Controllership Excellence in Times of Change

Dr. Paritosh Basu August 22, 2013

Flow of Discussion
 Accounting and Reporting in Changing Environment  How Future is Unfolding Itself  Don’t Challenge Your Limits – Limit Your Challenges  Changing Dimensions of Controllers Role

When future looks hazy, it is time to go back to basics

Accounting and Reporting in Changing Environment

Path to the Pinnacle?

Challenges, risks and sustenance

What is the frequency?

Ideal - Monthly + many more one-offs

What are the Frameworks?

Conceptual, Institutional, Regulatory, Legal

For whom it is done? What do we do?

Stakeholders, Governance Group and Management

Transaction > Measure > Recognise > Record > Report

Let us revisit each question in every step in forward path

Accounting and Reporting in Changing Environment .. 2
Global Country

Entity Division

Span and perspective of Corporate financial reporting
     Stakeholders Analysts Capital / Debt Market Transactions Multiple Regulators Relevance

Order of the day - Speed, Reliability, Relevance and Value Creation

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Value Creation =
“Value has a value only if its value is valued.”^ Maximisation of Value Additions & Innovention* Pre-assess impacts of seeds in the Womb of Time

Increase in Shareholders’ Wealth

*Innovention =
Innovative and Inventive Value Creation ^ Bryan Dyson, former CEO of Coca Cola

Let InnoventionismTM be our Mantra

How to approach the process of value creation
1. Half filled with water 2. Half empty 3. The glass is full - half filled with water and half with air. Successful Controllership presupposes positive attitude and approach towards business

Source: Unknown

The Story of A Ship Repair and Itemised Bill

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How future is unfolding itself?

Inter-exchange between • Tangible Assets and • Intangible Factors* in an enterprise’s Market Value

* Some of such Intangible Factors are explained
in Corporate Reports, but many are not.

Valuation of listed Indian Enterprises are on their way to similar transformation

The World is changing – Corporate Reporting must too
Population increase to 8.5 Bln. in 2050 from 2.4 in 1950
The world population is increasingly urban Global population by type of area and by region: 1950-2050

Shift of Economic Power West to East - India 38 Trln.
Global economic power is shifting Top 10 economies by GDP in 2050

Middle class population 400 Mln. to 1200 .

The global middle class is rapidly expanding Population in low- and middle-income countries earning $4,000-$17,000 per capita (purchasing power parity)

Growth
Source: UN Population Division, World Population Prospects: The 2008 Revision, 2008

Source: Goldman Sachs, BRICs and Beyond, 2007

Source: World Bank, Global Economic Prospects, 2007

Greenhouse gas emissions keep rising GHG emissions by regions

Environmental degradation jeopardises people’s quality of life People living in areas of water stress by level of stress

The world could be running out of some resources

Global supply forecasts according to the implied ultimate recoverable resources of conventional oil, date of peak production and the postpeak aggregate decline rate

Degradation
Source: UN Population Division, World Population Prospects: The 2008 Revision, 2008

Source: Goldman Sachs, BRICs and Beyond, 2007

Source: World Bank, Global Economic Prospects, 2007

Source – World Business Council for Sustainable Development - Vision 2050

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The evolution of Reporting …
2000

Source: Integrated Reporting Council

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Integrated Reporting *– The Future

Source: International Reporting Council : PwC’s World Watch, Issue 1, 2013

* ‘Don’t let others define you’ ! Communicate what you are trying to do
a. Strategies b. Performance c. Propects d. Governance and e. Propositions for creating and preserving values in short, medium and long term – Paul Druckman, CEO of International Integrated Reporting Council IRC’s final draft for consultation has been published – Expectations from Analysts will increase manifold
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Metamorphosis in Indian Regulatory and Corporate Environment
 New Companies Bill  CFO and CS designated as KMPs – CFO to sign Annual FSs  Minority Shareholders may nominate Directors in listed companies  Class Action Suit permitted to be filed against a company  Periodical rotation of Auditors

 NFRA to also prescribe monitor Auditing Standards
 Many more measures for strict enforcement of governance  Tax Accounting Standard knocking the door  GST and GAAR are on their advent way  Ind AS may not be far behind  Ring fencing of talents will pose a problem  IT enablement of systems - An imperative and not an option any more  Free lance Analysts continue to remain out of regulatory clutch

News Item in The Economic Times, August 15, 2013

Sustainable Value Creation is to Invest with 4P Approach > Earn > Reinvest …The journey goes one
Let us look forward to approach Investors

December, 2011
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Emerging Economic Environment for Equity Capital

Reduction of ~ $ 23 trillion

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Emerging Economic Environment for Equity Capital … 2

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Don’t challenge your Limits, Limit your Challenges Crisis is a great opportunity to be wasted Let us achieve a state of readiness

Target - Where to go from where ??

