What do you want to know about the company you invest in? What about the company you work for and depend on for your pension? Or the company with a large production facility near to your house? Or a supplier who has located most of its manufacturing or product sourcing in low wage economies?

The more you extend this list of questions, the more unlikely it is that the conventional financial reporting package is going to be sufficient to satisfy the competing information demands of an increasingly aware and articulate universe of stakeholders. So, has financial reporting finally reached the crossroads? Is it time to junk our historically focussed, financially biased experiment with financial reporting? What the stock market would ideally like from companies are annual profits and cash flow projections which they could then test against their own in-house forecasts. Wisely perhaps, the accounting profession has resisted the temptation to enter into this exercise in crystal-ball gazing, opting instead for the Operating and Financial Review (OFR) statement. The OFR seek to provide an interpretation of current operating results and current financial position as seen “through the eyes of management”, without going the additional step of trying to forecast future trends.

The OFR exercise is gaining increased international support though there is a tendency towards so-called “boilerplate” reporting. Recent developments in the UK , however, are now pointing towards a more rigorous OFR regime, based around management’s evaluation of what is actually material information from an investor perspective. Corporate governance disclosures take us further into the non-financial reporting field. The “comply or explain” approach to disclosure is now well established. Research from well-established consultancies such as McKinsey have pointed to the financial advantages to be gained from falling in line with international governance norms and there is burgeoning market for corporate governance ratings. Nevertheless, there remain significant regional differences in governance practice and disclosure, normally deriving from legal or cultural business approaches. Research conducted by ACCA in 2002 indicated that Asian business models are not well equipped to deal with the full frontal transparency requirements of western governance codes. Similarly, the European Union is cursed (or blessed, depending on how you want to look at it) with a patchwork quilt of governance regimes. 

Reporting on risk is a relatively new area of corporate disclosure.  Admittedly, financial statements are now benefiting from recent advances in classifying debt and equity. But such risk related disclosures only deal with the current effect of past financial transactions, and do not embrace any discussion of risk arising from  general operational factors — such impaired reputation. The OFR regime is partly intended to counter this shortcoming in core GAAP, as are the risk management aspects of some corporate governance disclosure regimes (for example, the UK’s 1999 Turnbull Report on internal control). Intangibles pose another problem for accountants. As business increasingly becomes service and IT focused, so the ratio of intangible to tangible assets grows. For financial accountants this represents a major area of concern. Issues like innovation continue to be dealt with in narrative form if at all. We rarely capitalise internally generated intangible assets such as brands, and we cannot, as yet, value human capital from a balance sheet perspective. As a result, balance sheets significantly fail to explain – or support – the valuations placed on a company by the market.

Recent developments in narrative reporting via the OFR are, however, partly designed to close this intelligence gap and provide investors with a much clearer picture of how wealth is both created and sustained. Disclosures in respect of product innovation, patents applied for, research and development trends and brand support are all part of the move towards filling in the gap between the balance sheet and the market valuation. As the scale of environmental degradation and third world poverty becomes clearer to us, it is also becoming clear that business has a role to play in reducing such externalities. The volume of investment in socially responsible or ethically managed funds has quadrupled in the last ten years and  companies are increasingly recognising this sector of their investor base by providing increased disclosure of social, environmental and economic (as opposed to purely financial) performance. Currently some 85% of the FTSE 100 either issue stand alone reports dealing with aspects of corporate social responsibility or make limited disclosures through the annual report and accounts. Being virtuous, however, is insufficient for stock markets. The most respected companies are those which communicate most successfully the marriage between innovative market strategies and socially responsible behaviour. As investors become more concerned with corporate attitudes to child and forced labour, contracts with despotic regimes, fraud and corruption and third world poverty, reporting on these issues is becoming more common. With respect to human capital, the starting point any discussion is usually a statement in the Chairman’s report to the effect that “our most important asset is our employees”. It then transpires that all employee related costs are expensed immediately and never appear in the balance sheet at all.

