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 NFRA issues Draft Procedure for Submission of Audit Files
 Auditors barred from putting a value on companies they are auditing
 Standard on Internal Audit (SIA) 18, Related Parties
 Standard on Internal Audit (SIA) 17, Consideration of Laws and Regulations in an Internal Audit
 Standard on Internal Audit (SIA) 16, Using the Work of an Expert
 Standard on Internal Audit (SIA) 14, Internal Audit in an Information Technology Environment
 Standard on Internal Audit (SIA) 13, Enterprise Risk Management
 Standard on Internal Audit (SIA) 12, Internal Control Evaluation
 Standard on Internal Audit (SIA) 11, Consideration of Fraud in an Internal Audit
  Standard on Internal Audit (SIA) 9, Communication with Management
  Standard on Internal Audit (SIA) 8, Terms of Internal Audit Engagement

Financial dimensions
January, 13th 2010

With the help of business analytics and real-time insight, the finance function has the potential to grow from the role of a bean-counting report provider to one of a trusted, well-equipped, knowledgeable, and respected business partner, says Hans-Dieter Scheuermann in the opening essay included in QFinance: The ultimate resource (www.qfinance.com).

Most finance professionals, however, are still at the backend of the pipeline, still analysing what others have done, he rues, citing the views of Paul Koppelman, CFO of BHP Billiton Marketing. The challenge in the future will be to help to develop the pipeline rather than reporting on the pipeline and on the ideas of others.

Best practices

Organisations can benefit from finance best practice networks, assures Scheuermann. For instance, BP thought of a five-year plan of finance transformation, including processes, analytics, management reporting, shared services, risk management, and so on. (The company had lost a lot of knowledge through outsourcing of IT and finance operations, and was heavily dependent on external consultants!)

The turnaround happened when a dynamic CFO of the company scanned the corporate environment for best practices such as how Siemens had solved the puzzle of complex organisational models, how Philips in the Netherlands had harmonised its multitude of charts of accounts, and how BHP Billiton had got to grips with risk management. In return, BP shared its Sarbanes-Oxley activities with Shell, helped Nestle to consolidate its African banking and treasury operations, and helped Barclays set up operations where currencies run into too many digits, the author narrates.

Another essay, in the veritable finance reference, is about managing your financial supply chain by Juergen Bernd Weiss. He speaks of indicators of suboptimal financial supply chain, such as: a very high number of paper-based business processes, low rate of straight-through processing, struggle with a large number of dispute cases during the creation of invoices, large amount of uncollectible receivables on the balance sheet, lack of a consistent credit management policy, difficulties in predicting cash flows, and too many bank connections.

Women in finance

There are too few women in key jobs in the financial sector, rues Tim Hindle in a viewpoint piece that the publication contains. The reason, he says, is a mix of male prejudice and female resignation.

Yet, the continuing absence of women at the top of the industry really does matter, Hindle avers. The links between the rational and emotional parts of the brain are greater in women than they are in men. When emotions are high, as when markets are dramatically rising or dramatically falling, women are able to keep in closer touch with their intelligence. Testosterone and cortisol are less likely to get in the way.

Arguing, therefore, that promoting women is now not just about sexual equality, it is about prudent regulation, the author concludes by saying that we need many more women in high places in the financial services industry well before the next time hormonal madness hits the markets.

Shariah banking

Five main prohibitions must be observed in the creation of a shariah-compliant financial services model, says Amjid Ali, in a Q&A carried in the book. These are: Riba (prohibition of interest); Gharar (there must be a full and fair disclosure, such as certainty as to the price of a contract before it is concluded); Maysair (prohibition of speculation or gambling); Profit (Islamic financier should only generate benefit from the project, and must take some risk); and Unethical investment (not dealing in alcohol, armaments, gambling and so on).

A parallel to asset-backed finance in traditional banking is ijarah, a lease-based contract, Ali mentions. In ijarah, the bank buys the asset in its entirety and then leases it back to the client and charges a rental. With ijarah, the return going to the bank from the customer is rent not interest, and Islam is comfortable with the concept of rent. Here the bank is making money on the use of an asset.

He says it is absolutely fundamental for a bank wishing to have a shariah banking service to have a body of Islamic scholars overseeing its shariah products and its operations. It is the key to gaining credibility and integrity in the eyes of the market Success in this market depends on a shariah banks ability to deliver in a way that demonstrates a respect and understanding of cultural differences, and of the importance of Islam in the daily life of a Muslim.

Financial reporting

The major problem with financial reporting is that people with limited financial knowledge can look at a set of accounts and, by attempting to interpret the numbers, feel that they understand what is happening in an organisation, laments Andrew Higson. Given the complexity of modern business, he cautions that todays statements may have the capability to mislead as much as they can inform their users.

Would it help, asks Higson, if companies were to report results on a minute-by-minute basis rather than just putting the annual accounts on the Internet? The argument is that immediate access to, and a greater quantity of, data about a company should improve users decision-making ability and thus improve market efficiency.

But let us not be confused between the recording and reporting aspects of accounting, he advises. Raw accounting data are simply a means of recording in order to keep track of the transactions undertaken by an organisation The periodic financial statements use these accounting data, and related assumptions and conventions, to allocate profit to the appropriate accounting period and to present the financial figures at a point in time.

Suspecting if instantaneous access to real-time accounting data would result in greater market efficiency, the author foresees greater volatility in share price movements as a distinctly possible consequence.

Missing metrics

We have tonnes of accounting numbers and financial ratios, but the cost of complexity is not managed or measured, says John L. Mariotti. These costs, he finds, are hidden in accounting systems, till the moment of truth happens in the form of a dented bottom line. Most of the complexity costs are hidden in catch-all accounts such as variances, allowances, and deductions, the author discovers.

Thus, the product still appears to be nicely profitable, and the complexity costs remain hidden in undifferentiated accounts or result in non-recurring charges, which, mysteriously, seem to recur from time to time. At the end of accounting periods, the true costs hit with full impact, in many cases wiping out all profit.

Operational and performance auditing

Audit gets no respect. With that quote of Larry Small of Fannie Mae opens an essay by Andrew Cox on incorporating operational and performance auditing into compliance and financial auditing. If the audit department in question is using yesterdays approach in todays company, has not manoeuvred top management and the board into focusing on the companys top five or ten risks, has not caused management to quantify these risks, and has not succeeded in developing authorised bounds of risk tolerance, then it doesnt deserve any respect, continues Small.

The real value in an internal audit, as Cox explains, is in determining the cause of the differences between what is and what should be, and developing audit findings and value-adding options and recommendations. This is the essence of what operational and performance auditing is all about With a bit of creativity, it is not too difficult to include a value-adding element in a compliance or financial audit.

Recommended addition to the finance professionals shelf, for the immersive treatment of the subject in its many dimensions.

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