Zone - A Tomorrow

Yesterday

Business performance management is all about making sense of • What is happening now and • What should happen in forward path

Today Zone - B % age Change in Turnover
Conduct trend analysis > Map present position > Fix strategic intent > Initiate Action

Questions for Introspection in the Given Environment
Does your entity or group have  Inherent substance to position itself with sustained performance?  A story to tell with duly evidenced plan?  Pillars of strength to support present activities without the IPO funds?  Leadership abilities with change management attributes for future needs?  Readiness in financial and reporting systems ready for overseas IPO

World is fast converging towards One Village
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Critical Audit Process for Fincl. Reporting in the USA
 US - SEC Listing, Application of SOX 404 with Top down risk assessment  Issuers are required to publish information concerning the scope and adequacy of the internal structure and procedures for financial reporting  Auditors attest to and report on their assessment of effectiveness of the above 
(SAS - 72 provides guidance to auditors about procedures to be followed for providing report after due diligence)

 Need therefore is to identify and assess – by both Management and Auditors
 Significant financial reporting accounts or disclosures  Material financial statements risks within these accounts or disclosures  Which entity-level controls would address these risks with sufficient precision  Which transaction-level controls would address these risks in the absence of precise entity-level controls  The nature, extent, and timing of evidence gathered to complete the assessment of in-scope controls

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Critical Audit Process for Fincl. Reporting in the UK
 UK Listing Authorities – Financial Reporting Practices
 Statutory Auditors to review and provide comfort to Board before ITF Meeting

on Extent, Quality, Speed, Effectiveness and ‘Top Down Risk Oriented Approach’ for
 Enterprise Risk Management Framework (ERM)  Functioning of Audit Committee  Internal audit including scope and approach  CFO’s oversight

 Operations reporting including procurement and tendering
 Arms’ length basis of conducting inter Group Co. transactions  Volatility management – Interest, Currency Exchange , Commodity, Policy  IT General Control (ITGC) and Information Safety  Formal documentation and review of SOPs  Directors’ Responsibilities Statement’ to include affirmative statements on  True and fair view of assets, liabilities, financial position and profit  MD&A includes fair review of developments and performance  Description of principal risks and uncertainties

If you don’t know what you don’t know, then you don’t know how to fix it

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Corporate Governance goes hand in hand with Corporate Reporting Risk and Performance Management

Disclosure and Transparency

Align strategic oversight role with Risk Intelligence and Congruated Goals25

Legal and Regulatory Boundaries

Corporate Governance

Independence and Value Orientation
Business Practices and Ethics

Facilitation of ERM is the Other Name of Controllership
Create and Review the Risk Register

External Risks – Reforms, Market, Technology,

Competitor, Natural, Legal & Regulatory, Political
Action - Map every ‘Cash Generation Unit’ vs. Risks and Mitigation Steps Currency Exchange

Financial

Credit

Planning

Customer Success
Human Resource Secrecy

Operational and Environmental Strategic

Goal Congruence
Health & Safety R&D Fraud

Cost of Capital

Leadership, Product Profile, Product Image Life Cycle, Business Portfolio, Business Erosion Model, Communication, Org. Structure, Business Alliances Product / Service Pollution Failure GAAP Conversion

Info. Reliability

Liquidity

Image Erosion

Brand Compliance Erosion Direct and Indirect Taxes 26

External Reporting

Challenges in Forward Path
 Information content  Protective confidentiality vs. complete transparency  Completeness vs. Invasion by analysts  More volatility in Income Statement  Relevance for stakeholders
 Recognition and transaction processing with flexibility for  Corporate reporting – Substance over Form, lesser prescriptive  Tax Accounts and Return – Historical Cost vs. Fair Valuation  Covenant compliance - Avoiding comments under CARO and going Concern  Least possible application of Regulatory framework of accounting  Habit of throwing away executive summary – Devil is in detail  Unlearning and relearning – Research, Reading, Benchmarking  Guidance of EAC of ICAI – Replaced by IFRIC, SIC and IndAs  Revised Schedule VI, Guidance Note,  Ind As going forward Note: India is presently suffering from ‘VUCA’ Syndrome (Volatility, Uncertainty, Complexity and Ambiguity – FCs cannot panic

Changing Dimensions of Financial Controller’s Role

Four Finance profiles become apparent when respondents are segmented by efficiency and business insight
Finance Profiles

High

Finance Efficiency

Low Low High

Business Insight
CFO Study India Point of View

Source: IBM Institute for Business Value, The Global CFO Study 2010

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The current environment has had a large impact on the role of the CFO, which will in turn change the role of the Financial Controller

Source: The changing role of the financial controller, Ernst & Young, 2008

Further Thoughts

“The essence of management lies in dropping the last letter and make it ‘Manage Men’! It is still better to drop the last two letters and make it ‘Manage Me’!”
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Thank You