Living as a Global Citizen

I would like to believe I am a global citizen. No, I have not renounced my Malaysian citizenship, I am still very much a Kelantanese Malaysian. Notwithstanding that, I had been to many places on this globe, for official duties and for pleasure. I have countless friends all over the world with different beliefs, culture and world views  Given where we are in terms of technology, I could still interact with them as if there is no boundary between us.

I suppose many other people on this planet share the same situation as mine. Our circle of influence goes beyond people who we can meet face to face in a single location. Many of us are connected to many people around the world for many reasons, business, blood lines, friendships, official duties, common interests and many other reasons. Some even have people on social media whom they have not ever met in person but are rather close to each other.

Hence, being global means one must have the ability to connect with diverse people in many parts of the world and able to appreciate our common interests and respect our differences. Sounds very simple, right? Yes, if one if willing to suspend judgment and able to articulate his viewpoints without insisting others to agree with him. People who want to win all the time and all they way may find it difficult to live with differing views, especially those positioned at the top end of societies where power distance is wide. In this sort of societies, truth comes only in one way, from the top.

One of the important skills in dealing with people with diverse views, culture and practices is the understanding of how the differences arise. For example, there are societies where religion is considered a private matter whereas for some other societies, their lives are anchored on and around religions. If this foundation is not appreciated, differing views may not be easily managed. Such fundamental differences could also happen within a society as well. This arises from the diversity of worldview due to education, culture and experiences. Those who go to international schools in Malaysia may think and act differently from those who are schooled at our national schools. This is a fact that we have to accept.

To make things worse, there are people who benefit when others disagree with each others. Politicians tends to take this approach to win votes although they may be claiming they are doing the opposite. Sometimes, we cannot put the blame on politicians alone as they tend to dance to the gallery. Who are they dancing to? You and me. If we are unable to live with differences, this would be amplified by politicians who want to get our support at all cost.

So, in this holiday season when we are spending time with our loved ones, family members and friends, we should take the opportunity to reflect on our openness to diversity. As the world becomes more interconnected, we have to deal more with people will all kinds of characters and beliefs. we need to be more global in our thinking.

Happy holidays and enjoy the break.

Risk and Audit in the Age of Vulnerability

We are in the VUCA world

If we accept that profit is the reward for risk taking, all companies have to deal with risks in creating value for their customers, investors, and other stakeholders. This means that picking and choosing risks which correspond to the risk appetites set by boards, who are ultimately responsible for the governance of enterprises, should be an activity which boards and senior management must be familiar and comfortable with.

The strategic options chosen by enterprises shape their risk profiles, which would also be influenced by their chosen markets and operating environment. In the past few years, VUCA, which stands for Vulnerability, Uncertainty, Complexity and Ambiguity, has become synonymous with the state of the global business environment. Geopolitical events, natural disasters, market collapses and disruptions brought by technological advancements have made the world less certain and predictable, and thereby lifting the overall risk barometer.

Regulators have responded to this new environment by issuing tighter regulations which has led to compliance risks becoming key risks for companies, particularly for financial institutions and market intermediaries. Populist movements in America, Europe and many other countries against established political philosophies have also reshaped many governments and global policies. The election of President Trump in 2016, for example, has resulted in policy reversals by the United States in areas such as climate change and global trade which have in one way or another affected the strategies of many global businesses which developed strategies based on pre-Trump policies.

Risk management and effective audit becoming more important

The increased level of uncertainties means that boards and management have to continuously understand the shifting business landscape, assess and manage risks effectively and capture opportunities faster before their competitors do. 

Such expectations have created demand for companies to enhance their risk management and audit functions in order for them to continue to create and capture value in the VUCA environment while remain as sustainable enterprises on the long run. Why?

It is important that the risk management function of an enterprise is not only able to detect emerging risks but can work with management to find ways where those risks could be mitigated within the risk-appetite of the board and the enterprise could proceed to venture into opportunities within that market segment. This may require some controls to be put in place to address the identified risks but those controls should not result in unnecessary costs or in setting up of non-value-adding processes which could slow down decision making and time to market.

The audit function, another layer of defence mechanism in modern enterprise management, focuses on the assessment of effectiveness of the whole risk-taking and risk management processes and whether controls are working as planned. The assessments made by internal auditors would help audit and other relevant committees to perform their roles effectively. Internal auditors are now even expected to be able to add value at the strategic level by framing their views beyond the pass or fail approach. If internal auditors are able to meet this expectation, discussions in audit committee meetings would be more valuable.

