Corruption and high-income economy don't share the same house

WHEN the World Economic Forum (WEF) published its Global Competitiveness Index 2009-2010, the countries which are listed in the top 10 most competitive nations remain the same. The difference is only how these countries are ranked.

Switzerland is now in pole position, relegating the United States to the second spot. Our neighbour Singapore is now ranked third, overtaking Sweden and Denmark which are ranked fourth and fifth respectively.

The competitiveness ranking is based on the 12 pillars of competitiveness which are grouped into three categories — basic requirements, efficiency enhancers, and innovation and sophistication factors.

As countries progress economically from factor-driven to efficiency-driven and finally to innovation-driven, the pillars that drive competitiveness gradually shift from basic requirements to sophistication and innovation as they must design cutting-edge products and processes to maintain their competitive edge.

The first pillar which provides the foundation for competitiveness is the institution, which represents the legal and administrative framework within which individuals, firms and government interact to generate income and growth in the economy.

According the WEF report, the quality of institutions has strong bearing on competitiveness and growth as it influences investment decisions, organisation of production and the ways in which societies distribute benefits and costs of development strategies and policies.

Let us consider the position of the top competitive countries in the Corruption Perception Index (CPI) that was released by Transparency International last week. The CPI measures the perceived level of public-sector corruption in 180 countries and territories around the world based on 13 different experts and business surveys.

The top five countries ranked with the least incidence of corruption are New Zealand, Denmark, Singapore, Sweden and Switzerland. If we compare the WEF list and CPI, the composition of the countries in the top five spots is about the same with the exception of New Zealand (which is ranked 20th in the WEF report) and the United States (ranked 19th in the CPI).

A simplistic reading of the two reports would suggest that a country would have a better chance to be competitive if the public institutions are functioning effectively and corruption is kept at a minimum. Why?

As suggested above, the quality of institutions influences economic decisions and wealth distribution. For people to be innovative and creative, they should first believe that being innovative and creative pays.

If budding entrepreneurs who are starting their venture believe that they have equal chance to business and commercial opportunities, more would be putting efforts to create something that could be eventually commercialised and sold to the world.

Corruption naturally disrupts the fair distribution of wealth and opportunities. Worse, it sends the wrong signal that key success factors in the economy are not about thinking and working hard but that success could be bought and sold provided the price is right.

In our case, the failures of governance and controls as reported by the auditor-general every year could deter real entrepreneurs from putting more effort in their enterprises. Some may even be looking at other countries with similar if not better opportunities.

The recent statement by the Port Klang Authority (PKA) that it would accept and implement the recommendations by the Ad Hoc Committee on Governance established in responding to the PKFZ problem is a positive sign.

Among the recommendations of the committee is the implementation of the Integrity Pack which will put in place strong anti-corruption mechanism within the governance framework of the port authority.

The Integrity Pack consists of a process that includes an agreement between a government or a government department and all bidders for a public contract.

It contains rights and obligations to the effect that neither side will pay, offer, demand or accept bribes; collude with competitors to obtain the contract; or engage in such abuses while carrying out the contract. It also introduces a monitoring system that provides for independent oversight and accountability.

Given that PKA is one of the many government agencies, it would be appropriate if this anti-corruption tool is also implemented across all government agencies.

In fact, if PKA adopts and applies the Integrity Pack, it would be interesting to know the reasons why other government ministries and agencies are not doing the same. Even if the rest do not have similar problems as PKA's, putting in place a strong deterrent of corruption will make the rakyat happy.

In order for Malaysia to move into the high-income economy, we should ensure the foundation for that is firmly established.

The fight against corruption would not only strengthen the foundation for our economic competitiveness, but would also enhance the creative and innovative culture among entrepreneurs as they would see them as the key driver for success when opportunities are made available based mostly on merit.

This article was also published on the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/154292-corruption-and-high-income-economy-dont-share-the-same-house.html

Could KPIs derail innovation?

Key Performance Indicators (KPIs) are one of the management tools used in ensuring organisations achieve their strategic goals and objectives. It provides a broad idea of how far an organisation has performed relative to a set of criteria that is chosen to reflect its performance.

While profits and economic returns to shareholders are the ultimate aims for commercial organisations, KPIs have been used as complementary measures which guide management to achieve commercial objectives in the way that would ensure sustainability of business while providing desired returns to shareholders. This is necessary when financial measures per se may not be adequate as a gauge of performance, especially for organisations which care about the social and environmental impact of the way they conduct their business activities.

