chief executive officer of Cheapflights. He is a director of Aldermore Bank and mySupermarket.com, and chairman of Smart Traffic.
Illustration: Dmitry Litvin/Dutch Uncle
spend or making an acquisition, which require additional funding the taking on of manageable debt is no bad thing. However, you always need to plan for the worst. Ensure that you are always in a position to repay the interest and the principal, if necessary. You do not want to be beholden to the bank, however rosy the current prospects may appear. And ensure that you maintain a good working relationship with the bank so that if problems do arise, the bank is not caught unawares and issues can be solved together. It constantly surprises me just how many businesses give no thought to maintaining what is a crucial relationship. But do not look at plain debt in isolation. Look to other sources of capital, such as invoice or asset financing, which can be better alternatives for many businesses. And do shop around. Banking is gradually becoming more competitive so it is worth shopping around for debt in the same way as you would for any other important supplier.

Apr 2013 PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Apr 2013 PDF

Uploaded by

Copyright:

Available Formats

Financial Management

www.fm-magazine.com April 2013

Sir Terry Leahy

Financial Management | April 2013

A word from the president

A sharper focus in the boardroom locates potential time bombs

Illustration: Masao Yamazaki/Dutch Uncle

Financial Management | April 2013

Financial Management | April 2013

Financial Management | April 2013

Financial Management | April 2013

I worked on Delivering doubledigit growth at KPMG Sri Lanka

Name: Reyaz Mihular, FCMA, CGMA

Industry: Accountancy Location: Sri Lanka CIMA qualified: 1982

Role: Managing partner of KPMG, Sri Lanka and the Maldives

Financial Management | April 2013

Financial Management | April 2013

Update Now on CGMA.org

Our guide to the best online tools

Illustration: Lucas Varela/Dutch Uncle

Financial Management | April 2013

Financial Management | April 2013

Earnings uncertainty is key risk for finance executives

Hot potato This months dilemma:

Illustration: Denis Carrier/Dutch Uncle, Dave Murray/Dutch Uncle

Financial Financial Management Management | July/August | April 2012 2013

Financial Management | July/August April 2013 2012

The Data Patent grants by country of origin G20 countries

US Domestic: 108,626 Foreign: 92,532

Mexico Domestic: 245 Foreign: 228

Brazil Domestic (2010): 314 Foreign: 567

South Africa Domestic: 567 Foreign: 552

Australia Domestic: 1,267 Foreign: 4,895

The rise of Chinese innovation

Argentina Foreign: 104

Source: World Intellectual Property Organization

Financial Management | April 2013

Forum From the blogs

Poll of the month We asked

Yes, but infrequently (every 10 years or more ): 3%

No, there shouldnt be forced rotation: 8%

Dont know/cant decide: 8%

Innovation and risk in the spotlight

Financial Management | April 2013

Financial Management | April 2013

Financial Management | April 2013

Sir Terry Leahy

Photography by Matthew Stylianou

Financial Management | April 2013

Financial Management | April 2013

Whats a brand really worth?

Investors are starting to pay attention to brands as indicators of financial health

Top 10 global brands

Brand Finance Global 500 (2013)

Financial Management | April 2013

Financial Management | April 2013

Jasmin Harvey, FCMA, CGMA, manager, corporate governance implementation, Qantas

Financial Management | April 2013

Financial Management | April 2013

Top 5 countries, ranked by B2C e-commerce sales, 2011-2013 (billions)

Financial Management | April 2013

Financial Management | April 2013

Choose factoring for credit support

US Domestic: 108,626 Foreign: 92,532

Mexico Domestic: 245 Foreign: 228

Brazil Domestic (2010): 314 Foreign: 567

South Africa Domestic: 567 Foreign: 552

Australia Domestic: 1,267 Foreign: 4,895

Argentina Foreign: 104