Management Accountant 0506_11

7/23/2019 Management Accountant 0506_11

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Budget Highlights 2011-12

By Tariq Mustafa Ramzan & Co.,Cost & Management Accountants

Sales Tax and Federal Excise

The rate of Sales Tax is proposed to be reduced from17% to 16%.

The exemption of sales tax on Dump Trucks, Con-crete Mixer, Agricultural Equipment/Machinery, CKDkits, CNG kits, cylinders and valves for CNG kits,Commercial catalogues, Rock Phosphate, Phos-phoric Acid and Mineral oil has been withdrawn.

Exemption of Sales Tax on bricks, building blocks,computer software, surgical tapes, aircraft, ambu-lances, fire fighting vehicles and other items of 6thschedule to be withdrawn.

The exemption of sales tax on defence stores at im-port and local supply is proposed to be withdrawn.

Zero Rating of CNG Buses, Trucks, Dumpers, Trail-ers and Road Tractors has been withdrawn.

Thevalue addition tax leviedon commercial importersis being enhanced from 2% to 3%.

Excise duty on cement is being reduced. Further, dutyon white cement is proposed to be withdrawn.

Reclaimedlead, if supplied to recognized manufactur-ers of lead batteries has been exempted from SalesTax.

SED @ 2.5% chargeable to importers and manufac-turers has been abolished.

FED leviable on aerated beverages is proposed to bereduced from12% to 6% to make it in line with its sub-stitute juices.

FED levied on services provided by property develop-ers or promoters is proposed to be abolished.

FED on locally produced Cigarettes is proposed to beincreased by increasing the upper limit of duty slabs.

The FED leviable on filter rods for cigarettes has beenrationalize from Rs.1/- per filter rod to 20% ad val.

The FED on unmanufactured tobacco is being en-hanced from Rs.5/- per kg to Rs.10/- per kg.

The reduced rate of sales tax @8% on supply of sugarhas been withdrawn and now sugar will be taxable atnormal rates.

Further Crystaline Sugar has been exempted fromsales tax and would be subject to federal excise duty@ 8% payable in sales tax mode.

The zero-rating regime has been rationalized to limitits application only to selected sectors.

Inspector Inland Revenue is proposed to be includedas an authority under the sales tax act, 1990.

Officers with designation assistant commissioner andabove have been empowered to carry out investiga-tive audit under 38b of the sales tax act, 1990.

Officers inland revenue is being empowered to rejectrefunds filed under section 66 of the Sales Tax Act,1990 where incidence has been passed on to the con-sumers.

Customs Act

Regulatory duty on certain items including edibleitems, is proposed to be removed.

Duty on pharmaceutical raw materials is proposed tobe reduced to 5%.

The budget proposes tariff rationalization on bars,rods and profiles of refined copper and copper alloy.

To provide incentives to local manufacturers and sup-pliers of domestic goods against international tend-ers, finance bill proposes to treat these supplies asexports to entitle them duty drawback.

The followingconcessions have been proposed for in-dustries:

Butyl acetate industry through concession on importof its raw materials (Sabutol)

Glass industry through concession on its two majorraw materials namely mirror backing paint andwaste / scrap of glass

Focus Section 8 Management Accountant, May-June 2011

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Machinery and equipment used in oil exploration.

Income Tax

The federal budget 2011-12 seeks to enhance basicexemption limit from Rs.300,000/- to Rs.350,000/-.

Individual taxpayers whose normal income is be-tween Rs.300,000/- to Rs.350,000/- shall now be re-quired to file return of income, for the purposes ofdocumentation.

Individual Tax Payers would be required to file Wealth

Statement if income exceeds Rs.1,000,000 as com-

pared to current limit of Rs.500,000/-

Tax on services, in case of companies which is cur-

rently adjustable is proposed to be the minimum tax.

To encourage equity financing, and to provide relief tonew corporate industrial undertakings established on

or after 1st July 2011, with 100% equity financing, a

tax credit equal to 100% of tax payable is proposed.

The existing companies may also take benefit under

this arrangement if investment in BMR is financed

through 100% equity, on or after by 1st July 2011.

The rate of tax on Cash Withdrawals from Banks isproposed to be reduced to 0.2% from existing 0.3%.

In order to harmonize theexisting tax credits available

to individuals for investment in shares and for pre-mium paid to Insurance Company, the maximum cu-

mulative limit for both the investments is fixed @ 15%

of the taxable income, with maximum upper limit for

investment up to Rs. 500,000 as compared to current

limit of Rs.300,000/- and the time period for holding

the investment to get the benefits of tax credit is en-

hanced from one year to three years

Tax relief is proposed to be provided to withdrawalsfrom a Voluntary Pension Fund exceeding Rs.500,000/-.

To encourage enlistment on stock exchange, the ex-isting tax credit equal to 5% is proposed to be en-hanced to 15%.

Filing of withholding tax statements are proposed tobe filed on monthly basis before 15th of the subse-quent month.

For Broadening of Tax Base and utilization of thirdparty databases, NTN and CNIC of eligible taxpayersare proposed to be provided expressly along withother particulars, in the withholding tax statementsfiled by withholding agents.

For broadening of tax base, the requirement of man-datory filingof return of incomeby thecommercial andIndustrial consumers of electricity with annual billingabove one million rupees, is proposed.

The rate of tax on return on receiving dividends fromAsset Management Companies by banks is proposedto be enhanced from 10% to 20% to discourage thepractice of arbitrage by banks.

To encourage investments made by nonresidents inGovernment Securities, the withholding tax on profiton debt deductible @ 10% is proposed to be a finaltax. Now they will not be required to file return of in-come.

To encourage domestic investments in the Govern-ment Securities, the withholding tax on profit on debtdeductible @ 10% arising from investment in Govern-

ment securities by individual is also proposed to be afinal tax. They will also be relieved from statutory filingof return of income.

After imposition of capital gain tax on Modarba certifi-cates and instruments of redeemable capital traded atstock exchange through Finance Act 2010, the 0.01%CVT on such instruments is proposed to be withdrawn

Exemption from income tax of the income of Com-puter Training Institutes is proposed to be withdrawn.

Extract from TMRCs Brief Comments on Federal Budget 2011-12


Corrigendum in Mar-Apr. 2011 Issue

On page 13, second para in the introduction of Syed Asad Ali Shah may be started with "Mr. Shah served as Former President ..."

instead of "Mr. Shah is currentlythe President...".On page 16,the comments of heads of thetwo Institutionsare extractedfrom the

letter addressed by them to the President ICMAP.


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Brief Summary of

Federal Budget 2011-12

Compiled by Asif Hussain Siddiqi, APA

Economic Situation

The economy hasshown resilience de-spite severe chal-

lenges i.e. floods, security situation, energy shortages, ris-ing international oil and commodity prices and higher inter-est rates.

GDP growth from 2.4% (revised) in 2010-11 to 4.2% (tar-

get) 2011-12.

Inflation (CPI) from 15.5% during 2010-11 to 12.0% in2011-12(target).

Fiscal Deficit reduced from 6.3% in 2009-10 to 5.1% in2010-11 and 4% of GDP in 2011-12 (target). During 2010-11 past arrears amounting to Rs.120 billion (0.6% of GDP)were paid. Fiscal deficit 2011-12 including grants would beat 3.4% of GDP.

Exports grew by 27% in the first ten months and will cross $24.5 billion mark.

Remittances are likely to cross $ 11 billion.

The foreign reserves above $ 17 billion.

Pakistani Rupee is stable.

FBR tax collection at Rs.1320 billion for 11 months i.e. anincrease of 16% over the same period last year.

Current account in surplus July-April 2011 (US $ 748 mil-lion).

Challenges

Containing of Fiscal Deficit.

Reducing Inflation.

Overcoming energy shortage.

Increasing investments.

Creating employment.

Reducing Public Debt.

Proposed Budget Strategy

Containing Fiscal Deficit to 4% of GDP.

FBR Tax to Rs.1952 billion.

Gradual elimination of tariff differential subsidy.

Targeted food and fertilizer subsidies.

Zero net financing from SBP each year.

Implementation of New Growth Strategy.

Continuation of ban on new recruitments and purchase ofdurable goods.

Rationalization of other expenditure.

Establishment of an independent commission to scrutinizeall development and current expenditure with a view to en-suring their necessity, efficacy and value to the public ex-chequer.

Establishment of an independent commission to examinestructure of pay and allowances across the public servicesand bring equity and fairness across them.

Salient Features of the Budget

Thebudget2011-12 hasthefollowingmain salient features:

The total outlay of budget 2011-12 is Rs 2767 billion. Thissize is 14.2% higher than the size of budget estimates2010-11.

