This year's conference was dominated by governance issues. By Danka Starovic, senior technical issue manager, CIMA.
More than 250 delegates at CIMA's annual conference heard speakers reflect some of the most pressing concerns facing finance professionals today, including corporate governance, performance measurement and the fight against fraud.
The day was kicked off by the City economist and author Roger Bootle. He insisted that, contrary to popular belief, the stock market bubble is far from deflated. Instead, the distortion of financial values continues to be a problem all over the world and has led to a worsening of the pensions problem and general disillusionment with investment professionals.
But, according to Bootle, one of the most significant consequences has been the housing market bubble, which has effectively been transferred over from equities. Although a major issue in the UK it is not exclusive to this country and Bootle pointed out that the situation is similar in Australia, Spain and the US.
His somewhat gloomy prediction was that the housing market could drop by as much as 20 per cent in the next few years, so property investment was not a way to get good returns. When asked if he would invest in equities his response was a categorical no: government bonds and gold seemed to him to be a much better option.
Bootle finished his speech by reminding delegates that the economic axis of the world is shifting to Asia. To be successful globally, he said, businesses need to pursue Asian-centric investment philosophies, be it as suppliers, customers or intermediaries.
Performance within the finance function
Professor Sir Andrew Likierman, former CIMA president, recently retired head of the Government Accounting Service and now professor of management practice and London Business School, talked about measuring the performance of the finance function.
There is no doubt, he said, that the finance function is under pressure at the moment and, as with other support functions, it is often threatened by outsourcing. It is therefore important to measure the performance of the finance function to determine how it adds value and where it can be improved. But the way this is done, according to Likierman, is often far from sophisticated.
Companies are often content to work with simple measures based on inputs or activities. They may measure only what is easily measurable rather than spending time developing a more sophisticated framework. Not only is the data poor but there is no clear connection between the measures chosen and the objectives and therefore the overall organisational strategy. He said there is often a lack of communication between the finance function and other departments within the company so there is little feedback on what is being done well or badly.
In addition to these more generic problems often found in support functions, Likierman pointed to some that are specific to finance departments. For example, boundaries between finance and the rest of the company are often difficult to draw (and getting even more difficult as the structures of organisations change). Also, there is a fair amount of ignorance about what the finance function does.
The remedies, he suggested, are to improve communications, produce better – though not more – measures, make sure the links with organisational objectives are clear and use robust comparisons whenever possible.
Professional integrity
If there was one subject that dominated the conference, despite the lack of a common theme, it was undoubtedly that of ethics and personal and professional integrity.
CIMA chief executive Charles Tilley talked about the credibility of all participants in the financial reporting chain, including those that prepare information within companies, and the programme of reform following the accounting scandals of Enron, Parmalat and others. He singled out the International Federation of Accountants’ forthcoming code of ethics as one of the key international developments.
He drew on CIMA's work in this area and in particular the concept of enterprise governance. Recent high-profile corporate scandals have brought corporate governance issues to the top of the business and political agenda all over the world. However, while cases such as Enron resulted from fraud, there have been other examples of companies falling into difficulties as a consequence of their strategic performance. While it is critical that corporate governance failure is addressed properly, there is a real risk that insufficient attention is paid to the need for companies to create long-term, sustainable value.
Enterprise governance is an inclusive framework designed to address this problem. It focuses on both the corporate governance and business management aspects of the organisation and thereby seeks to redress the balance between conformance and performance.
The danger of poor controls
The presentation that got everyone talking was that of Marta Andreasen, former chief accounting officer of the European Commission (EC). Her eventual dismissal from the EC after years of appeals and investigations is a shocking tale of vulnerable systems, poor internal controls and a staggering lack of accountability.
According to Andreasen, not only did the EC's accounting system not follow basic principles such as double-entry bookkeeping, but also the IT system was far from secure and there was no segregation of operational and accounting functions.
When she suggested that some basic changes ought to be made, such as an independent treasury audit and an integrated computer system, she was accused of being disloyal before finally being sacked this year.
However, Andreasen dismissed the notion of herself as a whistleblower, an image popularised in the national press. In her opinion she was merely doing her job. She finished her speech by saying that following rules and procedures is a bare minimum – the floor, as she called it – and what organisations ought to be aiming for is the ceiling.
If anyone needed further warning about how a vulnerable system can leave the door open to fraud, Ken Farrow talked about his experience of being at the helm of the City of London Police Economic Crime Department. He told delegates that they should not lull themselves into believing it is only a few bad apples who commit fraud within companies. The so-called white-collar crime in fact represents only a small proportion of what his unit has to deal with. Instead, companies should be worried about organised crime networks that infiltrate business and siphon off millions of pounds annually.
Farrow admitted that police forces do not have vast resources to deal with economic crime and that the way performance is measured and current targets set means that there is little incentive for improvement.
He emphasised the good relationship he and his team already have with major City institutions, particularly some of the largest investment banks. His concluding advice to business was simply to go and talk to the police and try and put systems and relationships in place that may prevent some of the crime from happening or at least detect it in time to protect business and society as a whole.
Even when the criminals are caught, prosecuting them is not easy, according to Paul Garlick, QC, who spoke about the increasingly international nature of criminal activity. He said the globalisation of crime causes problems not only of jurisdiction but also of trying to obtain evidence and return suspects to the country where they are to be prosecuted.
Delegates also heard a presentation from Eoin McGettigan, executive chairman of Budgens Stores and Musgrave UK, who spoke on mergers and acquisitions, and one on the introduction of International Financial Reporting Standards from Professor Geoffrey Whittington, member of the International Accounting Standards Board. Guy Outen, chief financial officer of Shell Gas & Power, presented on performance management.
Presentations can be viewed on the annual conference website.
December 2004