But of course, employees are valuable. As well as wages and salaries, companies also incur significant training expenditures. In the case of directors, companies make huge commitments in terms of share options (usually ignored for accounting purposes but soon to be expensed along with all other employee related costs). Companies take out “key man” insurance policies and place restrictions on the ability of disaffected employees to move to competitor organisations. It seems unlikely that the traditional approach to dealing with employee related costs is going to change any time soon. What is more likely to happen is that companies will begin to disclose more pertinent information relating to employees so that better informed analysis and bench-marking can take place. These disclosures will either be in the OFR or in a separate section of the annual report, perhaps called an “Intellectual /human capital” report, which will bring together information relating to both costs and innovation. It is clear then that the traditional finance function is facing some stiff challenges.  In conjunction with the Board, it may be equipped to deal with measurable accounting issues and with much of the corporate governance disclosure. But expanding the annual report to accommodate risk, human and intellectual capital and socially responsible behaviour implies a breaking down of internal barriers and a far greater sharing of knowledge and understanding of the inter-relationship of risk, innovation, stakeholders and return than is usually the case.

Accountants of the future will need to be aware of a much broader range of reporting issues than earlier generations. ACCA itself is introducing a range of education and training initiatives designed to equip tomorrow’s accountant for this new role. Social and environmental issues are now part of our core syllabus and we have developed separate diploma schemes – in international financial reporting and corporate governance – which will enable our existing members to add to the their core competences. Our programmes of continuing professional development also reflect this changing agenda. Yes, there is a new frontier, but it is one which accountants and the accounting profession should not shy about venturing across.
The Association of Chartered Certified Accountants
29 Lincoln’s Inn Fields  London WC2A 3EE  United Kingdom
tel: +44 (0)20 7396 7000  fax: +44 (0)20 7396 7070  www.accaglobal.com

Verdelle Jeffrey, Manager of Business Services, Business Development Company of TT (BDC), believes that technological advances can increase access to regional and global markets Technological advancement mitigates the negative effect of economic adjustment  by  reducing timelines and increasing access to markets, she said.

Speaking at the E-commerce symposium last week, she said Caribbean businesses and exporters now have to adjust to globalisation and liberalisation. “They need to upgrade or perish.”
She notes that there are also hindrances which exacerbate the challenges of SMEs, like small size, weak management systems and obsolete production technologies. Like Questel, she felt that government needs to provide more support for SMEs and advocated  the provision of financing, technology, innovations and the requisite components which facilitate e-commerce. She emphasised how essential SMEs are to the economy, generating over 50 percent of private sector employment. The SME sector, she said, empowers large segments of the population using local materials, taking advantage of niche markets and benefiting marginilised groups. They must, however, be willing to change including exploring new markets, she said. She disclosed that there have been initiatives in TT to increase co-ordination among SMEs and to imcrease the use of cutting edge managerial techniques. The BDC, for example, has been mandated to explore the feasibility of an export services facility. Other BDC initiatives will allow enterprises to benefit from loans and grant funding for upgrading in quality, planning, procurement, marketing and promotional activities. Melvin Edwards, Project Manager, CIDA-funded Caribbean Regional HRD Program for Economic Competitiveness (CPEC), advised that TT needs a reality check.

He said that the country  needed to recognise that there are some hard and fast structural problems which need to be addressed as we move to being a wealth creating state from a poor underdeveloped state. There are inconsistencies which need to be addressed, he said, for example the differences in regional definitions as to what constitutes small or medium economies. The question of investing in proper human resource as well as access to credit and capital are universal problems for SMEs, he said. He added that whereas others were optimistically predicting imminent e-governments he held a more conservative forecast. “I still can’t see government being paperless in the next five years.” he said. He questioned the impact of the CSME given international influences and pressures, asserting that “the global regulators are the de facto regulators.” Edwards identified some targets for government, too. He advocated legislation and implementation of new policies as well as streamlining of government agencies to make them standards driven.

Access to services should be increased, he said, and ministries should become more e-oriented which would generate cost-cutting. Additionally, infrastructure should be improved and consumer and public awareness should be increased, including bringing academic institutions up to speed in adoption of technology. He warned that the future held not only opportunity but also threat for SMEs. They would soon be measured against the best in the world as we go global. Investment in quality people and advice would be crucial. Safety would be a major watchword because crime and harassment are factors which seriously undermine tourism. Good capital, he said, includes a sound environment and financial skills need to be honed. Also, it is fundamental to growth and development that lines of financing be made available. He promoted goal-setting, follow-through and rewards for the pro-active as well as increased training which benefits the sector and country as a whole.  He advised, too, that the savings base of the country needs to be developed. In business, he says, there is only the quick and the dead. Kurt Lange, Representative of the Caribbean Association of Industry and Commerce (CAIC) stated that the corporate landscape is changing with fewer large players and a growing number of small players. ‘We need infrastructure, human capacity, policy, financial capital and tax incentives to be points of focus included on the nation’s agenda, “ he said.