The resource availability during 2011-12 has been esti-mated at Rs 2463 billion against Rs 2256 billion in thebudget estimates of 2010-11.

Net revenue receipts for 2011-12 have been estimated atRs 1529 billion indicating an increase of 11% over thebudget estimates of 2010-11.

The provincial share in federal revenue receipts is esti-mated at Rs 1203 billion during 2011-12 which is 16.4%

higher than the budget estimates for 2010-11.

The capital receipts (net) for 2011-12 have been estimatedat Rs 396 billion against the budget estimates of Rs 325 bil-lion in 2010-11.

The external receipts in 2011-12 are estimated at Rs 414billion.

The overall expenditure during 2011-12 has been esti-mated at Rs 2767 billion of which the current expenditure is


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Rs 2315 billion. Current expenditure shows an increase of

less than 1% over the revised estimates of 2010-11, while

development expenditure will increase by 64.4% in 2011-

12 over the revised estimates of 2010-11.

The share of current expenditure in total budgetary outlay

for 2011-12 is 84% as compared to 90% in revised esti-mates for 2010-11.

The expenditure on General Public Services (inclusive of

debt servicing transfer payments and superannuation al-

lowance) is estimated at Rs.1660 billion which is 71% of the

current expenditure.

The sa ient fea u res of the PSDP 2011 12 are as under:

The size of Federal Public Sector Development Pro-

gramme (PSDP) for 2011-12 is Rs. 300 bil lion. While for

Other Development Expenditure an amount of Rs.97 billion

has been allocated. The PSDP shows an increase of 53%

over the revised estimates 2010-11. The provincial PSDP for 2011-12 has been approved at

Rs.430 billion against revised estimates of Rs.266 billion.

An amount of Rs.10 billion has been allocated to ERRA in

the PSDP 2011-12.

Within the resource available, allocations have been made

to maximize economic impact of the development pro-

gramme and to achieve core objective of growth reducing

poverty and to ensure balanced development.

The proposed federal development programme places an

equal emphasis on physical infrastructure sector (55%)

and social sector (44%).

Water sector has been allocated Rs.36 billion i.e. 12% of to-

tal federal PSDP. Raising of Mangla Dam including reset-

tlement Satpara Multipurpose Dam, Gomal Zam Dam,

Kachi Canal, Raini Canal and other water sector projects

have been provided appropriate funds.

To overcome energy shortage, investment would be made

for power generation, distribution and conversation by the

government in WAPDA during 2011-12 at Rs.115 billion

which include Rs.32.5 billion through budget. This will help

in reducing power shortage in the country.

For Basha Diamer Dam, Rs.18 billion has been allocatedfrom budget while WAPDA will arrange Rs.2.5 billion from

the market. In addition, Neelam Jhelum Hydro Power Pro-

ject, Gudu Steam Power Project and Combined Cycle

Power Plant at Chechoki Malian are being implemented by

WAPDA.

In addition to hydel projects, nuclear sources would also be

used for power generation. An amount of Rs.22 billion has

been allocated to Pakistan Atomic Energy Commission.

Transport and Communication Sector has been allocated

Rs.55 billion. NHA has been allocated Rs.40 billion and

Rs.15 billion has been allocated to Railways. This would

ensure economic integration and balance regional devel-

opment.

Health sector will be devolved to the provinces by June,2011, however, to implement CCI decision, Rs.15 billion

has been proposed to finance different vertical health pro-

grammes.

HEC and Population Welfare Programme will also be fi-

nanced by federal government with an allocation of Rs.14

billion and Rs.4 billion respectively.

Allocation for Special Areas (AJK, GB and FATA) is atRs.28 billion with a view to accelerate development activi-ties in less developed areas.

Allocation for special programmes (People Works

Programme-I and People Works Programme-II) an alloca-tion of Rs.33 billion has been made.

Re ief Measures

Following relief measures are proposed to be extended to the

Civil Servants and the Personnel of the Armed Forces with ef-

fect from 1st July, 2011:-

An increase of 15% in pay of all Civil Servants and Person-

nel of the Armed Forces with effect from 1st July, 2011.

Pensioners who retired on or after 01.07.2002 may be al-

lowed an increase @ 15% and those who retired on or bef-

ore 30.06.2002 may be allowed an increase @ 20% in pen-

sion.

Existing Conveyance Allowance may be increased by 25%

to all the employees in BPS 1-15 and their equivalent in the

Armed Forces.

All the Civil Servants and Personnel of the Armed may be

allowed Conveyance Allowance at the prescribed rates ir-

respective of their place of duty.

Increase in misc allowances mostly admissible to the em-

ployees in BPS 1-15.

All the ad-hoc relief allowances granted upto 01.07.2009

will be merged in the Basic Pay Scales-2008 and to intro-

duce the new pay scales.

Compulsory Monetization of transport facility to the

Civil Servants in BPS-20 to BPS-22 of the Federal

Government

Focus Section 11 Management Accountant , May-June 2011


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Harnessing Eco-Control to BoostEnvironmental and Financial Performance

The growing importance of environmental issues in business has prompted companies to put effective environmentalmanagement systems in place. The use of eco-control tools can improve both the environmental performance and financialperformance of organizations. A study of Canadian manufacturing firms illustrates this concept.

By Jean-Franois Henri, CMA and Marc Journeault, CMA

The most recent report by the Intergovernmental Panel on Cli-mate Change (IPCC) asserts that climate change is attribut-able to human actions. It also describes the numerous repercus-sions of this phenomenon on the environment and underlines theimportance and urgency of reducing environmental impacts. Asone of the main ecological offenders, organizations have an unde-niable role and responsibility to work toward a solution. Moreover,the increase in environmental legislation and pressure from inter-nal and external stakeholders unequivocally confirms the impor-tance of this issue for organizations. The challenge for organiza-tions is to undertake concrete actions to reduce the ecological im-pact of their operations while maintaining their economic objec-tives a crucial importance to shareholders and investors. Eco-control tools can play a pivotal role in this area by allowing organi-zations to attain their environmental objectives while ensuring theprofitability of their operations.

What are Eco-Control Tools?

Organizations implement and use management control systems(MCS) to monitor, control, measure and modify their strategic ob-jectives. Performance, budget and incentive management sys-tems are among the most widely used MCS. Eco-control refers totheconsideration of environmental aspects in each of these tools.

The objective is not to create new management tools but rather tointegrate environmental aspects in existing tools and to isolatetheir effect on the organization. The integration of ecological as-pects in performance measurement systems entails the develop-ment of environmental performance indicators (EPI). Diverse EPIallow organizations to monitor changes in internal environmentalaspects and measure the attainment of environmental objectives.

They may translate, in quantifiable measures (monetary or physi-cal), the various environmental impacts of the activities of the or-ganization. They may also measure the efficiency of internal pro-cesses and systems put in place to improve the organizations en-vironmental performance.

Moreover, in an eco-control context, budgets can serve to identifyand plan objectives for spending, income and environmental in-vestments and to monitor the attainment of these objectives. Envi-ronmental spending may include the cost of waste processing orwater purification, whereas environmental income may originate

from the sale of waste materials used as an input by another com-pany or from the reuse of recyclable materials. Environmental in-vestments may include purchases of emission reduction technolo-gies or construction of infrastructures that reduce the risk of eco-logical damage. Lastly, environmental incentivesentail the integra-tion of environmental criteria in companies bonus systems to moti-vate employees to endeavour to attain specific environmental ob-jectives.

Eco-control and Environmental Performance

It is difficult to define the concept of environmental performance.One of the definitions proposed rests on four dimensions: i) im-provement of products and processes, ii) regulatory complianceand financial impacts, iii) relations with stakeholders and iv) envi-ronmental impacts and corporate image. The first two dimensionsdeal with internal processes in the organization whereas the lasttwo involve external processes. Environmental performance is

therefore defined as the simultaneous attainment of satisfactoryperformance along these four dimensions.

In general, eco-control tools can contribute to environmental per-formance by allowing organizations to procure reliable informationrequired for strategic decision making concerning the environ-ment. Considering that the organization has limited resources andfaces a multitude of choices in day-to-day management, thesetools also represent a wayto orient the actions of all employees to-ward the attainment of environmental objectives set by top man-agement. Specifically, they let the organization establish, co-ordinate and communicate strategic priorities related to the envi-ronment; signal critical issues to managers; improve the allocationof resources managed; measure its ecological actions and pro-

mote congruence between individuals and the organization.