Given organisations in the public sector are established with the aim of supporting nation building and providing services to the people, monetary measures alone are definitely not adequate in measuring performance. In the past, the amount of spending was about the single measure used to indicate their efforts. This has been proven to be faulty as spending money need not necessarily result in the desired outcomes. The annual findings of the Auditor-General suggest that the people’s money had not been prudently and wisely spent by ministries and agencies.

To reflect the seriousness of the present administration in attending to issues which concern the people, certain Key Result Areas (KRAs) had been introduced. What is the difference between KPIs and KRAs? Simply put, a KRA is the destination while KPI measures whether an organisation is moving towards the destination.

For example, if we are travelling from Johor Bahru to Kuala Lumpur, passing through Air Keroh and Seremban indicates that you are on the right track. Paying toll at Sungai Besi tells us that we are about to enter Kuala Lumpur. Here, passing Air Keroh and Seremban could be the KPI for direction while paying toll at Sungai Besi without being booked by the police could be the KRA.

While the above example looks simple, it also indicates the limitation of the tool. For example, arriving in Kuala Lumpur without being caught by a speed trap does not necessarily indicate we have been driving according to speed limit! Furthermore, if there is not enough fuel in the car, this is only realised when the car stalls after passing Seremban, thus hindering us from reaching Kuala Lumpur as well.

Each government agency was set up with specific objectives and mandates. In pursuing the objectives and exercising the mandate, the organisation has to deal with changing circumstances and expectations of its stakeholders. Therefore, each agency should have the ability to reset strategy and its operational approach in responding to the changing circumstances in order to be effective and efficient.

If the organisation is assessed on a set of KPIs which is rigid, and worse be imposed without due consideration of the changing circumstances, the whole concept of KPIs may not work. Here, ability to respond to change and realignment of KPIs may be required while the ultimate desired outcome may not necessarily be compromised. The question here is how far agencies are empowered to deviate from pre-determined indicators when it is necessary to do so?

If they are so empowered, would the leadership of these organisations exercise this power for the benefit of the people while putting themselves in a situation where they may need to challenge “higher authorities” to justify the re-alignment?

In moving up the value chain and transforming ourselves into an innovative society, the performance of our higher education institutions is absolutely critical. Our ultimate desire is for these institutions to facilitate young and bright Malaysians to develop their intellectual capabilities so that they could lead this country in competing with the best in an open environment where merit and performance are the order of the day. Do they have enough flexibility to focus on what is really necessary to achieve this ultimate outcome?

In the quest of maintaining quality, the institutions of higher learning have to comply with certain performance indicators that are generic and applied across the board. If they fall under the category of research universities, another set of indicators needs to be observed, particularly on the number of researches cited in established journals.

Annually, where they stand in the ranking made by external parties would be used as part of the assessment of their performance. To ensure consistent performance, universities now require ISO certification. How would all of these initiatives be linked to the production of graduates who have the knowledge, skills and values to be our saviours in the future?

The risk of using KPIs blindly is the tendency of grabbing what is easily quantifiable and used by others while ignoring the reality of the institutions and the dynamics that are faced by the management of universities. What works for others may not necessarily work for us.

If would really be unfortunate if before a university even starts to think about strategy, KPIs have been assigned for them to meet. Wouldn’t this result in killing innovation?

This article was also published at the Edge Malaysia website:

http://www.theedgemalaysia.com/commentary/153787-could-kpis-derail-innovation.html

Was There When Tiger Won The Australian Masters

No, I was not at Kingston Heath, the venue of the Australian Masters. I was in Melbourne on the Sunday when Tiger Woods won the trophy, but in a meeting on matters which were related to the accounting industry.

Although not playing well on the third day, Tiger did not disappoint the 25,000 odd crowd but displaying the performance which makes him the World number 1.

Everybody in Melbourne was talking about Tiger and nobody complaints about the A$3,000,000 appearance fee paid to Tiger to appear and play at the tournament.

It was reported that visitors and golf fanatics spent around A$20 million over the tournament period. In addition to that, the positive reporting regarding Tiger would carry Melbourne a long way.

Regarded as the sporting city of Australia, Melbourne hosts the Formula One racing, Melbourne Cup horse race and host major cricket and Australian football games at the famous Melbourne Cricket Ground.

It's beautiful skyline and the refreshing Yarra river position Melbourne as one of the must visit city in Australia. Not the mention its role as the centre of business along side Sydney.

Yes, I was in Melbourne when Tiger Woods won the Australian Master at Kingston Heath.

Regulatory Effectiveness and Operational Sustainability of Accounting Firms

Somehow accountants in practice take regulation seriously. What more when regulation created opportunities for them to provide services be it audit, tax, insolvency or secretarial services. That is why when there are proposal to amend regulations, this group of professionals would normally pay serious attention to the possible changes although the change may occur a number of years down the road.

