Baker Tilly International has been named the winner of the prestigious Network of the Year Award at The Accountant & International Accounting Bulletin (IAB) awards 2016.
The annual Accountant & International Accounting Bulletin (IAB) awards celebrate excellence in the accounting profession and bring together some of the most prominent people in the industry.
“The IAB Network of the Year is awarded to networks that have demonstrated the execution of profitable growth strategies during the past 12 months and have excelled in a number of key strategic and operational areas. They are also recognized by the industry as a reputable brand that consistently delivers high quality professional services.
Commenting on the award, Ted Verkade, CEO and President of Baker Tilly International, said: “I am exceptionally proud that the network has been recognized by IAB for our outstanding growth, our innovation and commitment to delivering excellent client service, and for being the first network to obtain the ACCA Approved Employer status award in professional development”.
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"There was a well fought battle in this category, and had it been an athletic race a photo finish would have been needed to determine the winner. The jurors commanded the close second, RSM, for their good growth and successful rebranding of the network. But Baker Tilly International took the prize for a well-rounded submission that discussed good growth, excellent client satisfaction scores, many employer awards showing focus on people and innovating globally with its one audit methodology and other tools.
Growth was reported in all four service lines - audit, accountancy, tax and consultancy – and Baker Tilly International was the first network to obtain ACCA Approved Employer status award in professional development. "
7 October 2016 by IAB and TA editorial
Click here to view the source
Wednesday, November 30, 2016
Tuesday, May 31, 2016
Growing Global Treaties for Automatic Exchange of Information (AEoI) to crack down Tax Evasion
In 2010, the first United States federal legislation called Foreign Account Tax Compliance Act (FATCA), was enacted to track the non-US bank accounts and investments (that belong to US persons or companies) outside the United States of America in order to ensure that they settle their tax liabilities.
To enforce such Act, the US government had to enter into intergovernmental agreements with world countries’ governments to put FATCA into force.
Pursuant to the Inter-Governmental Agreement (IGA) dated April 29, 2015 between the Government of the State of Kuwait and the Government of the United States of America, to improve international tax compliance and implement the Foreign Account Tax Compliance Act (FATCA), Kuwait Ministry of Finance issued the Ministerial Resolution No. 48 of 2015 dated September 3, 2015 regarding the preliminary guidelines for the implementation of FATCA requirements in the State of Kuwait.
Under such resolution, all financial institutions operating in the State of Kuwait are required to pay due attention in reviewing and identifying the financial accounts belonging to US persons. They should then communicate such information relating to such accounts to the State of Kuwait Ministry of Finance, who, in turn, shall transmit such information to the USA Internal Revenue Service (IRS).
Organization for Economic Co-operation and Development (OECD) adopts the Standard for Automatic Exchange of Information in Tax Matters
On the other hand, the Standard for Automatic Exchange of Financial Account Information, developed by the OECD under mandate from G20, was released in 2014. It represents the international consensus on automatic exchange of financial account information for tax purposes and enables the countries committed to implement the Standard to identify their citizens and companies operating overseas and thus, enable them to collect the due taxes. On May 9, 2016, OECD announced that 101 jurisdictions are now committed to the Standard for Automatic Exchange of Financial Account Information to fight tax evasion. OECD, headquartered in Paris, expects that exchange of such information would commence in September 2010.
It is worth mentioning that 55 countries announced early adoption of the Standard, i.e. by the end of 2017 while 46 countries announced their commitment to implement the Standard in 2018 including Kingdom of Saudi Arabia, State of Kuwait, United Arab Emirate, Qatar, Kingdom of Bahrain and Lebanon.
Global Financial Crisis Pressures
Under the pressures of the 2009 global financial crisis, endeavors for fighting tax evasion and finding common rules gained momentum. Public and central banks needed more funds as a result of significant increase in their liabilities due to high costs of bank bailout programs intended to support banks that were facing bankruptcy or collapse. However, with European Union issuing a blacklist of non-cooperative jurisdictions, European jurisdictions such as Andorra, Liechtenstein and Monaco, which were considered as tax havens, had to ease their strict bank secrecy.
End of banking secrecy?
On October 29, 2014, 51 countries gave up banking secrecy by signing pact in this regard called Multilateral Competent Authority Agreement as per OECD standards. Although about 100 countries did not sign such Agreement, they announced their endorsement and support to the measures set forth in the Agreement. It noteworthy that Switzerland, Liechtenstein, Singapore, Caribbean countries signed the Agreement although they are deemed as important financial hubs viewed as tax havens and homes to shell companies.
Panama, like USA, did not completely accept OECD standards since Panama is the home to many shell companies just like certain states in USA including Nevada. Pursuant to the aforesaid Agreement, the signatory states are committed to exchange information and data about natural persons holding and operating bank accounts in jurisdictions other than their home countries. Through automatic exchange of information and data, it will be easier to monitor outbound financial flows and minimize frauds and tax evasions.
According to such Agreement, banks and financial institutions are required to provide competent authorities in their countries with information they have about interests, profits, balances and proceeds generated from sale of financial assets when the beneficiary is resident outside their home country. Furthermore, the Agreement regulates the practices and rules for exchange of information and each party’s rights and obligations. However, such new rules contained in the Agreement shall apply to bank accounts opened starting from 2016. Effective from September 2017, the countries can exchange information among each other.
Bridging Tax Gaps
In the meantime, major industrialized countries developed a plan to bridge tax gaps, which are utilized by giant multinational or transcontinental companies such Google, Amazon and other major worldwide businesses.
In the G20 summit held last year in Antalya, Turkey with participation by major industrialized and emerging countries, an action plan was adopted to fight tax evasions and bridge gaps exploited by multinational companies. It requires a company to prepare a tax report on annual basis based on the reports of its branches operating in various countries by senior management of the company in the country where its head office is located. Such report can be automatically accessed by tax administrations in the respective countries but with no permission to release it. Companies required to prepare such report are those having branches in other jurisdictions and their annual business turnover exceeds Euro 750 million.