Environmental Performance Indicators (EPI)

Specifically, four main uses of EPI areobservedin organizations toenhance environmental performance. First, EPI can be used tomonitor the level of compliance with laws and regulations. By set-ting the maximum levels of waste and emissions required by thelaw as an objective, EPI can be used as a vigilance system tomonitor, control and correct any deviation from the targets. Sec-ond, EPI can be an important source of information that facilitates

Meritorious Article 17 Management Accountant, May-June, 2011

Meritorious Article

This is one of the Articles of Merit, judged as such underProfessional Accountants in Business - Articles of

Merit Programme 2009, for distinguished contributions to Management Accounting, established by the

Professional Accountants in Business Committee (PAIB), (under its former name of FMAC) of IFAC.


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strategic decision making concerning the environment. By supply-ing accurate reliable data on processes and environmental im-pacts, EPI enable managers to acquire a clear vision of these is-sues and to take them into account in their strategic decisions.Third, EPI can be used to favour continuous improvement by di-recting the organizations attention to environmental issues. EPIcontinuously send signals to managers regarding environmentalissues and stimulates discussion, dialogue and debates on this

topic. This dynamic process contributes to the emergence of initia-tives and innovations that modify the processes in place and miti-gate the environmental impact of operations. This process alsoclarifies the causes of these issues and contributes to organiza-tional learning. This learning, in turn, allows the organization to for-mulate new policies or internal standards that specify how futureactions can be carried out in a more environmentally-friendly man-ner. Fourth, EPI can be used to supply the data required for exter-nal reporting purposes. This reporting is a means of responding tovarious pressures from stakeholders (investors, clients, creditors,shareholders, etc.) by presenting financial and non-financial infor-mation on the environmental impact of company operations. Re-porting informs and promotes awareness among the stakeholdersof the environmental actions taken by the company. As environ-

mental performance is a subjective issue conditioned by the ex-pectations of each of the parties, reporting represents a key prac-tice to legitimize the environmental actions of the organization.

To support these assertions, a survey was administered to 303 Ca-nadian manufacturers in order to assess their level of use of eco-control systems and their level of environmental performance. Ta-ble 1 illustrates the results related to the use of EPI in these compa-nies. First, it presents an average index of usage of the EPI de-scribed above for all respondents. Second, the table compares the

usage index of EPI for the top 50 performingfirms in environmental matters versus the 50worst performing firms.

The results shown in this table reveal thatmanufacturing firms use EPI fairly intensively,

with an index of about 70 per cent. The EPI areused primarily to monitor the level of compli-ance with legislation and regulations (75 percent), favour continuous improvement (73 percent) and facilitate decision making (71 percent). This table also suggests that the level ofuse of EPI by the top performing firms in envi-ronmental matters is higher than that of theworst performing firms. The average differenceis 50 per cent.

Budget

The integration of environmental aspects in thebudget can help organizations improve their en-vironmental performance. First, the budget canbe used as an operational and strategic plan-ning tool to allocate the resources required toattain the environmental objectives of the or-ganization. It also serves to communicate finan-cial objectives related to the environment to all

employees. In addition, this eco-control tool can be used to monitorobjectives, to direct and motivate employees toward attainment ofthese objectives and measure the results obtained. The organiza-tion has the ability to use the budget as a vehicle to ensure congru-ence between the employees actions and the organizations ob-

jectives. Lastly, similar to EPI, the budget can be used as an infor-mation base to favour organizational learning related to the envi-ronment. For example, it can compile data on expenses related tothe environment, allowing the organization to assess the sourcesof these expenses and subsequently implement concrete actionsto decrease spending.

Table 2 illustrates an index of the degree of integration of environ-mental aspects in budgets of manufacturing firms.

Table 2: Index of In egra ion of Envi onmental

Aspects in Budgets and Incen ives


Table 1: Usage Index of EPI


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The results show that these companies integrate environmentalaspects in their budget to a moderate degree, with an averageglobal index of 61 per cent. Spending is the main environmentalaspect included in the budget of these companies. This table alsoshows that the top performing firms with respect to the environ-ment incorporate ecological aspects in their budget (82 per cent) to

a greater extent than do the worst performers (35 per cent).

Envi onmen al Incen ives

Integration of environmental aspects in bonus programs can alsohelp organizations improve their environmental performance. Bo-nus systems based on attaining environmental objectives repre-sent a powerful tool to motivate employees to undertake the ac-tions required to attain these targets. They therefore represent away to orient employees actions in the direction desired by the or-ganization. A bonus system linked to the environment lets com-pany management clearly convey to employees the importance ofthese issues for the organization. In turn, the employees wishing tooptimize their compensation will prioritize actions related to the en-

vironmental objectives rewarded by the bonus system and will will-ingly exert more effort to achieve these objectives. Environmentalincentives promote concerted action by all employees and contrib-ute to environmental performance. This proposition is affirmed bythe results in Table 2.

Among the manufacturers surveyed, the top 50 performers with re-spect to the environment incorporate more environmental aspectsin their employee bonus program (68 per cent) than do the 50worst performing firms (22 per cent).Nonetheless; this practice re-mains fairly uncommon among the companies included in thissample, as shown by the low index of 47 per cent.

To summarize, the results of this study demonstrate that, by sup-plying useful information for decision making, by directing and mo-tivating managers and employees to attain environmental objec-tives and by favouring continuous improvement, eco-control toolscan contribute to the environmental performance of companies.

Eco control and Financial Per ormance

Virtue is a universal ideal, but not at any price. Even if executivesendorse active engagement in environmental initiatives, they rec-ognize that mobilization of businesses in this area is currently in-sufficient. One of the major obstacles to the implementation of en-vironmental actions within organizations is the belief, still firmly en-trenched among executives, that considering environmental as-pects is costly and represents a substantial expense for the organi-zation. Increasingly, however, experts are insisting that it is possi-

ble to couple environmental management and organizational prof-itability. How can this be achieved?

First, the proponents of the win-win argument emphasize that im-proving environmental performance can help reduce environment-related costs. This reduction may originate from a decrease in thequantity of waste sent to landfills and in energy consumption orfrom increased use of recycled materials in manufacturing. As partof this process, preventive actions must be put in place to reducethe environmental impact at source, as opposed to an end of-pipe approach that is simply a stopgap solution. Moreover, better

environmental performance can translate by an increase in salesto green consumers.

By contributing to the brand image and the companys reputation,stronger environmental performance can generate an importantstrategic advantage vis-a-vis the market. By contributing to the en-

vironmental performance of companies, eco-control tools can alsoenhance financial performance. First, they can help organizationsidentify opportunities to reduce environmental impacts at sourceand determine the associated financial gains. Second, these toolscan be used to supply information for reporting, namely by publiciz-ing the environmental performance of the company to its variousstakeholders.

Table 3 underlines this contribution of eco-control tools to financialperformance via environmental performance. The 50 top perform-ing firms in environmental aspects (linked above to a higher use ofeco-control tools) have a higher financial performance index (64per cent) than do the 50 worst performing firms (58 per cent). Thisvariance between the two groups of firms might seem modest, but

it is non-negligible when one considers the multitude of elementsthat influence organizational performance.

Table 3: Index of Financial Per ormance

Harness ng these tools

Eco-control tools represent a simple and accessible solution thatwill let executives take escalating environmental challenges intoaccount in their organization. Because this environmental consid-eration is part of the organizations existing MCS, it does not re-quire the development of new systems and is therefore less oner-ous. The results of this study of manufacturers show that eco-control tools can contribute to the environmental and financial per-formance of organizations. However, the findings also indicate thatawareness of the strategic advantages of the use of eco-controltools needs to be raised considerably, to generalize their imple-mentation in companies as a whole

Jean-Franois Henri, PhD, CMA, is a professor in the school ofaccounting at Universit Laval and holder of the chair in cost and

performance management. Marc Journeault, CMA,is an associ-ate professor in the school of accounting at Universit Laval. He is

pursuing PhD studies in environmental accounting at the Univer-sit Catholique de Louvain in Belgium.



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IFAC Increases Support for SMPs

By Sylvie Voghel, Chair of the IFAC Small and Medium Practices Committee, Provides an Update on the SMPCommittees Implementation of the IFAC Board Recommendations

Its been nearly a year since the IFAC Board reviewed the activi-ties of theInternational Federation of Accountants (IFAC)to sup-port small- and medium-sized practices (SMPs), and made tar-

geted recommendations for improvements based on the changing

market environment and needs of our constituents. As a result of

the review, IFAC will increase its support for SMPs. In this inter-

view, Sylvie Voghel speaksabout the SMP Committees role in im-

plementingthe recommendationsand provides an update on prog-

ress made so far.

Why is IFAC putting so much emphasis onsupporting SMPs?