The percentage of the country with access to telephones and the internet should be identified, he said, and telecommunications issues like bandwith and piracy need to be investigated.
He said that whereas there is a great deal of communication done through the internet in TT there is actually very little e-shopping taking place. This is possibly because of the nearness of the stores to their customers. “If the CSME is to be effective it would require that the ICT level in the region reaches a certain standard.” he said. He advised that initiatives should be designed to endure beyond one-term of government.They should be sensitive to local conditions, shaped by regional co-operation and a result of the aligned interests of the key stakeholders. Like Edwards, Lange believed that safety and security should be developed. He added that incentives need to be provided for the business community to promote e-commerce and ICT.

Gultekin Ozaltinordu, Administrator of the E-Trade Bridge Programme, identified chinks in the ICT and e-commerce armour of the region. He noted that there is a low level of communication among stakeholders and a low level of concordance among strategies. Management skills are also minimal, he said, and there is an apparent lack of knowledge on the optimal use of the existing infrastructure. Although there has been specific training in specific areas, he said, a comprehensive approach is needed.

Q. Last week you suggested that for some people it could be more lucrative to invest in the stock market than open their own business, I don’t get it. Even if it’s possible, won’t that take away from the sense of fulfilment, etc that comes from running your own business?

Davin, St. Augustine

A: To understand this perspective clearly let us go back to first principles. A fundamental reality of the economic system is that the factors of production, which are land, labour and capital, are scarce. Therefore, economic agents, in choosing to use resources in a particular way are incurring an opportunity cost, which is the benefit of the next best alternative. As a result, the economic system would want resources to flow to the most efficient producers in order to optimise the use of resources.  The way the system achieves this is by aligning individual self-interest with the system-wide objective of resource optimisation. In other words, the persons who make the most money from resources for themselves and the system as a whole are the ones who would obtain the most resources. For example, the entrepreneurs whose businesses are most profitable are the ones who would get the most capital from the banks and hire the best talent. Similarly the companies listed on the stock market, which yield the best returns, are the ones whose shares would appreciate because of the increased demand from investors.

In this way the interest of the investor as well as the system are aligned. The investor gets the best return for his capital and the system allows more capital to flow to that company who is able to pay such a good return on capital. Applying this to the question of opening your own business, the reasoning is clear. If you can earn the same or more by just buying shares on the stock exchange, from a purely economic point of view, you would not want to open your own business because not only is it a cost in terms of monetary value, but it is also a drain on your time which could be used in doing something else which could earn you even more money.

Only if the return from your own business exceeds the return from the stock market plus the extra income you can earn from having more time should a business be opened up. My guess is that it is only in rare circumstances that a start-up business would make more than the large companies in certain economic sectors of the local stock exchange, never mind the costs in time. By following this principle, only entrepreneurs who can outperform the stock market, ie the next best alternative, would open businesses and hence resources would be optimised. Individuals who cannot outperform the market would give their funds to the listed companies, which would be able to grow and expand, employ more people and pay more taxes to the Government, which would eventually result in more public goods and a higher standard of living. The investors who do not open their own businesses but invest in the stock market would now have more time to invest their skills in other areas.

Q. How do I go about setting up a “blind trust”?

Martin, Westmoorings

A: A blind trust is a device where an individual hands over the management of his wealth to trustees in trust for beneficiaries being himself and others he may appoint. The trustees in this arrangement have full discretion over the investment policy, which cannot be disclosed to the beneficiaries. In Trinidad and Tobago individuals going into public office usually utilise a blind trust. For example someone entering the political arena may decide to hand over the management of his funds so that he is safeguarded from accusations that he may use his authority for self-aggrandisement. The concept of the blind trust is recognised in Canada and Australia but is unknown in English law. It has been given statutory expression in Trinidad and Tobago by the Integrity in Public Life Act, No 8 of 1987, s 21.