Consequences of Growing Global Agreements for Exchange of Financial Information
In light of the increasingly growing requirements for tax related financial information to be provided by financial institutions, the financial institutions would have to create tax officer position within their organizational structure to ensure that their tax requirements are managed effectively and efficiently. This will require developing internal systems to enable timely response and create secure automatic databases.
To enforce such Act, the US government had to enter into intergovernmental agreements with world countries’ governments to put FATCA into force.
Pursuant to the Inter-Governmental Agreement (IGA) dated April 29, 2015 between the Government of the State of Kuwait and the Government of the United States of America, to improve international tax compliance and implement the Foreign Account Tax Compliance Act (FATCA), Kuwait Ministry of Finance issued the Ministerial Resolution No. 48 of 2015 dated September 3, 2015 regarding the preliminary guidelines for the implementation of FATCA requirements in the State of Kuwait.
Under such resolution, all financial institutions operating in the State of Kuwait are required to pay due attention in reviewing and identifying the financial accounts belonging to US persons. They should then communicate such information relating to such accounts to the State of Kuwait Ministry of Finance, who, in turn, shall transmit such information to the USA Internal Revenue Service (IRS).
Organization for Economic Co-operation and Development (OECD) adopts the Standard for Automatic Exchange of Information in Tax Matters
On the other hand, the Standard for Automatic Exchange of Financial Account Information, developed by the OECD under mandate from G20, was released in 2014. It represents the international consensus on automatic exchange of financial account information for tax purposes and enables the countries committed to implement the Standard to identify their citizens and companies operating overseas and thus, enable them to collect the due taxes. On May 9, 2016, OECD announced that 101 jurisdictions are now committed to the Standard for Automatic Exchange of Financial Account Information to fight tax evasion. OECD, headquartered in Paris, expects that exchange of such information would commence in September 2010.
It is worth mentioning that 55 countries announced early adoption of the Standard, i.e. by the end of 2017 while 46 countries announced their commitment to implement the Standard in 2018 including Kingdom of Saudi Arabia, State of Kuwait, United Arab Emirate, Qatar, Kingdom of Bahrain and Lebanon.
Global Financial Crisis Pressures
Under the pressures of the 2009 global financial crisis, endeavors for fighting tax evasion and finding common rules gained momentum. Public and central banks needed more funds as a result of significant increase in their liabilities due to high costs of bank bailout programs intended to support banks that were facing bankruptcy or collapse. However, with European Union issuing a blacklist of non-cooperative jurisdictions, European jurisdictions such as Andorra, Liechtenstein and Monaco, which were considered as tax havens, had to ease their strict bank secrecy.
End of banking secrecy?
On October 29, 2014, 51 countries gave up banking secrecy by signing pact in this regard called Multilateral Competent Authority Agreement as per OECD standards. Although about 100 countries did not sign such Agreement, they announced their endorsement and support to the measures set forth in the Agreement. It noteworthy that Switzerland, Liechtenstein, Singapore, Caribbean countries signed the Agreement although they are deemed as important financial hubs viewed as tax havens and homes to shell companies.
Panama, like USA, did not completely accept OECD standards since Panama is the home to many shell companies just like certain states in USA including Nevada. Pursuant to the aforesaid Agreement, the signatory states are committed to exchange information and data about natural persons holding and operating bank accounts in jurisdictions other than their home countries. Through automatic exchange of information and data, it will be easier to monitor outbound financial flows and minimize frauds and tax evasions.
According to such Agreement, banks and financial institutions are required to provide competent authorities in their countries with information they have about interests, profits, balances and proceeds generated from sale of financial assets when the beneficiary is resident outside their home country. Furthermore, the Agreement regulates the practices and rules for exchange of information and each party’s rights and obligations. However, such new rules contained in the Agreement shall apply to bank accounts opened starting from 2016. Effective from September 2017, the countries can exchange information among each other.
Bridging Tax Gaps
In the meantime, major industrialized countries developed a plan to bridge tax gaps, which are utilized by giant multinational or transcontinental companies such Google, Amazon and other major worldwide businesses.
In the G20 summit held last year in Antalya, Turkey with participation by major industrialized and emerging countries, an action plan was adopted to fight tax evasions and bridge gaps exploited by multinational companies. It requires a company to prepare a tax report on annual basis based on the reports of its branches operating in various countries by senior management of the company in the country where its head office is located. Such report can be automatically accessed by tax administrations in the respective countries but with no permission to release it. Companies required to prepare such report are those having branches in other jurisdictions and their annual business turnover exceeds Euro 750 million.
Consequences of Growing Global Agreements for Exchange of Financial Information
In light of the increasingly growing requirements for tax related financial information to be provided by financial institutions, the financial institutions would have to create tax officer position within their organizational structure to ensure that their tax requirements are managed effectively and efficiently. This will require developing internal systems to enable timely response and create secure automatic databases.
Thursday, April 28, 2016
Internal Audit: Main Driver, Rather than Just a Defense Line, for Corporate Development
If a general question is raised to the top management and the board of directors about the role to be played by internal audit in the business entity. Surely, most of the responses will focus on being the defense line that protects the entity’s assets and detect weaknesses in internal control. However, such prevailing view of the internal audit is untrue, and requires further clarification by the professionals concerned with the profession of internal audit, thus reflecting the true role of internal audit, which became a major partner in moving forward with the top management towards upgrading the entity and assisting it to achieve its objectives. Moreover, the recent changes to the international professional framework for practicing the profession of internal audit confirm correctness of such trend, especially the principles adopted, making the internal audit prudential, initiative-oriented, and of future outlook, while supporting the development and improvement of the entity. Nevertheless, there are some contradicting matters that require us, as practitioners of internal audit, to be aware of.