Put simply, we recognize that SMPs help support the healthand prosperity of the small and medium-sizedentity (SME) sec-tor, a sector that in most countries around the world accountsfor the majority of private sector employment and Gross Do-mestic Product. In fact, many countries are relying on this sec-tor to help their economies recover from the global economicslowdown.

SMEs often, especially when they lack sufficient in-house ex-pertise, look to SMPs to provide a broad range of professionalservices, from traditional accountancy-based services to busi-ness advisory services. In addition, a strong SMP constituencycan contribute to increased choice and competition in the mar-ket for professional services.

Meanwhile, SMPs are confronted by a range of operational,market, and regulatory challenges themselves. These chal-lenges are nothing new, but what is new is their enormity. IFACand our members recognize that to provide effective support tothe SME sector,SMPsneed more help. The vast majority of theheads of IFAC member bodies (95 percent) told us, in their re-sponses to IFACs 2010 Global Leadership Survey that ad-dressing the needs of SMEs and SMPs is crucial. (See thepress release.)

How have the IFAC Board recommendationsimpacted the SMP Committees objectives andwork plan for this year?

The Boards recommendations have essentially become thefoundation of the SMP Committees objectivesnot only forthis year, but for the next several years. The scope of the rec-ommendations is exciting but also overwhelming as there is alot of work to be done. At the same time, I feel fortunate to be in

a position of leadership within the committee at this time, as wepursue many exciting new initiatives that should greatly in-

crease the committees ability to assist SMPs globally.

Our strategy is built upon four key objectives, which align veryclosely with the Boards recommendations:

Provide input to IFACs policy-making process and partici-pate in its regulatory dialogue to ensurethat SMP and SMEissues are fully considered;

Help to shape the form and content of international stan-dards to ensure their stability, relevance, and proportional-ity to SMEs and SMPs;

Communicate the importance of the SME sector and therole SMPs can play in supporting this crucial sector to en-

hance the visibility, voice, and recognition of SMPs; and

Provide and promote practical support to SMPs to enhancetheir ability to provide high-quality and relevant profes-sional services to their clients.

What contributions has the SMP Committeemade recently to IFACs regulatory dialogue?

The committee participated in the development of IFACs re-sponse to the European Commissions Green Paper, Audit

Article 21 Management Accountant, May-June, 2011

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Policy: Lessons from the Crisis. Our insights and viewshelped ensure the IFAC response was robust, balanced, andsufficiently focused on SME and SMP issues. The committeewill continue to closely moni tor IFACs regulatory dialogue andparticipate when relevant.

How does the SMP Commit ee help shape

standards?

The committee provides input on key standards and publica-tions at all stages of their development. In April, the committeesubmitted a comment letter on the Proposed IAASB Strategyand Work Program for 2012-2014,issued by the International

Auditing and Assurance Standards Board (IAASB).We werehappy to note that the work program gives due recognition tothe needs of SMPs and SMEs.

This year, with the formation of the its SME/SMP WorkingGroup, the International Ethics Standards Board for Account-ants (IESBA) is working to address the issues faced by SMEsand SMPs in complying with the IESBA Code of Ethics for Pro-fessional Accountants (the Code). Two SMP Committee mem-bers serve on this Working Group.

How will the SMP Commit ee enhance the

visibil ty of SMPs?

One of the ways the committee hopes to enhance the visibilityof SMPs is by increasing speaking engagements by committeemembers and staff at national, regional, and global events andmeetings, where they will discuss the value of SMPs and theirrole in supporting SMEs.

Each year, the committee holds an SMP Forum where practitio-ners from IFAC member bodies convene to learn, share, anddiscuss the key issues facing the profession. The 2011 SMPForum in Istanbul attracted over 200 delegates. The event af-fords us an opportunity not only to promote the profession, butalso to gain feedback from our constituents, which we can useto fine tune our support for them.

How does the SMP Commit ee support and

engage SMPs?

IFAC is a fed eration of professional accountancy organizationsand, as such, we primarily seek to support SMPs through ourmember bodies, who serve several hundred thousand SMP

practitioners around the world. Increasing the engagement ofthis global constituency is a priority for the committee.

This year, the committee is developing a range of materials thatmember bodies can use to communicate with their SMP mem-bers, including articles with tools and tips to support practicemanagement and implementation of the International Stan-dards on Auditing (ISAs). We also initiated a quarterly SMPpoll, which many of our member bodies have distributed to theirown members.

The SMP Committee has also issued three comprehensiveguides to help practitioners implement international standardsand proficiently manage their practices: Guide to Using Interna-tional Standards on Auditing in the Audit of Small- and Medium-Sized Entities, 2nded., the Guide to Quality Control for Small-and Medium-Sized Practices, 2nded., and the Guide to PracticeManagement for Small- and Medium-Sized Practices. All threewere released in 2010. IFAC member bodies may translate, re-produce, and adapt the guides as needed. The guides and ex-isting translations are available free of charge on the IFAC web-site under SMP Publications and Resources and in the Transla-tions Database.

Is there any h ing else that you wou ld like to add

that we have not al eady covered?

Clearly, SMP and SME issues are an integral part of IFACsstrategy. The independent standard-setting boards supportedby IFAC have made great progress in accommodating SMEs

and SMPs: the proposed IAASB strategy is testimony to this.

The IFAC SMP Committee is here to champion the cause ofSMPs and represent the global SMP constituency. However, inisolation, its influence is limited; effective and enduring imple-mentation of the IFAC Board recommendations depends upona collective effort by IFAC, its member bodies, and the willing-ness of SMPs to engage, get involved, and speak with a singlevoice at the national, regional, and global level.

For More In o rma ion

To learn more about the SMP Committee, see IFACs Interna-tional Center for Small and Medium Practices, where practitio-ners can access a wide range of free resources and practicalsupport, including the guides, the electonic SMP newsletter,links to tools and resources, a discussion board, and other SMPCommittee publications.

About the Author: Sylvie Voghelbecame chair of the IFACSmall and Medium Practices Committee in January 2006.


This year, with the formation of the its SME/SM

Working Group, the International Ethics Stand

Board for Accountants (IESBA) is working to a

the issues faced by SMEs and SMPs in comply

the IESBA Code of Ethics for Professional Acc

(the Code). Two SMP Committee members ser

Working Group.


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Financial and Business ServiceAccountancy and AuditingStandards and Benchmarks Accounting Standards

By Chandra Wadhwa

The concept offair value hasbeen adopted fornon-current assetsand liabilities andnot for currentones. Thereshould have been

a complete shift from historical cost to the fair value concept inthe global regime.

The implementation of International Financial Reporting Stan-dard (IFRS), to be made mandatory in India for certain types ofcompaniesfrom April 1, hasbeen postponedIndia being an im-portant emerging global economy, the Ministry Corporate Af-fairs, made the commitment that the convergence of Indian Ac-counting Standard with IFRS will be in place with effect from

April 1, 2011. Gradually, it will be made mandatory to the listedCompanies having net worth of Rs 500 crore or less.

Indeed, this will bring uniformity and transparency in the finan-cial reporting of the Indian companies and their performancecan be compared with the foreign companies and could bring alot of investment to India. Finally, the IFRS will play an impor-tant role in contributing to the economic development of India.That may be the reason for China to adopt IFRS at the very ini-tial stage.

Now the question arises whether the proposed framework ofIFRS will give the true financial picture to the investors or otherstakeholders?

Major Shift

If we analyse the IFRS, it can be concluded that the major shiftis from historical cost to fair value of non-current items of thebalance sheet. Thecompanies have been given the freedom togo for the concept of fair valuation of its fixed assets and liabili-ties. In the absence of non-inclusion of the concept of fair valueof current assets and liabilities in the proposed structure of

IFRS, the question arises whether the financial results of acompany will present a correct picture to the stakeholders.

Under IFRS regime, the companies will be required to followthe historical cost for preparation of Profit & Loss and currentassets and liabilities; fair value concept, if adopted, for non-current items of balance sheet. In this process, if the propertyprices changes drastically, the difference has to be booked inProfit & Loss statement and the depreciation and insurance,worked out on the basis of fair value of fixed assets, will bebooked in the Income Statement. Similarly, the gain or loss on

investment, financial instrument, etc, due to fair value will bebooked as a part of Profit & Loss.

Dual Standards

In the entire new structure of IFRS, the concept of fair valuehas been adopted for non-current assets and liabilities andthe same concept has been left out for current assets & liabili-ties. If we analyse this structure, the following issues have tobe addressed:

(a) Whetherthiswillgive thetruepicture of the financial state-ment to the stakeholders;

(b) Whether this will give the correct picture of sustainability;and

(c) Whether a comparison can be made between the twocompanies, when one is following a concept of fair valueand another is following cost concept for its non-currentassets & liabilities

From the above, it is clear that the new structure will provideample scope to the companies to manoeuvre their accounts,because it allows them to adopt the concept of fair value fornon-current assets & liabilities as and when they feel.