These were the issues that were discussed during a forum with the theme Effective Regulation; Sustainable Operations organised by the Malaysian Institute of Accountants (MIA) today for the practitioners. I was invited to be the moderator. The panellists were Billy Kang, Council member of MIA, Jennifer Lopez, Head of ACCA Malaysia and Dr Cheah Foo Seong, Chief Technical Officer of Tricor.

While certain risks were identified with changes in the company laws, for example, opportunities are aplenty as well. Jennifer suggested that accountants consider training as one options to expand their firms. Changes in accounting standards, for example, means companies need to build capacity and ensure their staff are competent to handle new financial reporting standards.

Billy reminded auditors to educate and convince their clients to see value from audit. Otherwise, clients would not appreciate the value of audit and would be very hesitant to pay audit fees.

Dr. Cheah shared his experience in providing services to corporate clients. According to him, accountants need to be innovative and provide services beyond the ones which are triggered by regulation.

I had the opportunity to suggest accountants to shape their future without waiting for the laws to be amended. If accountants are working on their practices rather than in their practices, they would be able to spot opportunities faster or identify risks that are forthcoming. This requires a shift in mindset.

Eventually practising accountants have to create value out of the services provided to clients rather than relying on regulation to drive their practices forward. This is quite challenging for some as being in a closed profession, regulation has provided accountants with monopoly over certain services such as auditing.

One in the bag, more work for MASB

THE Malaysian Accounting Standards Board (MASB) successfully hosted the first meeting of the Asian-Oceania Standard-Setters Group (AOSSG) meeting in Kuala Lumpur last week. The meeting was attended by more than 100 representatives from 21 accounting standard setting bodies from the Asia and Oceania regions.

Sir David Tweedie, the chairman of the International Accounting Standards Board (IASB) and a number of top guns from the international standards setting body were also present to show support and to provide updates to participants of the meeting.

The Kuala Lumpur AOSSG meeting saw the signing of the memorandum of understanding (MoU) which formalised the regional grouping. The MoU crystallised the objectives of AOSSG which, among others, included coordinating the input from the region to the technical activities of IASB and to cooperate with governments, regulators and other regional organisations to improve the quality of financial reporting in the region.

The formation of AOSSG is to provide views from this region to IASB. Given that the future growth of the world would come significantly from Asia, it would be appropriate that the interests of the region is given due consideration when a position is taken at the global level. This is more important as IASB is courting the Americans to announce the date of convergence between international and American accounting rules.

Malaysia was honoured when MASB was chosen to be the first chair of AOSSG. With this position, MASB would be able to set the agenda and workplan for this new regional group. This is important as more countries are aligning themselves to be in convergence with the IFRS standards. It is also hoped that by being the first driver, MASB would be able to promote areas which have significant impact to our interest — accounting for Islamic finance and transactions among the government-linked corporations are examples that could be considered.

Given that the membership of AOSSG includes accounting standard setters from major trading countries such as China, Japan, Australia and South Korea, it would be interesting to observe how this new regional grouping would operate and achieve consensus in decision-making. Hopefully the modus operandi that was also adopted at the Kuala Lumpur meeting would help to shape operational efficiency of AOSSG.

At the same time, MASB is expected to lead and play a more definitive role in steering Malaysia's own convergence agenda. The 2012 target is not that far away and time is really not on our side. 2010 will set the convergence agenda in motion when FRS 139 will be effective. While there are opposing views on whether this should proceed, any reversal would reinforce the perception that we tend to flip-flop when it comes to making critical decisions. Any date would not be a good date as the world keeps moving with new issues and challenges.

Beyond IFRS 139, there are other standards and interpretations which need to be brought in before the 2012 deadline. Among these are accounting for agriculture where PLANTATION [] companies would need to fair value their plantation assets, and accounting for property development where revenue is recognised based on whether control over the property development assets has been transferred or not. These issues need to be brought into the public sphere and the stakeholders need to participate in the debate so that the full impact is understood. Otherwise, complaints are only raised after things are settled and done with, as what we usually do in Malaysia.

Another issue that needs the attention of MASB and other relevant parties is the supply of competent human resource to the capital market to ensure IFRS could be implemented effectively. This issue needs to be appreciated and attended to, to ensure that our listed companies are not left with complicated standards but without enough people who could implement those standards.

MASB had said in the past that with convergence, Malaysia has to approach accounting standards setting differently. Being involved in the international due process very much upfront is one of the ways in which the game is now expected to be played. The chairmanship of AOSSG has given MASB a golden opportunity to make good the strategy that it has identified.