Added Value or Corporate Protection?
Internal Audit is defined as “An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.” The definition clearly specifies two objectives of the internal audit: adding value to the organization, and improving its operations. The question is: Is adding value to the organization limited to identifying the control gaps and drawing recommendations to improve this situation, or does it extend to identifying the development areas of the organization, which require the auditor to be characterized by strategic thinking, prudence and foresight regarding the expected events that may affect future decision making, which may upgrade the organization’s performance? From another perspective, the Institute of Internal Auditors (IIA) developed a mission for internal audit: “Support and protect the organization by providing assurance, advice, and risk-based objective prudence to the stakeholders.” The mission may clearly conflict – to some extent – with the objective of internal audit, and the principles adopted, which necessitate that internal auditing should be prudential, initiative-oriented and of future outlook, as well as supporting and improving the organization.
Developing and Improving the Organization is Part of Internal Auditing Definition
Having a close look at the internal auditing definition, we also note that it has set a clear mission for internal auditing, relating to the improvement of the organization’s operations. The question is raised: is such definition limited to improving the operations by identifying the weaknesses in control, risk management and governance only, or improving all operations that exceed such scope? The objective of corporate governance is eventually to improve the performance. Further, one of the objectives of risk management is to manage and utilize corporate resources. Here, the question is raised: Do control assessment, risk management and corporate governance meet the principles adopted in relation to prudence, future outlook and corporate development and improvement?
Risk Management Requires Addressing both Risk and Opportunity
The Institute of Internal Auditors (IIA) defines the risk as the “Possible occurrence of an event that may have impact on achieving the organization’s objectives.” We are aware that risk management addresses the uncertain events, and that risk is often something causing damage. Uncertain events could be positive, providing the organization with opportunities. Hence, such events should be dealt with either as a risk or opportunity. Many internal audit departments build an audit plan based on risk assessment. However, such method ignores the opportunities, which constitute the core that can add value to the organization. On the other hand, if the audit programs prepared by auditors are assessed, we will notice that they are often free of a procedure relating to identifying the opportunities for improvement, whether administrative or financial. They also do not link between the audit objectives and the objectives of the organization, which indicates that the internal audit mission may not be consistent with the organization’s ambitions.
The Three Defense Lines Model: Why Defend while the Organization Needs to Move Forward?
Such contradictions may be aggravated when the three defense lines model stresses that internal audit is a third defense line, while ignoring the internal audit’s objective and the role indicated under the definition of internal auditing. Despite my personal reservation to the name of such model, as it is not a defense model, by a model to provide assurance that the work of the entities referred to in the second line is not limited to defending the organization, but extends to developing it. For example, under the second level reference was made to the functions relating to quality, of which the main task is to develop the organization, rather than defending and protecting it. So, is it reasonable to state that all parties to the model seek to defend the organization, without considering its future and development?
Changing the Culture is a Difficult Part that Requires Intellect and Awareness for the Profession Practitioners
At the outset of my career, I recall the first audit task I performed. Many auditors may share with me the same experience. I was asked to audit a work center. During the audit task it was my objective to write the largest number of observations relating to the weak controls and non-compliance with the work procedures. As my professional thinking developed, I became aware that compliance with the procedures is not an objective in itself. The procedures set out may not help achieve the objectives of the organization. During the audit tasks, I began to consider the necessity of compliance, and what procedures to follow for the development of this area. Years later, as another phase of thinking developed, it was essential to look at a higher level of procedures. Looking at the organization’s strategy and how far it has achieved its main objectives has been of greater impact for the top management, and involving in providing consulting with strategic dimension has been of much greater impact. Certainly, the forthcoming period exceeds this, as IIA, among the principles it adopted, has focused on the necessity that internal auditing be prudential, initiative-oriented, of future outlook, and that it should support the organization development.
The auditing culture formed by the top management depends on the content of reporting. If reports address adding value and developing the organization, internal auditing would become a strategic partner to the top management in leading the organization, rather than being an obstacle – that is the prevailing view of auditing – that hinders the management from moving forward. Moreover, internal auditors play a significant role in guiding the auditors and providing awareness to the top management of the role expected from internal auditing, in order to convert from defense to offense.
Standards Concerted with the New Internal Auditing Standards
Principles adopted by IIA include that internal auditing should be prudential, of future outlook, and support the organization. All of these require personal judgment and opinion. Meanwhile, standards on internal auditing, in their current form, do not help achieve the principles adopted. Furthermore, the standards require from the auditor to rely on sufficient, proper, relevant and useful information. This may hinder giving opinion. Here, I do not mean involvement in decision-making instead of the management, but to share their interests and expectations relating to the development of the organization and improving its performance by providing initiatives of strategic dimensions, rather than being limited to criticizing reports. The exciting point about this matter is that the draft amended version of the standards did not consider covering this part? Why?
Conclusion
At the end of this article, conservatives whose view is that internal auditing profession must remain unchanged may have an opinion contrary to mine. Expectations of the top management may play a major role in keeping such role unchanged. Meanwhile, those whose view is that the internal auditing profession is on the verge of a major change that may increase its importance to developing the organizations, may agree with me. Finally, these are ideas that raise several questions in a manner that requires us not to take any development to the professional framework for practicing the internal auditing as is, but consider its contents more deeply.
Article Author Mr. Ayman Abdelrahim (MQM,CIA,CCSA,CFE)
The author is interested of your participation by feedback and you can communicate him on his emailayman.abdelrahim@outlook.com
This Article published in the internal Audit Magazine that issued by Jordanian Internal Audit Association – March 2016
Added Value or Corporate Protection?