In this process, the companies can select this scheme whenplanning for public issues and show the higher profits to the in-vestors. Moreover, having a combination of two concepts, his-torical cost for current items and fair value for non-currentitems, will not give the true picture to the shareholders.

In order to give true value of thebusiness based on current costaccounting, there should have been complete shift from histori-cal cost to fair value concept under IFRS. The concept of fairvalue should have been introduced for all the resources includ-ing human resources accounting, social accounting, inflationaccounting, etc, which would have given the correct picture tothe shareholders and stakeholders. Such kind of reporting toshareholders would definitely have indicated the sustainability

of business enterprise andhave fulfilled oneof theobjectives ofshifting from historical cost to fair value concept under IFRS.

By giving hybrid type of model to the presentation of accountsthrough new structure willcreate confusion in the mind of stake-holders. In addition, in the absence of valuation mechanism forcertifying the current market price of fixed assets, the correct-ness of the fair value of assets will be suspected

(The author is a Past President, ICWAI.)

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Performance Auditfor DFIs

By Qaisar Mufti, FCMA, FCIS

Performance isin relation toan objective interms of a well de-fined parameter.Other achieve-ments of a ventureare off-shoots of theprincipal activity or

objective. A park is set-up to the end of community service. Toguard against entry of undesirable, an entry fee on outsiders may

be levied. This may generate some money. But success of thecommunitypark venture does nothave to be judgedon thebasisofsuch money collection.

A Development Financial Institution (DFI)s basic function is to helpestablishment and harnessing projects it is called upon to assist.Besides new projects, a DFI helps expansion or balancing andmodernization of already existing entities. Its success can also bemeasured by wayof other parameters. However, DFIs thrust is noton making money through profitable operations, net profit andprofit after tax or earning per share (EPS) by milking the projects itnurtures. Target of a DFI is not and can not be profit making inmonetary units. Its basictask is development, building projects andstrengthening ventures.

DFIs achievement has to be measured in terms of success storiesof the projects assisted, in keeping with the objects of such proj-ects setting-up. Profits made by a DFIs assisted project can of-course be interms of monetary units aswell. In most of the cases itis so. However, success measurement is in relation with an al-ready provided paradigm for the venture. In the case of a hospital,achievement or a gain / profit can be gauged by way of number ofpatients treated, decrease in loss of men days amongst the hospi-tals clientele or in the area where the hospital is set-up or someother territory catered by the hospital vis. a vis. the time when thefacility as such was not there. In the case of a highway project, itcan be passenger miles traveled or saving in time or cost of travelor both. When the highway is put-up in an under developed region,one of parameters or the parameter can be increment in incomelevels of inhabitants of the areas through which the highway

passes in contrast with the position when it was not on the scene.When the project is an educational institution it can be number ofstudents qualifyingfrom the educational institution. A pharmaceuti-cal research projectssuccess can be with reference to the drugs ithad patented over a period of time. When the objective of a DFI ora project financed by it is to provide gainful employment to people,performance yardstick will be number of jobs created and per unitcost of their creation. When a DFIs objective is exports growth,performance of the DFI can be measured in terms of physicalquantum of exports it enabled. It may not necessarily be on the ba-sis of exports in terms of money which has ado with a host of fac-

tors including fluctuation in cost of goods for export at home, parityof thehome currency vis. a vis. importingcountry, terms of creditorsettlement of the transactions etc.

If a DFI earns a profit in monetary units, it is subsidiary or fall out ofits main activities, a secondary achievement. Rewards or repri-mands to managers and other functionaries of the DFI have to bein relation with their success stories in the sphere assigned to theinstitution these peopleare on thepayroll of.Performanceparame-ters laid down for a venture utilizing a DFIs assistance can beidentified differently viz. by way of foreign funds flow in case it is a

venture with the objective to mobilize foreign exchange.Need for balancing an industrial venture is when outputs of two ormore of its configurations are not symmetrical, not in harmony.What a component turns out for subsequent processing can notabsorbed by thenext line of production. This happens when itspro-duction capacity in the subsequent process is lower than process-ingcapacity of the machines in the earlier set-up. For example, ca-pacity of the finishing department at end of the processing pro-cesses, may be lower than of the fabricating department in theearlier process. It used to be a feature in cotton spinning unitswhere blow rooms, at beginning of production process could offerto produce more than what the ring frames by way of yarn couldturn out. Reverse canalso be thecase.Capacityof configuration atthe end can be more than capacity of machines in an earlier pro-

cess.Other things remaining the same, it is always considered incum-bent to put the things on an even keel by augmenting capacity ofthe configuration failing or lagging behind in the industries unit.This not only increases overall production. It eliminates the idle ca-pacitycosts. Elimination of or reductionin idle capacity,through re-duction in fixed cost per unit, culminates into reducing overall unitcost. Cost reduction leads to business strength, making the ven-ture more competitive - also by widening safety margin which inturn adds to marketing vigour of the enterprise, adding to their sol-ace. DFIs facilitate such balancing. They are keen to remove asubsisting dis-balancing particularly when the unit has earlieravailed their assistance.

Modernization goes to update an industrial plants technology.

Through shift in the production process or change in inputs or re-placement of existing machinery by another set modernizationgets underway.It helps improve the quality of output, decrease thecost of production, reduces intake of utilities or result in slash oflevies on production. At times a combination of these takes place.Modernization also covers, putting a device in place which adds tomarketing potential of the produce. Expansion causes augmentingor scaling-up production facilities in a way that overall output of theenterprise increases. This normally reduces per unit cost, increas-ing profit margin per unit produced as also overall profit of the en-terprise.


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Often balancing also gets going to modernize. Modernization in-creases overall production capacity.

A DFI evaluates projects submitted to it for accommodation. Pro-jects may also be conceived by a DFI. DFIs examination as such ismulti-dimensional. Broad categories of its tests, examination or ap-praisals are:

Technical. Economic & Marketing. Financial.

A project suitable for a DFI accommodation should be equippedwith wherewithal for production of the identified goods or services.Getting into its wherewithal would include suitability of the landwhere the project is located, appropriate plant and equipment to beused to attain the objective, tested formula for production togetherwith availability of other related infra structure, raw material andmanpower technical, skilled and non-skilled. Above all is the de-mand existing and which can be pushed into being for proposedproduction.

In relation to land for the project not only price, properties of thesoil, proximity of water, power and other utilities, availability of rawmaterial and avenues for the finished goods marketing are to belooked into. Not to be winked at is title available for the land and itspayment schedule. Land may be available as free hold or on 5, 25and on 99 years lease. Land may be available on spot cash basisand in installments payable upto a period of 20 years. These fac-tors cast shadows on decisions relating to choice of land for a proj-ect. Financiers have a minute look on these points which go to de-termine bank-ability or otherwise of the project. Financiers may notbe moved to touch a project with a five years lease period, if repay-ment of their credits etc. is not assured well ahead of expiry of thefive years period. A highly startling observation was made after theFukosheema debacle in Japan. It was stated that a nuclear plantshould not be set-up around seismic soil. The finding is highly in-

triguing when one is told that almost entire Japan is seismic.Before getting into this rigmarole, the entrepreneur should be cer-tain also on the quality of production desired and planned. Class ofcustomers projected to be catered and the potential demand isgone into. This would take to size of the project and then the re-sources to be mustered and which can be mustered. Texts on proj-ect appraisal do not normally lay much emphasis on muscle powerof the entrepreneur in the matte of mustering resources. Probablywith proven viability of a project, financing is not an issue in theworld these texts are produced in. But certainly it is in our scenario.In our culture, contacts, financial, political and bureaucratic link-ages, this or that clubs membership and pedigree of the entrepre-neur have more ado with ones musing and with muscle contract-ing and expansion of arm. It would be too theoretical to believe that

things may be done abstract or so to say only in a text book style professional way. This scribes finding is that in the matter of fi-nances things move same way everywhere.

Technical experts on the roll of DFIs not only go into capacity andefficiency etc. of plant and equipment proposed for production ofthe desired product. On the basis of their training and exposureotherwise it is usual for them to suggest that instead of going for ac-quisition of a composite plant offered and proposed by sponsors ofthe project, a proposed textile spinning unit should go for blowroom machinery from X, ring frames from Y and air-conditioningequipment from Z. It may be concluded that in place of a composite

plant offered from the shelf some other combination of the plantcan be more effective, cost wise or productivity-wise or both. Amodest example of this can be had by visit to Shahrah-e-Liaqat ofKarachi. Often machinery dealers suggest to a prospective cus-tomer that to lift water from the underground to the overhead tank,instead of buying electric motor and its pump of the same mark

more advisable would be to have a configuration of electric motorproduced by A and pump fabricated by B.

