Learning lessons from the crisis

A FAILURE of corporate governance in banks has played a role in the current financial crisis, according to the president of the Association of Chartered Certified Accountants (ACCA), Richard Aitken-Davies, speaking on a recent visit to Bratislava. Accountants and auditors should learn from the last year, he said, adding that fair value accounting still has an important part to play in modern global financial reporting.

Richard Aitken-DaviesRichard Aitken-Davies (Source: Courtesy of ACCA)

A FAILURE of corporate governance in banks has played a role in the current financial crisis, according to the president of the Association of Chartered Certified Accountants (ACCA), Richard Aitken-Davies, speaking on a recent visit to Bratislava. Accountants and auditors should learn from the last year, he said, adding that fair value accounting still has an important part to play in modern global financial reporting.

“I am delighted to have been able to visit Slovakia at a very important time in the country's history, as it plans to adopt the euro as its currency next year,” Aitken-Davies said. “ACCA is growing in the country and has an increasing number of students and members, a number of which have high profile positions within the country.”

The Slovak Spectator spoke to the ACCA president during his first visit to the Slovak capital, Bratislava, where he awarded full ACCA qualifications to 37 Slovak accountants and auditors on September 10.

The ACCA was established in 1904 with the intention of creating an accounting association based on more liberal principles than had previously applied. Currently, it is possible to take ACCA accounting qualification exams in 170 countries. For many years ACCA supported the adoption of International Financial Reporting Standards (IFRS) and was the first professional body to base its exams on IFRS, in 1996.

The Slovak Spectator (TSS): Currently, the whole financial sector is facing the crisis which spread from the US mortgage market. What is the ACCA’s view of its origin?
Richard Aitken-Davies (RAD): According to a recently released ACCA paper, Climbing Out of the Credit Crunch, the principal source of the credit crunch is a failure in corporate governance at banks, which encouraged excessive short-term thinking and blindness to risk.

The fundamental responsibilities of a corporate board – to provide strategic oversight and direction, to ensure a strong control environment and to challenge the executive – appear to have been inadequately discharged. Remuneration and incentive packages have encouraged short–term thinking. We need to ask what inhibited banks’ boards from asking the right questions and understanding the risks that were being run by their managements.

If banks’ existing incentive and career structures meant enormous rewards for failure, then this needs to change.

First, we have to question whether the relative share of banks’ income paid as remuneration compared with dividends has been in the best interest of long-term shareholders.

Second, risk management and remuneration and incentive systems must be linked. Executive bonus payments should be deferred until there is incontrovertible evidence that profits have been realised, cash received and accounting transactions cannot be reversed.

Increased transparency of regulation is also important. Most large banks now combine both retail and investment banking activities, and the regulatory goal should be for separation of retail from investment banking to protect retail customers from wholesale risk, or at least to alert them to the risks if they opt to deposit funds in banks combining the two.

TSS: The professions of accountants and auditors are closely interlinked with the financial sector. What role do you see for the profession in the current financial turmoil?
RAD: Accounts preparers, standard-setters and auditors must all learn from the last year. It is clearly unacceptable that poor quality loans can be sliced, diced and parcelled up with an AAA sticker and overvalued on banks’ balance sheets as a consequence.

ACCA still believes that fair value accounting has an important part to play in modern global financial reporting but we must make sure the model is as robust as we can make it.

TSS: What recommendations does the ACCA have in order to improve the health of financial institutions?
RAD: The financial industry and all involved in it need to learn the hard lessons from the past year and be bold enough to make the changes needed to climb out of the credit crunch - and make sure the mistakes made are not repeated.

Accepted practices in all the key areas, which were also specified in the ACCA papers – corporate governance, remuneration and incentives, risk identification and management, accounting and financial reporting and regulation – need to change to avoid future failures.

Risk management failures need to be addressed since weaknesses in these areas meant risk management departments in banks did not have sufficient influence, status or power.

Lack of training to enable management to understand complex products and the underlying business models has to be addressed as well.

TSS: The ACCA is one of the major bodies in qualifying the accounting and auditing professions. What is the importance of continuous professional development for accountants, auditors and people in business and management?
RAD: It is important that all professional accountants and auditors, not only ACCA members, regularly update their knowledge, which is beneficial not only for their career and professional reputation, but also for employers and clients.

Undertaking Continuous Professional Development, or CPD, ensures that a professional accountant has the latest information on regulations and legislation, but is also up–to–date with the latest thinking on important issues. The ACCA introduced mandatory CPD for its members in 2005.

ACCA requires that each member complete 40 CPD units, or hours, each year. While some accountants may choose to learn in a classroom environment, there are many other ways for CPD to be achieved.
These can include learning in the workplace, through mentoring or coaching colleagues, by attending networking events, undertaking e-learning modules or attending face-to-face courses, or general reading of business and technical articles.

TSS: How do students prepare for ACCA qualifications and what is their main focus?
RAD: There are several ways in which students can prepare for our exams. The ACCA is the examination body only and we do not train towards our professional qualification. We work with organisations which specialise in training towards ACCA examinations, i.e. tuition providers.
Students can decide if they want to attend face-to-face courses or study via on-line or distance learning packages. There are over 350 tuition providers worldwide for students to choose from within ACCA's Tuition Provider Directory. Over 100 of these tuition providers are ACCA Approved Learning Partners where the ACCA guarantees quality and monitors them regularly.

Students must also undertake three years of professional training but it is not necessary to enter into a formal training contract with one firm, unlike other professional accountancy qualifications.
The experience can be obtained in a number of workplaces, provided that certain core competencies are attained.

The ACCA syllabus and training is designed to be broad ranging so that students become expert not only in accounting and auditing, but acquire the strategic management skills to equip them for senior posts.

In order to qualify as an ACCA member, students have to complete 14 exams, nine of which are eligible for exemption, then relevant practical experience for a minimum of three years, as well as a professional ethics module.

The ACCA Qualification embeds the global accounting education standards set by the International Federation of Accountants (IFAC). There is also a strong focus on professional values, ethics, and governance.

TSS: Who can study for ACCA qualifications?
RAD: In the early days of the accountancy profession, a man could not qualify unless he served under articles of clerkship in a practising accountant's office. Parents were expected to pay a substantial premium and support their sons during their training.

The intention to create an accounting association based on more liberal principles than were previously applied was one of the core principles on which the ACCA was built. The ACCA began in 1904 as the London Association of Accountants and was formed by a group of eight men.

The first examinations of the association took place in the UK in 1906. Today, examinations can be sat in 170 countries worldwide and the ACCA has over 122,000 members and 325,000 students.

We welcome all students with completed secondary education and good English. We offer opportunity to people regardless of age, gender, race or previous formal education.

TSS How long has ACCA been operating in the Slovak market?
RAD: ACCA supports students and members in Slovakia through its Prague office, which provides local services such as CPD seminars, graduation ceremonies and social networking events.

In Slovakia we registered our first three students in July 1992 and they took their first examinations in 1994. ACCA now has over 800 students and 220 members in Slovakia, with ACCA exams running twice a year in Bratislava.

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