Internal Audit is defined as “An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.” The definition clearly specifies two objectives of the internal audit: adding value to the organization, and improving its operations. The question is: Is adding value to the organization limited to identifying the control gaps and drawing recommendations to improve this situation, or does it extend to identifying the development areas of the organization, which require the auditor to be characterized by strategic thinking, prudence and foresight regarding the expected events that may affect future decision making, which may upgrade the organization’s performance? From another perspective, the Institute of Internal Auditors (IIA) developed a mission for internal audit: “Support and protect the organization by providing assurance, advice, and risk-based objective prudence to the stakeholders.” The mission may clearly conflict – to some extent – with the objective of internal audit, and the principles adopted, which necessitate that internal auditing should be prudential, initiative-oriented and of future outlook, as well as supporting and improving the organization.
Developing and Improving the Organization is Part of Internal Auditing Definition
Having a close look at the internal auditing definition, we also note that it has set a clear mission for internal auditing, relating to the improvement of the organization’s operations. The question is raised: is such definition limited to improving the operations by identifying the weaknesses in control, risk management and governance only, or improving all operations that exceed such scope? The objective of corporate governance is eventually to improve the performance. Further, one of the objectives of risk management is to manage and utilize corporate resources. Here, the question is raised: Do control assessment, risk management and corporate governance meet the principles adopted in relation to prudence, future outlook and corporate development and improvement?
Risk Management Requires Addressing both Risk and Opportunity
The Institute of Internal Auditors (IIA) defines the risk as the “Possible occurrence of an event that may have impact on achieving the organization’s objectives.” We are aware that risk management addresses the uncertain events, and that risk is often something causing damage. Uncertain events could be positive, providing the organization with opportunities. Hence, such events should be dealt with either as a risk or opportunity. Many internal audit departments build an audit plan based on risk assessment. However, such method ignores the opportunities, which constitute the core that can add value to the organization. On the other hand, if the audit programs prepared by auditors are assessed, we will notice that they are often free of a procedure relating to identifying the opportunities for improvement, whether administrative or financial. They also do not link between the audit objectives and the objectives of the organization, which indicates that the internal audit mission may not be consistent with the organization’s ambitions.
The Three Defense Lines Model: Why Defend while the Organization Needs to Move Forward?
Such contradictions may be aggravated when the three defense lines model stresses that internal audit is a third defense line, while ignoring the internal audit’s objective and the role indicated under the definition of internal auditing. Despite my personal reservation to the name of such model, as it is not a defense model, by a model to provide assurance that the work of the entities referred to in the second line is not limited to defending the organization, but extends to developing it. For example, under the second level reference was made to the functions relating to quality, of which the main task is to develop the organization, rather than defending and protecting it. So, is it reasonable to state that all parties to the model seek to defend the organization, without considering its future and development?
Changing the Culture is a Difficult Part that Requires Intellect and Awareness for the Profession Practitioners
At the outset of my career, I recall the first audit task I performed. Many auditors may share with me the same experience. I was asked to audit a work center. During the audit task it was my objective to write the largest number of observations relating to the weak controls and non-compliance with the work procedures. As my professional thinking developed, I became aware that compliance with the procedures is not an objective in itself. The procedures set out may not help achieve the objectives of the organization. During the audit tasks, I began to consider the necessity of compliance, and what procedures to follow for the development of this area. Years later, as another phase of thinking developed, it was essential to look at a higher level of procedures. Looking at the organization’s strategy and how far it has achieved its main objectives has been of greater impact for the top management, and involving in providing consulting with strategic dimension has been of much greater impact. Certainly, the forthcoming period exceeds this, as IIA, among the principles it adopted, has focused on the necessity that internal auditing be prudential, initiative-oriented, of future outlook, and that it should support the organization development.
The auditing culture formed by the top management depends on the content of reporting. If reports address adding value and developing the organization, internal auditing would become a strategic partner to the top management in leading the organization, rather than being an obstacle – that is the prevailing view of auditing – that hinders the management from moving forward. Moreover, internal auditors play a significant role in guiding the auditors and providing awareness to the top management of the role expected from internal auditing, in order to convert from defense to offense.
Standards Concerted with the New Internal Auditing Standards
Principles adopted by IIA include that internal auditing should be prudential, of future outlook, and support the organization. All of these require personal judgment and opinion. Meanwhile, standards on internal auditing, in their current form, do not help achieve the principles adopted. Furthermore, the standards require from the auditor to rely on sufficient, proper, relevant and useful information. This may hinder giving opinion. Here, I do not mean involvement in decision-making instead of the management, but to share their interests and expectations relating to the development of the organization and improving its performance by providing initiatives of strategic dimensions, rather than being limited to criticizing reports. The exciting point about this matter is that the draft amended version of the standards did not consider covering this part? Why?
Conclusion
At the end of this article, conservatives whose view is that internal auditing profession must remain unchanged may have an opinion contrary to mine. Expectations of the top management may play a major role in keeping such role unchanged. Meanwhile, those whose view is that the internal auditing profession is on the verge of a major change that may increase its importance to developing the organizations, may agree with me. Finally, these are ideas that raise several questions in a manner that requires us not to take any development to the professional framework for practicing the internal auditing as is, but consider its contents more deeply.
Article Author Mr. Ayman Abdelrahim (MQM,CIA,CCSA,CFE)
The author is interested of your participation by feedback and you can communicate him on his emailayman.abdelrahim@outlook.com
This Article published in the internal Audit Magazine that issued by Jordanian Internal Audit Association – March 2016
Tuesday, March 1, 2016
CMA prevents dealing with countries not adopting the recommendations ofThe Financial Action Task Force on Anti Money Laundering
The Capital Markets Authority (CMA) issued Circular no. 3 of 2016 on March 7th, 2016 to all licensed persons instructing them not to deal with the countries not, or inadequately, adopting the recommendations of the International Financial Action Task Force.