While external auditing would normally focus on the auditors’ opinion on whether the financial statements are true and fair, external auditors are a great source of information and insights to audit committees and even the full board. They should be able to share their observations on the state of play of industries, emerging risks, best practices and above all, on the quality of management in dealing with matters which the auditors deem to be critical. Make the most out of private sessions with external auditors by asking them difficult questions and observing their responses. Even their silence could give you an idea of what they have in their minds.

This is the reason why audit committees must develop robust criteria for selecting external auditors. Who are the engagement partners, their background, their involvement in the whole audit, the audit team and their credentials and the value which the audit firm could bring to your enterprises beyond their opinion on your financial statements. In considering fees for the auditor, please bear in mind the consequences of a bad audit to your enterprise and yourself as a director.

What will make things work?

It is critical to have people in risk management and audit who have competencies and experience to deal with VUCA. While risks or failures of control would be more visible at the tactical and operational levels, strategic failures would be more catastrophic to enterprises. They should understand strategic issues and be able to connect them to emerging trends and form views on their impacts. The challenge has always been to find, recruit  and retain such individuals as many other organisations would be trying to entice them as well. One way of addressing this is to have good talent development programs and succession planning.

Boards should also enquire whether management has allocated enough resources for risk management and internal audit to function effectively. In this day and age, investment in technological tools would not only help them to be more efficient but they could add more value to their work which would eventually enhance the quality of risk management and governance at the enterprise level. There would always be conflicting demand for budget and the natural bias towards value creating and money making activities should not be underestimated. This is where the board or relevant board committees could step in to ensure investment decisions are made from the enterprise perspective, balancing between profits and risks and to enable risk management and audit to function effectively.

Amongst the inherent risk in developing strategies, assessing and managing risks as well as assessing effectiveness of controls are the reliability of assumptions and judgments which form their foundation and the quality of data and information used in the whole exercise. In some cases, these factors seemed to be overlooked with severe consequences when the risks around them eventually crystallised. Management should ensure the integrity of data and information used in their planning and decision making processes. All assumptions underpinning strategies and models used should be tested to ensure their reliability. On the other hand, professional skepticism must always be applied when dealing with strategic issues. This is not to suggest that all premises of decisions must be challenged but key elements of those decisions, especially assumptions and models, must be robustly scrutinised by all the parties who have to deal with those decisions.

For all the functions above to work properly, a culture of trust and openness is very crucial. People should be allowed to share their opinions, views and perspective without subsequent repercussions. Knowledgeable and experienced people should be able to externalise their tacit knowledge which is only possible through interactions. Without such trust and openess, the real value of having these check and balance mechanisms would not be realised in full. Hence, such culture must be shaped by the board in its deliberations and when dealing with management and other parties. This will be closely watched by the rest of the enterprise and it will eventually shape the culture of the whole organisation.

Culture, the new mystery

Since the aftermath of the 2008 global financial crisis, one of the areas which has become the focus of regulators worldwide is organisational culture. This includes the consequences of remuneration to risk-taking, especially by executives and traders of financial market players.

This is not an easy topic to be dealt with but it has been demonstrated that culture influenced risk profiles of organisations as “the way things are done here” had higher influence over values statements hanged on the walls of those organisations. In addition to imposing hefty fines, some regulators have revised their governance expectations and started reviewing culture of institutions under their supervisions.

The above development should not be overlooked by the risk and audit functions of organisations. The nexus between culture and risk has to be understood, assessed and managed. If the risk is material, internal audit should have their eyes on the issue of culture as well. Do we really have a good understanding of our organisational culture, its impact on our organisations and how to influence culture so that it becomes our pillar of strength? This is a mystery which will be the focal point of regulators until they are comfortable that enterprises are managing human behaviour properly and would not pose a threat to the stability to the market.

Closing

Vulnerability, Uncertainty, Complexity and Ambiguity are realities which enterprises have to deal with in continuing as sustainable value creation vehicles for many stakeholders. Such realities require risks to be managed with more understanding while allowing enterprises to be innovative and nimble. While technology would enable better oversight, the influence of culture should not be underestimated. Risk management and audit functions have to step up, remain relevant and be counted. 

Note:

This article was published in a Dubai-based magazine The Hawkamah Journal which can be downloaded here.

Pengiran Mokhsein, A Friendly and Professional Accountant

Last week I received a sad news of the passing away of Pengiran Mokhsein, the President of the Brunei Institute of Certified Public Accountants (BICPA), a friend and a professional colleague.

We know each other due to our involvement in the Asean Federation of Accountants (AFA) where we were council members. At one stage, Pengiran was the President of AFA while I was his deputy. Another Bruneian, Hajjah Ning was the Secretary General.

