Revised timing for internal control certifications

On July 29, 2005, the Canadian Securities Administrators (CSA) announced a delay in the effective date of its proposed instrument on internal control reporting. The earliest date an internal control reporting requirement would apply is for financial years ending on or after June 30, 2007. Under the proposed internal control instrument, as originally published, internal control reporting requirements were to be phased in over four years, starting with financial years ending on or after June 30, 2006.

The delay should give the CSA time to not only review concerns expressed by respondents to its own internal control certification rules; it will also have the opportunity to see the results of changes in the U.S. Securities and Exchange Commission’s (SEC) compliance regime. In March, the SEC changed the date by which SEC registrants that qualify as non-accelerated filers or foreign private issuers must comply with new compliance rules. These issuers now will not be required to comply with the rules until fiscal years ending on or after July 15, 2006. 

IFAC Board moves to strengthen financial reporting

At its meeting in New York City in late July, the Board of the International Federation of Accountants (IFAC) agreed to initiate a global study on how to enhance the quality of the financial reporting supply chain, approved a guidance document on environmental management accounting (EMA), developed jointly with the United Nations, and expressed its full support for moving ahead on initiatives to support developing nations and convergence to international standards.

Within the coming months, an independent chair will be appointed to lead a new IFAC global initiative on enhancing the quality of the financial reporting supply chain and will be charged with considering such issues as corporate management and governance, regulatory developments, auditor independence and rotation, and the expectations around the auditor’s responsibility for the detection of fraud.

“To enhance the credibility of financial reporting, action is necessary at all points along the information supply chain that delivers financial reporting to the market,” states IFAC president Graham Ward. “This project will identify investor expectations and needs and include practical suggestions for enhancements that the global accountancy profession can provide by direct action and those where it will need to engage with others to create change.”

Recognizing that environmental issues are of increasing concern to countries and that there is no conventional accounting practice to assist in the management of environmental issues, IFAC, together with the Division of Sustainable Development of the United Nations Department of Economic and Social Affairs, the U.S. Environmental Protection Agency and the U.K. Environment Agency, participated in the development of the new International Guidance Document on Environmental Accounting. The document, approved for release by the IFAC Board, defines EMA, defines its uses and benefits, and includes examples of EMA applications for internal management and external reporting initiatives. It is available on the IFAC Web site, www.ifac.org.

CMA Management articles garner Award of Merit

Two articles originally published in CMA Management have now been published in the International Federation of Accountants’ (IFAC) Professional Accountants in Business (PAIB) Committee’s Articles of Merit: 2005. The collection of award-winning international articles includes topics such as risk management, corporate social responsibility, and performance measurement for sustainability. This year’s Articles of Merit includes 10 previously published articles that were selected by the PAIB Committee as part of its annual Articles of Merit Award Program for Distinguished Contribution to Management Accounting.

“Responsible hands: A director’s guide to risk and its management,” by Anthony A. Atkinson, CMA, FCMA, and Alan Webb, CA, and “Scorecard support,” by Larry B. Weinstein and Joseph F. Castellano, were the articles from CMA Management chosen for publication.

The winning article for 2005 is “Corporate Social Responsibility: Why Business Should Act Responsibly and Be Accountable” by Carol Adams and Ambika Zutshi, first published in CPA Australia’s Australian Accounting Review. The article examines the pressure for organizations to report on corporate social responsibility, discusses problems with many current reporting practices, and identifies benefits from corporate social responsibility and reporting.

Articles of Merit: 2005 may be downloaded from the IFAC online bookstore by going to www.ifac.org/store.

Good returns not indicative of market, pension consultants claim

On the surface, Canadian balanced fund managers did fairly well during the first six months of 2005, with a median return of 5.3%, according to the results of Mercer Investment Consulting’s Pooled Fund Survey. However, the positive return didn’t improve the overall state of Canadian pension funds. 