We would like to draw your attention to the provision of Article 42-3 of “Anti-Money Laundering & Counter Terrorism Financing” Book of the Executive Regulation of Law no. 7 of 2010 concerning the Establishment of Capital Markets Authority and Regulation of Securities Business, as amended, by virtue of the Decision No. 72 of 2015 of November 9th, 2015, which reads as follows:
“The licensed person must scrutinize the business relationships, or transactions conducted, with financial institutions or customers from countries not, or inadequately, applying the recommendations of the Financial Action Task Force. In the event where CMA notifies the licensed person that a country is not, or inadequately, applying the recommendations of the Financial Action Task Force, the licensed person must classify all business relationships and transactions of such country as of high risk, which entails applying the procedures set forth in Article 21-3 of the present Chapter.”
Thus, the Financial Action Task Force has, in its latest meeting held in February 2016, updated the list of countries not, or inadequately, applying the recommendations of the Action Task Force.
Based on the provisions of the above Article, you are required to visit the website of the Financial Action Task Force to obtain the updated list of countries not, or inadequately, applying the recommendations of the Financial Action Task Force, so that you can act in compliance with the provisions of Article 42-3 of “Anti-Money Laundering & Counter Terrorism Financing” Book.
We would like to draw your attention to the provision of Article 42-3 of “Anti-Money Laundering & Counter Terrorism Financing” Book of the Executive Regulation of Law no. 7 of 2010 concerning the Establishment of Capital Markets Authority and Regulation of Securities Business, as amended, by virtue of the Decision No. 72 of 2015 of November 9th, 2015, which reads as follows:
“The licensed person must scrutinize the business relationships, or transactions conducted, with financial institutions or customers from countries not, or inadequately, applying the recommendations of the Financial Action Task Force. In the event where CMA notifies the licensed person that a country is not, or inadequately, applying the recommendations of the Financial Action Task Force, the licensed person must classify all business relationships and transactions of such country as of high risk, which entails applying the procedures set forth in Article 21-3 of the present Chapter.”
Thus, the Financial Action Task Force has, in its latest meeting held in February 2016, updated the list of countries not, or inadequately, applying the recommendations of the Action Task Force.
Based on the provisions of the above Article, you are required to visit the website of the Financial Action Task Force to obtain the updated list of countries not, or inadequately, applying the recommendations of the Financial Action Task Force, so that you can act in compliance with the provisions of Article 42-3 of “Anti-Money Laundering & Counter Terrorism Financing” Book.
Wednesday, February 24, 2016
Economic Stability of World Countries is Dependent on Sound Fiscal and Monetary Policies
The fiscal and monetary policies are critical topic, which a layperson should be aware of and understand their significance, impacts and objects, since such policies generally reflect on the individual’s day-to-day affairs including feeling of price hikes, difficulty in obtaining a loan or imposition of new taxes, etc.
The implementation of fiscal and monetary policies by a state is intended to achieve the economic stability, which means realizing a higher rate of economic growth in view of prices stability and full utilization of resources and expenses.
Fiscal Policy
The fiscal policy basically refers to the utilization or regulation employed by the State, represented by Ministry of Finance, in directing its economic programs. The fiscal policy tools include the government spending and taxes.
An appropriate fiscal policy to control the inflation resulting from increase in demand can be attained through increasing taxes, reducing governmental spending or both…
A tax increase may lead to decreasing the individuals’ purchasing power, which would result in reducing consumer spending; a component of overall expenditure. Therefore, a decrease in consumer spending will trigger a drop in overall expenditure, which would eliminate inflation in many cases, even if this occurs at different rates.
Furthermore, decreasing government spending leads to a decline in overall expenditure, which leads to shrinking the deflationary gap.
An appropriate fiscal policy to control recession (overall demand is lower than overall supply) can be attained through tax cuts, increasing governmental spending or adopting both approaches at different rates.
The impact of governmental spending on income is greater than that of taxes on income. That is why GCC countries have recently been focusing on the governmental spending.
Additionally, tax cuts result in increasing individuals’ purchasing power, which leads to increasing consumer spending and, accordingly, increasing overall expenditure that ultimately eliminates recession.
An increase in the government spending will result in increasing overall expenditure and hence, shrinking the recession gap.
Monetary Policy
Monetary policy refers to a set of actions and measures taken by a central bank to influence money supply and cost of funds in order to achieve the economic policy goals.
Influence on money supply takes place by employing open market policy, i.e. buying and selling bonds with view to reducing or increasing money supply.
If a state aims to increase the quantity of money, it will purchase bonds to individuals, which would lead to increasing bond prices. Further, purchasing bonds from individuals will lead to increasing bank deposits and hence, increasing the volume of lending extended to business people at a lower interest rate due to increased liquidity with commercial banks.
However, if a state aims to reduce the quantity of money, it will sell bonds from individuals, which would lead to increasing bond prices. Further, sales of bonds to individuals will lead to decreasing bank deposits and hence, interest rate will go up and the volume of lending will decline.
This policy is frequently employed by advanced countries such as USA given significant development of financial markets, which represents a prerequisite for the implementation of open market policy (daily trading volume in Wall Street Exchange is approximately USD 25 billion).
The most important monetary tools include the statutory reserve requirements, which are widely used in the developing countries due to absence of developed or weak financial markets.
If a state aims to expand the money supply, it will decrease the statutory reserve percentage, which would lead to increasing the capabilities of commercial banks to extend loans. However, if a state aims to reduce the money supply, it will increase the statutory reserve percentage, which would lead to limiting the commercial banks’ capabilities to extend loans.
To control economic downturn, a state will implement an expansionary monetary policy, where it will expand the money supply, which will lead to decreasing interest rates, and hence, promoting investments and ultimately increased overall demand.
On the other hand, to control inflation, a state will implement a deflationary monetary policy in order to reduce the money supply, which will lead to increasing the interest rates that will entail a decline in investments and hence, the overall demand will go down.
Which to adopt: fiscal policy or monetary policy?