At the same time, input from stakeholders is critical as quality arguments with compelling data and supporting information would ensure our points of view are respected. This is where all stakeholders representing the preparers, auditors, educators and regulators need to be more involved when consultations are made by MASB.

Given its new role in AOSSG, it is hoped that MASB would be provided with adequate resources and talents to be effective regionally and domestically. Shaping an infant regional organisation is not an easy task, what more when the issues at hand involve matters that are close to the hearts of policymakers. Even the Group of 20 nations (G20) has placed accounting standard setting on their meeting agenda.

The convergence agenda in Malaysia requires MASB's leadership, and as discussed above, the issues are aplenty!

This article is also available on the Edge Malaysia website http://www.theedgemalaysia.com/business-news/153249-one-in-the-bag-more-work-for-masb.html

Focus on People, Bring Back Values

I had the honour of chairing the forum with the theme "Profit maximisation as the future way of doing business" A myth or reality?" organised by the Malaysian Institute of Accountants (MIA) in Kuala Lumpur yesterday.

A resounding "no" said Tan Sri Megat Najmuddin Megat Khas, President of the Federation of Public Listed Companies. He argued that Malaysian corporations learnt their lessons from the 1997 Asian financial crisis and beyond profit, two other important "P" are people and planet. According to him, the essence of all the problems faced by corporates is greed.

Datuk Abdul Samad Alias, the Chairman of Bank Pembangunan Malaysia, added that stated that the last line of defence is the person himself. "What do you do when nobody is watching" he asked rhetorically. He believes that cases like Enron would happen again in Malaysia and other parts of the world due to greed.

The concept of Human Governance was later introduced by Dato' Aziuddin Ahmad, the Professor of Risk Management at the Universiti Putra Malaysia. He argued that we need to go back to basic of being human, accountanble to self, society and planet. However, different to the Western Society where beliefs have been left out, the Eastern societies adopts values and spirituality as part of the social system. "Business ethics is an oxymoron as we cannot impose values on legal person" he said.

At the opening of the forum, Abdul Rahim Hamid, the President of MIA said that MIA would be engaging the Ministry of Higher Education to incorporate the concept of Human Governance in the accounting curriculum at universities.

I added that the way forward is for each and every accountants to reflect what little changes they could initiate immediately to ensure values are appreciated and given emphasis. Rather than waiting and complaining, little baby steps would trigger larger change.

The event was also reported by the MIA here.

Same kind of AG report next year?

The Auditor-General’s (AG) Department celebrated its 100th anniversary a few years ago. The department is part of our democratic institution in providing checks and balances to ensure public funds are spent effectively and efficiently.

That is why the auditor-general reports directly to parliament. This is important so that we, the rakyat, would know how our money has been managed by those who were trusted to do so.

As practised in the private sector, the AG and his team are supposed to be impartial and provide an independent view on how public funds had been managed.

Beyond that, the department also promotes good governance within the public sector. One of the initiatives in this respect involves rating the accountability practices of federal and state ministries and agencies.

The accountability index is based on the critical elements of financial management such as organisational control, budgeting, control over receipts and payments, management of assets and liabilities as well as financial reporting.

Given the long history of the Auditor-General’s Department, the annual findings that were tabled to parliament without fail and the initiatives driven by the department, one would be wondering why we keep on reading about the serious shortfall in the execution of public expenditure? Would we be reading about the same issues being raised again next year?

Last week, the government announced the setting up of a high-powered task force, headed by Chief Secretary to the Government Tan Sri Mohd Sidek Hassan, to study the 2008 Auditor-General’s Report and initiate appropriate action against those responsible for financial irregularities and abuse of power mentioned in the report.

Since this is something new, the task force could consider the following initiatives:

• Were there systemic failures in control procedures? Given the recurring nature of some of the issues, the understanding of whether they occurred because of certain shortcomings in the relevant agencies’ financial management framework and procedures would be useful. This would enable enhanced control measures to be put in place to prevent future breakdown in control.

• Were there rampant control overrides? An internal control system is only as good as its execution. Although the system itself could have covered major risk areas, the outcome is determined by how the control had been executed. Control overrides could only be possible if more than one party was involved. Override normally originates from higher levels of management — individuals who normally have higher authority and power.

• What happened to the people who were responsible and accountable for previous shortcomings? Were action taken against them? Were they subsequently disciplined, transferred, promoted or even decorated? Not much information on this was shared with the public and the public would be interested to know the outcomes of earlier actions towards the findings of the auditor-general. Decisive and strong actions by the government would send a strong message that such failures to discharge responsibilities are not tolerated, and that there would be consequences to those who are part of such practices. Perhaps information of this nature is made public this year.