“While pension funds like to see strong returns, they don’t want them to be driven by returns from the Canadian long bond segment as we saw in the second quarter, since this will result in an offsetting increase in the liabilities,” said Peter Muldowney, principal for Mercer Investment Consulting in Canada.

This picture is reflected in Mercer’s Canadian Pension Health Index, an indicator of the impact of capital markets on the financial position of Canadian pension plans. The index was 79% at the end of June 2005, down from 84% at the end of December 2004.  This index is now at its lowest level since June 30, 2003.

The long segment of Canadian bonds was the best performing asset class for the first six months of 2005, as shown by the Scotia Capital Long Term bond index, which returned 10.1% over that stretch. The broader bond index, the Scotia Capital Universe index, which includes a combination of short, medium and long-dated bonds, returned 5.6%, while the Scotia Capital Medium Term and Short term bond indices returned 5.6% and 2.9% over the last six months.

International equities performed the poorest of all asset classes, with the MSCI EAFE returning 1.4% over the last six months (in Canadian dollar terms). The best performing region was Pacific (except Japan), which returned 7.8% during this period as shown by the MSCI Pacific ex Japan index. 

For more information visit www.mercerIC.com.

Red tape threatens business, say risk bosses

Nine out of ten executives expect the business costs of regulation to rise over the next three years, according to a new global survey of senior risk managers by the Economist Intelligence Unit. The survey, which captures the views of CEOs, CFOs, Chief Risk Officers and other executives responsible for managing risk, indicates that companies now see regulatory risk as the most significant threat to business, and a greater source of concern than country risk, market and credit risk, terrorism and natural disasters.

The survey results were published recently in Regulatory risk: trends and strategies for the CRO, a report by the Economist Intelligence Unit sponsored by ACE Insurance, Cisco Systems, Deutsche Bank, KPMG and IBM. The findings, which shed light on the business risks and problems posed by changes in the regulatory environment, are based on a survey of 230 risk managers. Just under 40% of executives are from the financial services sector, with the rest drawn from a cross-section of industries.

Over a third of executives in the survey say that regulation has stifled innovation in their companies. Roughly the same proportion fear their firms will become less competitive compared with rivals operating in less regulated countries. Executives acknowledge the need for regulation, but the majority believe the benefits of recent regulations are outweighed by the problems.

Increased complexity in the regulatory environment is one of the biggest challenges companies face, with regulations in one country having an increased impact on firms’ global operations. Only 17% of companies are very confident that they are compliant with regulations in their overseas markets, compared with 40% that believe they are compliant with regulations in their home markets.

The two best strategies for pre-empting regulatory change are to adopt best practice before it is mandated, and to maintain regular communications with domestic and international regulators, according to the survey. Direct lobbying of governments is deemed far less effective.

For more information visit www.eiu.com.

Transfer pricing a growing tax risk for financial services

Transfer pricing is central to the management of tax risk in the financial services industry, according to research published recently by Ernst & Young. The research showed that the risk is truly global, with 28 countries cited by survey respondents as likely to challenge their transfer pricing arrangements during the next two years.

The survey, entitled Transfer Pricing Organisations, Audits and Priorities in the Financial Services Industry was carried out in May and June 2005. It involved 108 financial institutions from a wide range of countries including Australia, Canada, Continental Europe, Hong Kong, Japan, Singapore, South Africa, United Kingdom and the United States. 

More than eight out of ten financial services companies felt that there was a greater than 60% chance that their transfer pricing policies would be challenged by the tax authorities in the next two years. As a result, more than half of the respondents now set aside a provision for transfer pricing risk in their financial statements.

More than 80% of respondents planned to devote more effort to managing transfer pricing issues in 2006 than 2005, a clear reflection of the increased importance of transfer pricing in the financial services industry.