Most countries use both policies concurrently to achieve economic stability and attain the desirable economic goals even though fiscal policies have long term impacts while monetary policies have quick short term impacts.
Adoption of expansionary or deflationary fiscal policies will be dependent on the economy condition and if a state suffers recession or inflation.
If an economy encounters a recession condition, an expansionary fiscal policy will be adopted, where the state will increase the governmental spending or reduce taxes in order to increase the overall expenditure. At the same time, an expansionary monetary policy will be implemented, which will lead to lowering interest rates, resulting in increased investments and higher overall demand.
However, if an economy encounters an inflation condition, deflationary fiscal policy will be adopted, where the state will decrease the governmental spending or increase taxes in order to decrease the overall expenditure. At the same time, deflationary monetary policy will be implemented, which will lead to increasing interest rates, resulting in decline in investments and lower overall demand.
The implementation of fiscal and monetary policies by a state is intended to achieve the economic stability, which means realizing a higher rate of economic growth in view of prices stability and full utilization of resources and expenses.
Fiscal Policy
The fiscal policy basically refers to the utilization or regulation employed by the State, represented by Ministry of Finance, in directing its economic programs. The fiscal policy tools include the government spending and taxes.
An appropriate fiscal policy to control the inflation resulting from increase in demand can be attained through increasing taxes, reducing governmental spending or both…
A tax increase may lead to decreasing the individuals’ purchasing power, which would result in reducing consumer spending; a component of overall expenditure. Therefore, a decrease in consumer spending will trigger a drop in overall expenditure, which would eliminate inflation in many cases, even if this occurs at different rates.
Furthermore, decreasing government spending leads to a decline in overall expenditure, which leads to shrinking the deflationary gap.
An appropriate fiscal policy to control recession (overall demand is lower than overall supply) can be attained through tax cuts, increasing governmental spending or adopting both approaches at different rates.
The impact of governmental spending on income is greater than that of taxes on income. That is why GCC countries have recently been focusing on the governmental spending.
Additionally, tax cuts result in increasing individuals’ purchasing power, which leads to increasing consumer spending and, accordingly, increasing overall expenditure that ultimately eliminates recession.
An increase in the government spending will result in increasing overall expenditure and hence, shrinking the recession gap.
Monetary Policy
Monetary policy refers to a set of actions and measures taken by a central bank to influence money supply and cost of funds in order to achieve the economic policy goals.
Influence on money supply takes place by employing open market policy, i.e. buying and selling bonds with view to reducing or increasing money supply.
If a state aims to increase the quantity of money, it will purchase bonds to individuals, which would lead to increasing bond prices. Further, purchasing bonds from individuals will lead to increasing bank deposits and hence, increasing the volume of lending extended to business people at a lower interest rate due to increased liquidity with commercial banks.
However, if a state aims to reduce the quantity of money, it will sell bonds from individuals, which would lead to increasing bond prices. Further, sales of bonds to individuals will lead to decreasing bank deposits and hence, interest rate will go up and the volume of lending will decline.
This policy is frequently employed by advanced countries such as USA given significant development of financial markets, which represents a prerequisite for the implementation of open market policy (daily trading volume in Wall Street Exchange is approximately USD 25 billion).
The most important monetary tools include the statutory reserve requirements, which are widely used in the developing countries due to absence of developed or weak financial markets.
If a state aims to expand the money supply, it will decrease the statutory reserve percentage, which would lead to increasing the capabilities of commercial banks to extend loans. However, if a state aims to reduce the money supply, it will increase the statutory reserve percentage, which would lead to limiting the commercial banks’ capabilities to extend loans.
To control economic downturn, a state will implement an expansionary monetary policy, where it will expand the money supply, which will lead to decreasing interest rates, and hence, promoting investments and ultimately increased overall demand.
On the other hand, to control inflation, a state will implement a deflationary monetary policy in order to reduce the money supply, which will lead to increasing the interest rates that will entail a decline in investments and hence, the overall demand will go down.
Which to adopt: fiscal policy or monetary policy?
Most countries use both policies concurrently to achieve economic stability and attain the desirable economic goals even though fiscal policies have long term impacts while monetary policies have quick short term impacts.
Adoption of expansionary or deflationary fiscal policies will be dependent on the economy condition and if a state suffers recession or inflation.
If an economy encounters a recession condition, an expansionary fiscal policy will be adopted, where the state will increase the governmental spending or reduce taxes in order to increase the overall expenditure. At the same time, an expansionary monetary policy will be implemented, which will lead to lowering interest rates, resulting in increased investments and higher overall demand.
However, if an economy encounters an inflation condition, deflationary fiscal policy will be adopted, where the state will decrease the governmental spending or increase taxes in order to decrease the overall expenditure. At the same time, deflationary monetary policy will be implemented, which will lead to increasing interest rates, resulting in decline in investments and lower overall demand.
Sunday, February 14, 2016
Streamline Recognition and Measurement of the Financial Statements IFRS 9 to replace IAS 39
On July 24th, 2014, the International Accounting Standards Board (IASB) published the final version of IFRS 9 in replacement of the IFRS 39 in terms of the financial instruments. The Standard has a mandatory effective date for annual periods beginning on or after 1 January 2018. However, the Standard is available for early application.
The new IFRS 9 is built on a single logical approach for classification and measurement of financial instruments as regards to the expected losses, the value degradation model, and the approach of sustainable improvements in the hedge accounting.
Classification and Measurement
The classification identifies the way of calculating the financial assets and liabilities in the financial statements, particularity the way of continuous measurement of assets and liabilities. The IFRS 9 introduces a logical approach for classification of financial assets led by the characteristics of the cash flow and the business model used to maintain the asset. Such principle based approach is to replace the current rule based approach which is generally more difficult and complicated in terms of application. The standard addresses also the deterioration of value of assets through a single way for all financial statements, which consequently removes the source of complications related to the previous accounting requirements.