There may be numerous ways / standards to express what qualityproduct would mean in relation to production of goods through aset of machines. Price of the machine at one time would be deter-minant. At other juncture, promoters of the projects may becharmed by availability of financing for local machinery at betterterms viz. a viz. the foreign machinery. Obviously, a visionary en-trepreneur does not line with craze for the best, in disregard of theantecedents. An industrialist friend of this scribe did not believe intop quality production. He shunned both low quality and high qual-ity biscuits. He believed that his customers would mainly be aver-age Pakistanis, content with middle of the road quality and price ofthe biscuits.

Accordingly, finalized was list of machinery consisting configura-tions from sources in and out of the country, much cheaper and yet

competitive than the compact plants quoted by foreign suppliers.The DFI which helped setting-up this project had brilliant ideas onselection of machinery, which led to substitution of a goodsnumber of foreign machines included in proforma invoices of for-eign suppliers by local machinery. Thus on the hand it went into atechnically more viable plant. Reduction in depreciation and inter-est costs enabled substantial lowering of the operational and finan-cial costs. It was other side of the story. Through reduction in costof the project and diminution in debt servicing these lowered break-even point and upped safety margin of the enterprise. Reduction infinancial vulnerability this way, provided boost to the ventures fi-nancial and marketing strength. Advantage to the nation was alsoby way of saving in foreign exchange. Dollar tagged around Rs.4.80 was badly scarce. One can only imagine adversities to busi-

ness in the event of non-servicing the debt in foreign currencywhile dollar marched forward against the home currency. Youearned in local currency but had to repay in foreign currency be-cause the loan amount was expressed in foreign currency.

An interesting case was of a group desirous of setting-up a cementplant. For the DFI requested to finance, foreign exchange compo-nent of the project was formidable. No one at that time had eventhought of (substantial) local fabrication of a cement plant. Therelevant DFI consulted the then well known appropriate technol-ogy guru, Ghulam Kibria. Plant designers as also fabricators, atLawrence Road in Karachi and Brandreth Road in Lahore, were


The DFI which helped setting-up this project h

brilliant ideas on selection of machinery, whic

substitution of a goods number of foreign mac

included in proforma invoices of foreign supp

local machinery.


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The Behavioral Aspects

of Internal Audit

By Abdul Wasey Khan,ACMA, CISA

Performing In-ternal Audit isa thankless job,and it would re-main so unless ittakes at least a180 degree turnfrom its current

purpose; who wants to be found fault with &still say thank you?

It certainly requires something more than sanity to say theleast.

For ease of understanding of the readers, the article has beendivided into two parts; 1st part describes the importance/ne-cessity of the behavioral aspect and understanding the charac-teristics of the auditee department officials. The 2nd part de-scribes the desired behavioral qualities and traits the Internal

Auditor should possess.

The Auditee Mindset

It is the duty of the internal auditor to check the controls identifymissing controls and report inefficiencies; whether he reports it

specifically or not, there is always someone to be blamed,someone who is found negligent, someone who couldnt iden-tify the risks, and someone who couldnt think out of the box.Well well, and though the intensity of the action taken by highups varies from company to company but it mostly results inreprimands,show cause,no salary raise,bar on promotion, de-motion, charge sheet, suspension or even lay off; Whew! Nowonder the entry of the internal auditor in other departments istakenas akin to vampire on theprowl,though lately the role ofeven vampires have taken a glamorized turn, and suddenly weare finding ourselves looking at such vampires who are morehumane and handsome than most of us, thanks to westernmovies on that subject;

Like salesand marketing the internal audit hasa behavioral as-pect too, it performs various tasks across the organization. Theauditor has to deal with the auditee department people particu-larly at 4 stages of audit

1. At the Kick off meeting, while discussing the brief scopeand objectives of the assignment and getting himself intro-duced

2. During process of audit, while asking for documents andinformation required to be worked upon

3. While querying and seeking explanations from theauditee about the exceptions identified to confirm his un-derstanding and thus elevating the exceptions to the nextlevel i.e. observations

4. When discussing the observations with the managementof auditee department and seeking their response beforefinalizing the report for the audit committee

To get required information and records from the auditee, in atimely manner, is in itself an uphill task, that leaves many audi-tors gasping for air like a worn out marathon racer. Gettingagreed the identified loopholes pose the biggest challenge ofall. It is pertinent that the internal auditor must have a clear un-derstanding of the behavior and the demeanor required of him,as well as understands the personality traits of the auditee per-sonnel so that he may perform his work with minimal frictionand complete the assigned task without unwarranted negativesentiments from either side.

The people in a department theInternal auditor goes to mayfallinto characteristically 4 broad categories

The Chums The Wise Ass

The Busy Bee; and

The Devil May Care

Moreover you could also find people having a blend of two ormore of the above mentioned categories, which makes the mat-ter more complicated than it already is.

An elaboration of the above categories is interesting.

The Chums: Got variants, from lighter shade, i.e. sincerelyfriendly & caring looking to the darker shade who make the

auditor feel like the newly throned king who just have returnedfrom a long exile to his rightful kingdom. These are the most in-

teresting characters who try to do almost every bidding of the

auditors and seem to hang on to his every word. Remember

these are the most insecure people, who fear that the auditor

may gethold of something at the endof the daythatmay render

them incapable to come up with proper and satisfactory justifi-

cations; so they try to taint the neutral and objective mindset of

the auditor and impact his professional skepticism.

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The auditor must understand that he has only one true friend inthe sanctuary of the auditee department and that is his own self.

The Wise Ass: are the exact opposite of the chums. They try tobreak the composure & concentration of the auditor by their irri-tating behavior.

Some of them are outrageously bullying. They try to exasperatethe hell out of the auditor so that he may lose his cool and overreact. Its a ploy to turn the tables down on him by reporting tomanagement the quarrel or the heated argument they try todrag the auditor through.

Some of them try to out- smart the auditor. When asked a ques-tion, they answer in such a manner as if the auditor had raised afoolish or childish query, hoping that the auditor gets irritatedand begins to question his own judgment and stops askingmore questions.

An auditor may also find himself in a scene where he is advised,that whatever he is doing is inconsequential and pure waste oftime. Further he is pursuing petty things while the big, juicy mat-ters that should be audited are elsewhere (some other depart-ment). Once in my career such a guy approached me and toldme of a particular assignment that the audit department shoulddo to add value to its work. The assignment he referred to wasnot only beyond the scope of Internal Audit but also hilariouslyimpossible, so what I did? While maintaining a blank face I ap-preciated his concern and asked him innocently if I could men-tion that assignment to my HOD quoting his name? He immedi-ately backed out!.

Remember these are the most dangerous people and shouldbe dealt with extreme caution and care.

The Busy Beee: They are always found going through deadlinesand pressures. Always in haste, papers and files strewn all overtheir desk, one hand on the mouse while the other throughgraying hairs, they try to act friendly, but at the same time keepon narrating their problems. They try to divert the auditor oneladder down or two ladders up! Though they have tried to borethe auditor for hours with the tales of their high blood pressureor sugar, yet seldom provide him with even five minutes to re-spond to some query.

The Devil may caree: They pride themselves by acting noncha-lantly trying to ignore the auditor as much as they can. Theyconsciously try to take no notice of the waves he has created,when the auditor goes to them to ask for some document or in-formation, they deliberately get unavailable, mostly these peo-ple are at a position higher than the auditor, these are verytough people to deal with, it is to be taken notice that such peo-ple are either

(a) Not get affected by the audit findings; because

They are not directly concerned with the subject matter ofthe audit

Are considered the blue eyed boy of the management &thus indispensable

Are at the end of their career

(b) Or they fake it

The best way to get the desired information from them is by be-ing friendly and polite and to create some kind of connection, tomake them feel it is to their benefit. Success is not guaranteed!

Audi ors Composure

Though pointing out behavioral deficiencies and putting peopleinto pre-determined slots and terming them from Wise Ass toDevil May Care is easy, to calibrate ones own attitude andlooking for and adapting to the behavioral norms suitable for theInternal Auditor is like untying the Gordian knot and is the mainpurpose of this article.