Myself, Pengiran Mokhsein and Hajjah Ning at AFA Council meeting in Manila

Although the membership of BICPA is small, Pengiran Mokhsein managed to make their contributions felt at AFA. He was a nice and friendly but would express his views without hesitant. He was willing to listen to opposite views and would make decisions professionally.

When I left the accountancy fraternity to be a regulator, our contact was reduced. However, we would normally try to meet each other when he was in Kuala Lumpur attending meetings or conference.

Few years ago I was told that he had cancer and went for surgery. It was very devastating for me to hear the news. When he recovered, he resumed his activities as a council member of AFA. I could recall that I met him 3 times, twice in Kuala Lumpur and one in Bangkok, for the last time. He was in high spirit and looking forward to a full recovery.

Apparently, his cancer relapsed late last year and Pengiran had to stay at home beginning of this year.

With Pengiran Mokhsein and Priya Terumalay (General Manager of CPA Australia) in Bangkok at a conference on small and medium sized accounting firms

A number of years earlier, Hajjah Ning also succumbed to cancer when she was holding the post of the Secretary General of the Ministry of Finance. A Bruneian delegation was in Kuala Lumpur and I was expecting to see her after so many years. Instead, I was told that she had passed away few months earlier.

With the passing of both Hajjah Ning and Pengiran, the Bruneian accounting profession had lost two towering figures who had contributed a lot to the profession. It would not be easy for the two of them to be replaced. This also means that I had lost two great friends and colleagues whom I had worked together in promoting the interests of accountants in Asean.

I pray to Allah that both of them would be accorded His forgiveness and be showered with blessings.

IAI Is 60!

Ikatan Akuntan Indonesia (IAI) is the national accountancy body of Indonesia. I was first introduced to IAI when I was the representative of the Malaysian Institute of Accountants (MIA) to the Asean Federation of Accountants (AFA) in 2000. Three personalities whom I could recall representing IAI were Pak Ahmadi Hadibroto, Pak Djoko Susanto and Pak Hanief Arie.

Since them my relationship with the office bearers and executives of IAI became close. We shared a lot of common positions at the regional level including in trade negotiations under the purview of the Asean Framework Agreement in Services (AFAS).

The peak of the relationship was the signing of the Mutual Recognition Agreement between MIA and IAI signed in 2006 where auditors from both institutions are recognised for the purpose of membership provided they fulfil certain requirements. This was the first agreement of its kind amongst accountancy bodies in Asean.

I was invited by IAI to join their 60th anniversary celebration in Semarang, Central Java  last week. I was very meaningful for me as I observed for myself how my accountant friends in Indonesia are recognised as a key pillar in the success of Indonesia. The theme "kejayaan akuntan profesional, kejayaan negeri" or "the success of professional accountants are the nation's success" captures the role of accountants in Indonesia in value creation, strengthening governance and providing career opportunities for Indonesians to develop a successful professional career.

Jusuf Kalla, Indonesian Vice-President, giving his keynote address at the opening ceremony of the IAI 60th Anniversary Conference

A conference was held in conjunction with the anniversary celebration and it could be easily observed how much the profession is recognised by the nation's leaders and the society at large. The conference was officiated by the Vice-President, Jusuf Kalla representing the President who was attending the OIC emergency conference in Turkey. Indonesia Finance Minister Sri Mulyani presented about the state of the Indonesian economy. There were another 5 ministers and 2 deputy ministers who were panellists at the conference covering topics ranging from the contribution of the accountancy profession to the nation to future of government accounting in strengthening public accountability.

A gala dinner was organised by the IAI to commemorate the event including a cultural performance. What was interesting regarding the performance was the participation of a number dignitaries including the Governor of Central Java, the Deputy Finance Minister and a Commissioner of the Financial Services Authority as the casts.

A cultural performance casted by high-powered Indonesians including the Governor of Central Java and the Deputy Finance Minister

I was also invited to be a panellist on the session on The relevance of Small and Medium Sized Practices (SMP) for Accountability in the New Economic Era. Together with me on the panel was Pak Langgeng Subur, the Head of the Center for Supervision of Financial Services Professional and Pak Suhartono, the representative from the Indonesian Certified Public Accountants.

I urged SMP to be meaningful and significant to their clients. This could be achieved by providing services which could help their clients to be better business in addition to the traditional services such as accounting, audit and taxation. I shared the outcome of a servey done by Inovastra which confirmed that small and medium sized enterprises need assistance in the areas of strategy, marketing, talent management, operations, financial management and compliance.

SMPs must be Significant and Meaningful to their clients

It was really an honour for me to be invited and I would like to thank IAI's Executive Director, Elly Zarni Husin for inviting me and would like to congratulate her and her team for a very successful organisation of the anniversary celebration.