Under the statute, the individual setting up the trust must pass a copy of the deed to the Integrity Commission. The income derived from the management of the assets is to be distributed to the beneficiaries as agreed. If his assets are converted to other assets the fact must not be communicated to him until he ceases to be a person in public life. For an individual not in public life a blind trust may not be very useful. If you want to set up an arrangement where your funds are administered for your benefit you can do so through the establishment of a trust fund. In such an arrangement you can appoint different types of beneficiaries. The income beneficiaries are given periodic distributions from the assets of the fund, which may be you and your spouse. Then, you can also appoint beneficiaries known as remaindermen, who would inherit the funds after all the income beneficiaries have passed on.

Q. In many countries they have a central point for monitoring people’s credit ratings, do we have anything like that in T and T?

Patricia, San Juan

A: No unfortunately there is currently no full-fledged mechanism by which banks can have access to objective data. Normally if a bank needs a credit reference they would write to another bank to get a qualitative not a quantitative report on the status of that customer’s finances. In such reports there are no details on which to make proper credit decisions and even if the bank gives a customer a good financial bill of health there is no way of knowing whether that information is accurate or subjective. This also affects the customer, as there is no objective way of building a credit history through hard data. Therefore there is no opportunity for a customer to improve his “rating” as there is no classification scheme or rankings which are updated from time to time neither is there any scientific criteria which is followed. There is thus a significant need for a Credit Bureau dedicated to this type of activity. There are unsubstantiated reports that the banks have appointed a private firm from which they can all get information on prospective or existing customers. However, any properly functioning credit bureau, that must be independent or seen to be independent, should operate as an arm of the state and we are still far away from that.

Questions can be sent so Po Box. 1830, Wrighston Road, Port-of-Spain
E-mail :cmmbsecurities@mycmmb.com

AFTER decades of emigration, it is now estimated that 1.75 million West Indians or persons of West Indian ancestry live in the United States. This connection has had significant social and cultural repercussions for both regions but, perhaps even more important, has been the relatively unrecognised contribution which remittances from immigrants make to a number of WI economies, including that of Trinidad and Tobago. While they left their native land to seek a better life in the US, West Indian immigrants have not forgotten family members they left behind and many have been sending money back home on a regular basis.

This, in fact, has been the case with emigration from the Caribbean and Latin America and their remittances now amount to a formidable figure. According to the Washington-based Inter-American Development Bank, remittances to Latin America and the Caribbean in 2002 total more than US$32 billion, an increase of 18 percent than the previous year. These sums accounted for more than ten percent of Gross Domestic Product in Jamaica, Nicaragua, El Salvador and Honduras. Mexico is the region’s largest recipient, capturing $10.5 billion. In the case of Trinidad and Tobago, remittances totalled US$51 million in 2002 compared to US1.2 billion for Jamaica and US$100 million for Guyana, representing 16.6 percent of that country’s GDP. IDB estimates indicate that if these flows continue to grow at a moderate rate of seven percent a year, the Caribbean and Latin America could receive more than US$400 billion in remittances during this decade.

The importance of these remittances, particularly to the struggling economies of the Caribbean and Latin America, cannot be underestimated. Because of this, it is time for these countries to examine the relatively high cost of making these remittances with a view to having them reduced. Anthony Bryan, Professor of International Relations at the University of Miami notes that remittances are important financial “capture” which governments and banks in the Caribbean have not yet come to fully appreciate. “Family support is but one aspect. The investment, business development and local goods consumption aspects are yet to be looked at closely.” One official estimate puts the total cost of transmitting remittances to the Caribbean and Latin America at US$4 billion or 12 percent of the amounts sent back to home countries. Bryan related: “I have had discussions with one large Caribbean bank about opportunities to capitalise on this market since they can offer more competitive transfer rates and banks can gain significant financial benefits when they integrate this segment of the population into the formal financial system.”

Here, we think, is an opportunity for Caribbean and Latin American banks not only to expand their businesses but also to facilitate the flow of these vital funds. In an age when billions of dollars are transferred from one place to another across the globe at the press of a button, the technology must be there to serve this purpose. Mexico has apparently set the pace in this regard where banks, as money transfer agents, issue special debit cards to be used by recipients of these funds. And recently Citibank and the Bank of America introduced new programmes utilising ATM technology to transfer remittances by issuing debit cards and “smart cards” to designated persons in Mexico upon the enrollment in a special US programme of those sending the money. For troubled economies such as Jamaica and Guyana — and even TT to a lesser extent — these remittances are important. The cost and method of sending them should not be a problem.