Once a close friend told me about a bank (his father used to

work there), where IA executives opted for golden handshake,75% of them died within 3 years, unbelievable? Reason ex-plained was that they were treated like VIPs at the bank, whenthey retired nobody was ready to provide them with that dose offlattering words. The attitude at home and of ex-colleagues tooka noticeably reverse turn. It was something shocking. They gotdejected bringing death nearness. I intend here to suggestsome useful tips that could be of some help to internal auditorsto save them from heartache, minimize their office friction, andthus enable them to develop some respect and motivation inthe organization they work for.

Be cour eous and friendly but not chummy It is best for theinternal auditor to have a courteous and friendly attitude but

getting chummy with the auditee is something they should re-frain from; IA profession requires the auditor to carry on hiswork with integrity, honesty and objectivity. He needs to work allthe time keeping professional skepticism, and use his profes-sional judgment; whenever an assignment is completed hemay produce observations that go against the people he gotclose to during the course of his audit. Such situation brings theauditor at cross roads; either to keep his friendship intact andsay farewell to all integrity and honesty blah blah crap, or main-tain upright professional behavior and report all deficiencies.However he should always re member that he is paid by thecompany for professional output. It is not fair to try to cover per-sonal interest at the cost of company interest.

Taking favors from auditee they so solicitously offer does alsocreate problems for the auditor. Remember the old adagethere is no free lunch, though such favors in reality may ex-tend far from mere free lunches. It is obvious that if you take fa-vors you would have to return favors, and if you refuse to returnfavors, there would be grievances. The auditees while extend-ing such favors validate their actions by stating it as custom andhospitality. May be some of them really mean it that way only,but it is not easy to distinguish between an honest offer and acrooked one in advance.

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What internal auditor must fathom is that he is not the externalauditor. Though from a different department, he is part of thesame organization. So people who got chummy or shower fa-vors will sure shout foul when reported against.

Be a good lis ener to listen to the comments and justifications

provided by the auditee as well getting a thorough understand-ing of the process requires both; a good pair of ears and a sen-sible head over the shoulders. It must be noted that good listen-ing doesnt mean only listening and comprehending abilities,but also making meaningful interruptions and intelligent queriesabout the subject matter, to keep the discussion on track and beguided to the next level. Misplaced interruptions can be timeconsuming, leading discussion to trivial matters, and can puthalt to an otherwise meaningful discussion. While making en-quiries the auditors tone should be friendly and polite. He mustunderstand that he is not one of the fibbies (FBI people) in hisprofession undue rigidity is a crime. He must accept seeminglyreasonable justifications for further review and maintain anopen mind. It is an art to go with the flow of discussion while fullydigesting and querying the new dimensions unfolded during thecourse of conversation.

An acquaintance of mine once confided that he tries to answeras succinctly as possible in front of a certain senior official ofaudit department, because he has seen that any wrong or care-lessly uttered statement leads to opening of a new Pandorabox.

Main ain a calm impersonal composure an auditor mustnot get excited at every juncture. People try to get him off-balance all the time to have some escape. He should strive notto get exasperated ever, or express negative emotions andcomment for others. Such utterances could take a personal di-

mension which is something to avoid at any cost. Though hav-ing a non nonsense attitude is good, during the course of hiswork the auditor may have to put up with lots of irrelevant talk.Maintaining an impersonal attitude always helps the auditor incarrying his work peacefully while he strives diligently toachieve the objectives of his assignment. When confrontedwith someone getting annoyed with his queries or demands fordocuments evidencing transactions, the IA must clarify thatwhat he is doing is all professional and there is nothing personalin it. He is doing what his job responsibilities require of him justas the auditee is doing what his job requires of him, and thatboth of them are performing in the best interest of the companyas a whole. The auditor must not be shy to appreciate the good

work done by the auditee both verbally and in his report.Main ain a Low pro i le Though being in lime light and some-one to be talked about or feared seems a definite ego-boosterand something some people crave for, such attributes couldharm the auditor in the long run.

When I was in the early stages of my career, a senior advisedme thus always keep a low profile. Say you are doing what youare told, you have no say in the proceedings and you dontknow and cant say how the matter would be reported at the endas you are just an ordinary audit official. On face these words

may seem lowering your self esteem (Mein tay Mali Aan), butas per my experience it is the wisest thing to do. An auditor ifworks diligently cannot expect to gain sincere well wishers. Thecolleagues accuse that the auditor is marauding their career foradding stars to his own shoulders. To avoid becoming the vic-tim of any such negative behavior the auditor should refrain

from publicity and should not drum his achievements in generalpublic.

Main ain a just behav or To do justice with his work, his as-signment and his subject matter is a must for internal auditor.What I intend here to point out is the behavioral aspect of jus-tice, which is justice with people. As already described earlier inthe article the auditor should maintain an impersonal attitude.

An auditor may find people related with the subject matter of hisaudit begin to dislike him, it gets reflected in their negative andirritating attitude, their creating hurdles in the performance ofhis work etc. the matter becomes more complicated when dis-likes get exhibited out of office too.

The auditor should realize that his position is of justice, neithershould he favor anyone nor unjustly victimize. His observationsshould be based on facts and while elaborating facts, the fore-most aspect is the merit of the matter; his biased commentsmay harm someone who is not at fault. The auditor himself isthe best judge of his own biased views. The auditor shouldnt lethis behavioral deficiencies taint his professional attitude and

judgment thus. Remember that integrity involves maintainingan unbiased attitude, whether the bias goes for or against theauditee.

A biased auditor is like a stray bullet which is as dangerous tothe reputation of his own department as for others.

Be Tact ul Tactfulness is the primary and one of the most use-ful weapons of the auditor. Among other things, the successfulcompletion of an assignment requires a healthy dose of tactful-ness. Tactfulness involves judging people right, have a knowl-edge how to deal with people having different personalities, andmake them implement auditors recommendations. To get therequired information, documents, soliciting replies from theauditee and to get them agree to the audit findings are the mainareas where tactfulness is required. However, remember thattactfulness is something other than hypocrisy, making falseclaims, or raising wrong hopes.

Conclusion

In the literature on Internal audit, the behavioral aspect in foundlacking or non existent. However good and competent andwell equipped the internal audit knowledge of an auditor maybe, behavioral problems may render him ineffective and a bur-den on his department. This article is a humble reminder and awakeup call to those who are more knowledgeable, have moreexperience, have more insight to the human behavior and thusbetter suited to the task, to step forward and contribute in thisneglected area where their en deavor could benefit thousandsof internal auditors performing their work around the globe

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European Social Welfare State A Dream World or Time Bomb

Inside Analysis and Alternative for Muslim Countries

By Muhammad Shahid Siddique, ACMAAccountant, PPL

It is human nature that he/she cannot live alone and alwaysdevelops relationships to fulfill material and immaterialneeds. To manage their needs state plays a very vital role.Western countries which are being managed under a capitalistsystem have implemented Social Security System to fulfillmedical and retirement issues. Now a days Muslims living inunder developed countries are very much impressed with

man-made social security system implemented by westerncountries like USA, Canada, England etc. To digout the insideof the social security system, we will explain the system in fourstages which is implemented in USA;

In 1st stage we will discuss how deficits shift from one gen-eration to 2nd generation and so on and its economicmeasurement.

In 2nd stage Generation imbalance and it impact on futuregenerations

In 3rd stage way out suggested by Economists and it possi-bility to achieve

In 4th and final stage solution given by Islam.

Stage - 1

Generational Effects of Fiscal Policy

Is a budget deficit a burden on future generations? If it is, howwill the burden be borne? And is the budget deficit the only bur-den on future generations? What about the deficit in the SocialSecurity funds? Does it matter who owns the bonds that thegovernment sells to finance its deficit? What about the bondsowned by foreigners? Wont repaying those bonds impose abigger burden than repaying bonds owned by Americans?

To answer these questions, we use the tool called genera-tional accounting an accounting system that measures the

lifetime tax burden and benefits of each generation. This ac-counting system was developed by Alan Auerbach of the Uni-versity of Pennsylvaniaand Laurence Kotlikoff of BostonIniver-sity. Generational accounts for the United States have beenprepared by Jagadeesh Gokhale of Federal Reserve Bank ofClevelandand Kent Smetters of theUniversity of Pennsylvania.

Generational Accounting and Present Value

Income taxes and social security taxes are paid by people whohave jobs. Social security benefits are paid to them after they

retire. So to compare taxes and benefits, we must compare thevalue of taxes paid by people during their working years withbenefits received in their retirement years. To compare thevalue of an amount of money at one date with that at the laterdate, we use the concept ofpresent value.A present value is anamount of money that, if invested today, will grow to equal agiven futureamount when theinterest that it earns is taken onto

account. We can compare dollars today with dollars in 2030 orany other future year by using present values.