• What happened to the parties in the private sector who were involved in earlier misuse of public funds? The problem needs to be addressed from both sides. What were the number of referrals to enforcement agencies such as the police and Malaysian Anti-Corruption Commission? If evidence was not enough for criminal action to be taken, were there any administrative actions against those who colluded with the civil servants?

• Who should be responsible and accountable for future failures? As we are now moving towards a performance-based administration, responsibilities for ensuring good governance and preventing future abuse of public funds should be shouldered by senior people in the government hierarchy. Clear key result areas and performance indicators should be set for senior civil servants who could make the difference in enhancing the financial management of public funds. Any adverse outcome should be taken into consideration in promotion, recommendation for decoration or extension of contracts.

• Could increased peer pressure reduce the incidence of failures in the future? This is where organisations such as Cuepacs could play their role. A strong message from their peers that public servants should be accountable for the power and authority accorded to them would enhance the environment of accountability and good governance in public sector.

• How to ensure the AG’s roles are preserved if not enhanced? There were statements made in parliament on the need for the report by the auditor-general to be “toned” down. While those who spoke at parliament have their parliamentary privileges, the High-Level Task Force should be concerned with this sort of statements. The independence of the auditor-general should be protected at all costs. This is about public money, the funds belonging to the people who ultimately decide who should be speaking in parliament.

Hopefully, significant change will result from the setting up of the High-Level Task Force. I am also looking forward to better findings in the 2009 Auditor-General Report next year.

This article was also published in the EdgeMalaysia website:

http://www.theedgemalaysia.com/commentary/152745-same-kind-of-ag-report-next-year.html

Value of Audit in a Modern Society

This topic was explored during a roundtable discussion organised by the ACCA in Singapore yesterday. Chaired by its President, Brendan Murtagh, the roundtable gathered distinguished personalities across the board to share their views and thoughts. They include David Gereld, the President and CEO of Securities Investors Association Singapore, Yeoh Oon Jin, Head of Assurance Practice, Pricewaterhouse Singapore and Dr Ng Boon Beng, Finance Director, Oracle Malaysia. I was there representing the Asean Federation of Accountants.

The value of audit was lengthy discussed especially on the background of corporate failures, declining public confidence and the widening expectation gap. A number of other issues were explored such as the possible widening of the audit scope, communication and alternative assurance services for the small medium enterprise sector (SMEs).

The panellists generally agreed that audit has value. However, almost everybody supported the view that auditors have to communicate more effectively to the shareholders and stakeholders. This would require the present audit reporting framework to be revamped.

In the area of audit for small medium enterprises, it was agreed that establishing audit threshold is necessary to elevate the burden of compliance from the smaller SMEs. The level of threshold should be determined based on the level of economic development of the jurisdictions concerned.

The roundtable also concluded that the auditing profession should also consider opportunities in the wider audit function especially relating to the environment and sustainability. Accounting profession around the would should not let this opportunity to be seized by other professions and accountants are in the best position to take up the role.

Competitiveness Over Subsidy

While the country wonders the ways to transform us into a high income economy, policy-makers appear to be stuck with the old ways of doing thing. The recently announced National Automotive Policy does not clearly position our automotive industry to be more competitive.

It appears that the main thrust is to provide the safe harbour to existing local players, give them some more breathing space to keep on doing what they are doing. Worse, the Rakyat, as we have always been, would be paying for the inefficiency of our automotive players. The so called policy to get old car inspected and possibly be scrapped in the future is no more than an attempt to create demand for locals cars which cannot stand at equal footing with the imported models. Now MITI is singing a different song that the policy is about ensuring road-worthiness of cars on our roads. Since when MITI is involved in the territory of the Transport Ministry?

One problem with Malaysia is that we are so good in self-glorification. So many millionaires or even billionaires were born out of contracts with the government or with the support of the government where even blind people could also achieve the same results, if they were given the opportunities. Replicating the time-tested approach which is not based on competitiveness would not get us that far.

As a society, we got caught in this glory that is not real. Even our soccer industry is no where compared to less lucky countries in this region. Why? The glory of the past (or could it be that others started later than us) remains in our head and we thought the future remains the same.

We really need to ditch the subsidy mentality in all aspects of our life. From getting degrees at universities, opportunities to work, business opportunities as well as in leading organisations, from the smallest to the largest. Unfortunately, those who benefited or are benefiting from the subsidy would not let go the sweets. It takes strong leadership to change this.

For you and me , we have to keep on sending the point that Malaysia need to progress on competitiveness, performance and justice. And this has to be reflected in whatever we do. Just stop for a while and think of the next few things that we could do together to move this country forward.