Deterioration of Value in the Financial Instruments
During the financial turmoil of 2008, the resultant late recognition of the credit losses in terms of loans (as well as other financial instruments) was considered as a weak point in the financial standards applicable at that time. Therefore, the IASB has incorporated the IFRS 9 with a new model to record the losses expected from the deterioration of value. The standard requires the rapid recognition of the expected credit losses; it requires business entities to record the expected credit losses on timely basis in order to recognize the financial instruments. In addition, the expected losses throughout the life of the financial instruments must be recognized in a timely fashion. The IASB has already expressed its intention to establish a group of transitional resources to support the stakeholders throughout the transition to the new requirements of the deterioration of value of the financial instruments.
Hedge Accounting
The IFRS 9 introduces the largely reformed model of hedge accounting, while improving the disclosures related to the activities of the Risk Management Department. The new model marks a comprehensive structural amendment of the hedge accounting, which allows alignment between the accounting treatment and the activities of the Risk Management Department and enables the business entities to better reflect such activities in their financial statements. In addition, and as a result of such amendments, the users of the financial statements will be provided with better information regarding risk management and impact of the hedge accounting on the financial statements.
Self Credit
The IFRS 9 eliminates the fluctuations of profits and losses, arising from the change of the credit risks of the liabilities required to be measured at the fair value. Such change in the change accounting indicates that the profits arising from the decrease of any entity’s self credit risks of such liabilities are no longer realized in the statement of profit or loss. IFRS 9 permits early application of such improvement in the financial reports before any other amendments in the accounting of financial instruments.
In this regard, Mr., Hisham Sorour – Managing Partner of Baker Tilly Kuwait, pointed out that such substantial amendments incorporated in IFRS 9 are very important, especially in the time being, will enhance the presentation of the financial statements, and are in line with the stability requirements and the taking of provisions for loan losses. He added that the application of the new standard will improve the investor’s trust in bank’s balance sheets and the financial system as a whole.
The Central Bank of Kuwait requested the local banks to study the effects that would arise from the application of the new standard on the financial statements of banks, and to proposed solutions to address the expected effects of application.
In addition, on December 30th, 2009, the Ministry of Commerce and Industry, represented by the Technical Committee, decided to postpone the early application of any accounting standard, unless by virtue of a notice from the Ministry that allows such application.
Baker Tilly Service
Noteworthy is that Baker Tilly, which ranks 8 among international firms in the field of audit, provides accounting consulting services to the banks and investment companies desirous to study the effects arising from the application of IFRS 9 on their financial statements before the effective date of application on January 1st, 2018. In addition, Baker Tilly provides training and workshop services for financial managers and accountants wishing enrich their knowledge of the new standard.
The new IFRS 9 is built on a single logical approach for classification and measurement of financial instruments as regards to the expected losses, the value degradation model, and the approach of sustainable improvements in the hedge accounting.
Classification and Measurement
The classification identifies the way of calculating the financial assets and liabilities in the financial statements, particularity the way of continuous measurement of assets and liabilities. The IFRS 9 introduces a logical approach for classification of financial assets led by the characteristics of the cash flow and the business model used to maintain the asset. Such principle based approach is to replace the current rule based approach which is generally more difficult and complicated in terms of application. The standard addresses also the deterioration of value of assets through a single way for all financial statements, which consequently removes the source of complications related to the previous accounting requirements.
Deterioration of Value in the Financial Instruments
During the financial turmoil of 2008, the resultant late recognition of the credit losses in terms of loans (as well as other financial instruments) was considered as a weak point in the financial standards applicable at that time. Therefore, the IASB has incorporated the IFRS 9 with a new model to record the losses expected from the deterioration of value. The standard requires the rapid recognition of the expected credit losses; it requires business entities to record the expected credit losses on timely basis in order to recognize the financial instruments. In addition, the expected losses throughout the life of the financial instruments must be recognized in a timely fashion. The IASB has already expressed its intention to establish a group of transitional resources to support the stakeholders throughout the transition to the new requirements of the deterioration of value of the financial instruments.
Hedge Accounting
The IFRS 9 introduces the largely reformed model of hedge accounting, while improving the disclosures related to the activities of the Risk Management Department. The new model marks a comprehensive structural amendment of the hedge accounting, which allows alignment between the accounting treatment and the activities of the Risk Management Department and enables the business entities to better reflect such activities in their financial statements. In addition, and as a result of such amendments, the users of the financial statements will be provided with better information regarding risk management and impact of the hedge accounting on the financial statements.
Self Credit
The IFRS 9 eliminates the fluctuations of profits and losses, arising from the change of the credit risks of the liabilities required to be measured at the fair value. Such change in the change accounting indicates that the profits arising from the decrease of any entity’s self credit risks of such liabilities are no longer realized in the statement of profit or loss. IFRS 9 permits early application of such improvement in the financial reports before any other amendments in the accounting of financial instruments.
In this regard, Mr., Hisham Sorour – Managing Partner of Baker Tilly Kuwait, pointed out that such substantial amendments incorporated in IFRS 9 are very important, especially in the time being, will enhance the presentation of the financial statements, and are in line with the stability requirements and the taking of provisions for loan losses. He added that the application of the new standard will improve the investor’s trust in bank’s balance sheets and the financial system as a whole.
The Central Bank of Kuwait requested the local banks to study the effects that would arise from the application of the new standard on the financial statements of banks, and to proposed solutions to address the expected effects of application.
In addition, on December 30th, 2009, the Ministry of Commerce and Industry, represented by the Technical Committee, decided to postpone the early application of any accounting standard, unless by virtue of a notice from the Ministry that allows such application.
Baker Tilly Service
Noteworthy is that Baker Tilly, which ranks 8 among international firms in the field of audit, provides accounting consulting services to the banks and investment companies desirous to study the effects arising from the application of IFRS 9 on their financial statements before the effective date of application on January 1st, 2018. In addition, Baker Tilly provides training and workshop services for financial managers and accountants wishing enrich their knowledge of the new standard.