Forexample, if theinterest rate is 5% a year, $1000 invested to-day will grow, with interest, to $11,467 after 50 years. So thepresent value (in 2056) of $11,467 in 2006 is $1000.

By using present value, we can assess the magnitude of thegovernments debts to older Americans in the form of pensionsand medical benefits.

But the assumed interest rate and growth rate of taxes andbenefits critically influence the answer we get. For example, atan interest rate of 3% per year, the present value (in 2006) of$11,467 in 2056 is $2,616 (=11,467/(1.03)^50). The lower the in-terest rate, the greater the present value of given futureamount.

Because there is uncertainty about the proper interest rate touse to calculate present values, plausible alternative numbersare used to estimate a range of present value.

Using generational accounting and present value, economisthave studied the situation facing government arising from itssocial security obligation.

2nd Stage

The social welfare time bomb

US case hasbeen presentedto analyze thesituation. When se-curity was introduced in New deal of the 1930s, todays demo-graphic situation was not envisaged. The agedistribution of theU.S. population today is dominatedby thesurge in thebirth rateafter World War II that created what is called the baby boomgeneration. There are 77 million baby boomers.


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In 2008, the first baby boomers have started collecting socialsecurity and in 2011, they will become eligible for Medicarebenefits. By 2030, all the baby boomers will have retired and,compared to 2006, the population supported by social securitywill have doubled.

Under the existing social security laws, the federal governmenthas an obligation to these citizens to pay pensions and Medi-care benefits on an already declared scale. These obligationsare a debt owed by the government and are just as real as thebonds that government issues to finance its current budget defi-cit.

To assess the full extent of governments obligations, econo-mist uses the concept of fiscal imbalance. Fiscal imbalancee isthe present value of the governments commitments to paybenefits minus the present value of its tax revenue. Fiscal im-balance is an attempt to measure the scale of the governmentstrue liabilities.

Gokhale and Smetters estimated that the fiscal imbalance was$45 trillion in 2003. (using alternative assumptions about inter-est rates and growth rates, the number might be as low $29 tril-lion or as high as $65 trillion). To pay the $45 trillion in perspec-tive, note that U.S. GDP in 2003 was $11 trillion. So the fiscalimbalance was 4 times the values the value of one years pro-duction (Refer CFA Economics 2009 Level-1).

3

rd

Stage

How can the federal government meet its social security obliga-tions? Gokhale and Smetters consider four alternative fiscalpolicy changes that might be made:

Raise income taxes

Raise social security taxes

Cut social security benefits

Cut federal government discretionary spending

They estimated that starting in 2003 and making only one ofthese changes, income taxes would need to be raised by 69percent, or social security taxes raised by 95 percent, or socialsecurity benefits cut by 56 percent. Even if the governmentstopped all its discretionary spending, including that on nationaldefense, it would not be able to pay its bills.

Of course, by combining the four measures, the pain from eachcould be lessened. But the pain would still be severe. Andworse, delay makes all these numbers rise. With no action, fis-cal imbalance climbs from $45 trillion of 2003 to $54 trillion in2008.

Genera ional imbalance

A fiscal imbalance must eventually be corrected and when it is,people either pay higher taxes or receive lower benefits. Theconcept of generational imbalance tells us who will pay. Gen-

erational imbalance is the division of fiscal imbalance betweenthe current and future generations, assuming that the currentgeneration will enjoy the existing levels of taxes and benefits.

Major source of the imbalances is Medicare. Social securitypension benefits create a fiscal imbalance, but these benefits

will be more than fully paid by the current generation. But thecurrent generation will pay less than 50 percent of its Medicarecosts, and the balance will fall on future generations. If we sumall the items, the current generation will pay 43 percent and fu-ture generations will pay 57 percent of fiscal imbalance.

Because the estimated fiscal imbalance is so large it is not pos-sible to predict how it will be resolved. But we can predict thatthe outcome will involve both lower benefits and higher taxes.One of these taxes could be inflation tax paying bills with newmoney and creating inflation. But the Govt always resist infla-tion being used to deal with imbalance.

4

th

Stage (Final)

From the above discussion it is concluded that there is only oneway out i.e creation of new money at the cost of in flation. Butthis solution will give nominal currency to the baby boomers notthe purchasing power.

Now the time has come when we have to change our thinkingparadigm which has been constructed under the capitalismframe work. We cannot solve above problem with quantitativenumbers (money creation), we have to change the basic char-acteristic of society which at present has been developed withcapitalist epistemology. In civil society every member havingself interestedness behavior, so he/she bear the cost based onwhat he/she will get in future (old age) after NPV analysis. A self

interestedness behavior in civil society never developed a jointfamily system (Khandan), therefore, in civil society every per-son treated like UNIT. In civil society state has to develop a so-cial security system to fulfill the needs of UNIT.

To solve this issue we (Muslims) have to develop the societywith the characteristic of Slavery to God rather than Freedom.When we talk about slavery to God means construction of a so-ciety based on principles on which Prophet Muhammad (PBU)developed a society in 600th century and it lived till upto the 19th

century. Principles on which society was developed:

1) Objectiveobedience Abdiat - accountable for his actionsin front of God

2) Companionship and wel-being. Relationship are built forthe pleasure of God, not for any social or economic bene-fits

3) Patience and thankfulness.

4) Self-annihilation, Qanat and Fana.

In Islamic society, built on above principles, there is noneed for Generational Accounting because present gen-eration has no need to invest today for future days. It can be



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explained with the following dis-cussion. Note that we will discussEconomic aspect only.

Islam developed a relationshipbetween Man and women through

Nikah (Marriage) Then Husband is economically re-

sponsible to take care of the wife.

If there are children than hus-band/father is economically re-sponsible to take care of his wifeand children. Father has to spendall his energies for upbringing anddeveloping its children life as perprophet ruling (sharia).

Family which started with two be-come Khandan (Brothers, sistersand - - - - )

From 1stgeneration process, one may thing that what will hap-pen when father and mother become old and having no eco-nomic resource. The answer is very simple given by Quran andSinnah

Kind with your parents Quran

Jannat is below the feet of mother

Gods consent is revealed behind the fathers concent

It is unanimous interpretation of above quotes that sons are(daughters to some extent) economically and socially responsi-

ble for their parents. In this process 2nd

generation automati-cally become responsible for 1stgeneration with minimum stateintervention.

Remember, parents are assets (to get Jannat) rather than liabil-ity in contrast to western capitalist society where parents are li-abilty.

From above Islamic society frame work one might ask somebasic questions;

a) person has only daughters

b) person has disobedient sons

c) person has no children

The success of a system depends upon its ability to provide so-lution to every economic / non-economic issue. Islam solvesthe above issues through the Mirath (inheritance) under the Is-lamic System. From the table we can understand how a strongfamily (Khandan) structure has been developed and practicedin Islamic Society. Islam negates self interestedness and devel-ops a society in which economic responsibilities among differ-ent levels are in reciprocal basis, means heirs are held respon-sible if deceaseds family failed to maintain economically. Fi-

nally in Islamic society the fundamental principle among rela-tionship is For the pleasure of Godd rather than self interest-edness. Following major characteristics of Islamic society are:

1. Should like for others as one like for oneself.

2. Do not tease each other by act and word

3. Deal with kindness and donot be proud

4. Do not back bite

5. Must resolve misunderstanding / quarrel

6. be kind and provide social and economic help whateverone can

7. When go for meeting, always get permission

8. Always be courteous and deal in accordance to mentalabilities

9. Respect elders and kind with children

10. Fulfill promises

11. Always problem solver among Muslims

12. Do not expose Muslims weaknesses

13. Do not blame each others

14. Always supportive to Muslims15. Whenever meet Muslim say Assalamu Alaikum

16. Respect and protect each Muslims life, wealth and status.

One should remember while performing the above activitiesthat purpose must be only fo r the Pleasure God.

God knows better


Table 1 ((Terms are in Arabic)

S. Prior ty in Dis ribu ion Included

1 Ashabul Faraeez Mentioned in Quran Father, Mother, Husband, Wife, Daughters,sons, brothers, sisters, Grand relations

2 Asbiaat Based on close relationship with deceasedperson after considering 1st

3 Muatiqu Related to Slaves

4 Alrudo Ala Zavil faroodi Ghairiz Zojain Distribution to 1st after wife or husband

5 Zavil Arham Maternal relationships

6 Moulal Mawalat Deep friendship with responsibility of Loss

7 Al Mukralaho Binnusbi Aalul Ghair Deceased has admitted relationship with aperson

8 Al-Mosalaho bima Zada aalus solosa Will (1/3) has been declared for a person

9 Baitul Mal Goes to State if no

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