“The industry expects the levels of transfer pricing risk to increase in the next few years. In today’s environment, tax directors and CFOs have the increased responsibility of anticipating and effectively managing potential tax risks that, if left unchecked, could compromise the integrity of financial statements and lead to significant costs resulting from double taxation, interest, penalties and, importantly, the costs of management time required to respond to the challenges,” says Ernst & Young’s global financial services transfer pricing leader.

For more information visit www.ey.com.

India moving into pharma’s top 10

India is in line to become one of the top ten global pharmaceuticals markets, according to the latest in a series of studies by PricewaterhouseCoopers. With an economy predicted to grow around 5% each year for the next half decade, India offers huge opportunity to pharma multinationals, particularly as sales growth is slowing in the more traditional target markets of North America, the European Union and Japan.

India — Prescription for Growth identifies a rapidly growing economy and population, changing demographics and pharmaceutical needs, a robust services base, and attractive tax concessions for overseas investors as all contributing to India’s global attraction.

A growing number of foreign multinationals have already been attracted by India’s financial incentives, including tax holidays for companies based in underdeveloped areas and the deduction of capital R&D expenditure. There is also great potential for increased sourcing of pharma ingredients from India, contracting local companies to make up the finished product and setting up manufacturing facilities there.

The relaxing of pricing controls within the last ten years, coupled with strong native manufacturing expertise, provides an attractive proposition for Big Pharma. The U.S. Food and Drug Administration (FDA) has already approved 60 manufacturing sites — more than any other country outside the U.S. — for new developments.

The real challenge will be intellectual property protection. Recent patent legislation may help to change this, but concerns remain. 

For more information visit www.pwcglobal.com.

Manufacturing downturn cuts world economic growth

Weak manufacturing activity, due largely to the high price of oil, is limiting the global economy to 3% growth this year, according to the Conference Board’s World Outlook — Summer 2005.

“Surging oil prices have cut into global consumer spending, and manufacturers have been forced to cut production and employment due to rising inventories,” said Kip Beckman, principal research associate. “Interest rate increases, intended to limit the inflationary effects of energy prices and a global housing boom in the U.S. and parts of Europe, are also weakening overall growth.

“The terrorist bombings in London are tragic in terms of human loss, but they are unlikely to affect significantly either the global or U.K. outlooks. Economies tend to recover relatively quickly from these tragedies. With the possible exception of the U.K.’s tourism sector, which could see visitor arrivals fall off slightly in 2005, the impact should be temporary.”

The world economy’s real gross domestic product (GDP) increased by 4% in 2004, but the global growth rate is forecast to decline to 3% in 2005 and 2006, respectively. China and the United States are keeping the world economy afloat. Despite high energy prices, U.S. consumer spending is growing solidly, investment in equipment is accelerating, and export demand is increasing. China’s economy continues to surge — growth will approach 9% in 2005, slightly less than the 9.5% gain recorded in 2004.

The global manufacturing downturn is having its greatest impact on Europe. Real GDP growth is forecast to increase by just 1.8% this year, and the economies of Germany, France and Italy are especially troubled. Even though the euro has declined against the U.S. dollar recently, it remains high compared with its levels of a few years ago, which has hurt the competitiveness of many industries in Europe.

For more information visit www.conferenceboard.ca.

High tech

Shining a light on LCD projectors

Presentations can suffer when the projector you’re using can’t compete with the bright light in an office. To address this challenge, Panasonic Canada has introduced the PT-LB20 series of ultra-light LCD projectors. The new series includes technology that improves image performance in bright rooms by as much as 50%.

The PT-LB20 series’ substantial improvements result from the projectors’ ambient light sensor, which detects changes in a room’s light intensity to enhance perceptible colours. It also provides white balance adjustment settings for both fluorescent and incandescent lamps to match the room lighting.

Other functions include a faster response time to commands from the keyboard, a built-in gravity sensor, a contrast ratio of 400:1, and a host of anti-theft functions.

For more information visit www.panasonic.ca.

New Software

• Sage BusinessVision 7.0
• Optrack, new software for tracking employee options

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