Monday, February 1, 2016
Kuwait Direct Investment Promotion Authority (KDIPA) convening itsfirst promotional conference “Kuwait Investment Forum”
Kuwait Direct Investment Promotion Authority (KDIPA), announces that it is convening its first promotional conference “Kuwait Investment Forum” under the patronage of H.H. the Amir of Kuwait Shaikh Sabah Al Ahmad Al Jaber Al Sabah, on March 8-9, 2016 at the Courtyard Marriott Hotel-Kuwait. The Forum intends to advance KDIPA’s promotional role in positioning Kuwait as a lucrative investment location, presenting a whole host of investment opportunities in the various priority sectors, as well as introducing the distinctiveness of Kuwait’s investment climate, and the incentives granted in accordance with its establishing Law No. 116 of 2013 regarding the Promotion of Direct Investment in the State of Kuwait.
The “Kuwait Investment Forum” will provide a profound platform, catering for both local and international audiences, and will highlight the crucial legislative and economic developments that Kuwait is witnessing. It will do so through touching upon several overriding themes that demonstrate the fundamentals of its core economic and financial policy formulation; the benefits under the new laws and legislations; the country’s strategic directions embedded in the new five year development plan; Kuwait’s attributes as an attractive investment destination; the availability of mega investment opportunities in a multitude of economic sectors; in addition to showcasing Kuwait as a recognized major world player in humanitarian aide and economic field; while touching upon the broad financing options available given the sound and solvent financial sector.
The Forum is well-timed to capture the positive impact of the accelerating favorable developments the Kuwaiti economy is witnessing, including the ongoing undertaking to improve the business climate to become more favorable for attracting quality investments; and offering a host of incentives, exemptions, and guarantees, above all allowing foreign ownership up to 100% equity. Such emerging changes will duly leverage efforts to enroll Kuwait amongst the leading economies in attracting value added direct investments, both local and foreign. Adding to that the benefits of Kuwait’s strategic geographic location, with extended access to a growing market in the neighboring GCC countries, and to West and Central Asia and beyond; along with a host of strategic opportunities under the approved new development plan with an allocated investment expenditure around US$ 103 billion, in vital sectors including oil, manufacturing, energy generation, communications, transport, urban and human development. This is further supported by notable advance and deepening of the local financial market and a leading role of the private sector in the economy, with focus on small and medium enterprises.
KDIPA is keen to ensure outstanding participation in the Forum by respective ministers, prominent personalities, renowned international experts, and other high ranking government officials. It will also seek to have a distinguished role by Kuwait Chamber of Commerce and Industry, and an equivalent effective representation of major foreign chambers of commerce and industry. In addition to inviting leading local and international investors, bankers, financial and investment executives, as well as professional unions and societies, and the specialized media.
In order to achieve the intended objectives of “Kuwait Investment Forum”, KDIPA will coordinate with all the stakeholders and concerned parties to succeed in presenting the promising features of the new Kuwaiti economy, its ability to generate rewarding business and investment opportunities, and how it is re-emerging as a vibrant and growing market, gaining increased attention by interested investors. This is further supported by sustaining a healthy dialogue between the government and the investors community based on renewed confidence, and effective collaboration. The Forum will also provide an opportunity to show success stories of settled investments that brought about the aspired goals of technology transfer, job creation and training for Kuwaiti youth, diversification of the economy, building the pillars of the knowledge economy that fosters innovation and entrepreneurship, which will be leading to achieve sustainable development and welfare.
The “Kuwait Investment Forum” will provide a profound platform, catering for both local and international audiences, and will highlight the crucial legislative and economic developments that Kuwait is witnessing. It will do so through touching upon several overriding themes that demonstrate the fundamentals of its core economic and financial policy formulation; the benefits under the new laws and legislations; the country’s strategic directions embedded in the new five year development plan; Kuwait’s attributes as an attractive investment destination; the availability of mega investment opportunities in a multitude of economic sectors; in addition to showcasing Kuwait as a recognized major world player in humanitarian aide and economic field; while touching upon the broad financing options available given the sound and solvent financial sector.
The Forum is well-timed to capture the positive impact of the accelerating favorable developments the Kuwaiti economy is witnessing, including the ongoing undertaking to improve the business climate to become more favorable for attracting quality investments; and offering a host of incentives, exemptions, and guarantees, above all allowing foreign ownership up to 100% equity. Such emerging changes will duly leverage efforts to enroll Kuwait amongst the leading economies in attracting value added direct investments, both local and foreign. Adding to that the benefits of Kuwait’s strategic geographic location, with extended access to a growing market in the neighboring GCC countries, and to West and Central Asia and beyond; along with a host of strategic opportunities under the approved new development plan with an allocated investment expenditure around US$ 103 billion, in vital sectors including oil, manufacturing, energy generation, communications, transport, urban and human development. This is further supported by notable advance and deepening of the local financial market and a leading role of the private sector in the economy, with focus on small and medium enterprises.
KDIPA is keen to ensure outstanding participation in the Forum by respective ministers, prominent personalities, renowned international experts, and other high ranking government officials. It will also seek to have a distinguished role by Kuwait Chamber of Commerce and Industry, and an equivalent effective representation of major foreign chambers of commerce and industry. In addition to inviting leading local and international investors, bankers, financial and investment executives, as well as professional unions and societies, and the specialized media.
In order to achieve the intended objectives of “Kuwait Investment Forum”, KDIPA will coordinate with all the stakeholders and concerned parties to succeed in presenting the promising features of the new Kuwaiti economy, its ability to generate rewarding business and investment opportunities, and how it is re-emerging as a vibrant and growing market, gaining increased attention by interested investors. This is further supported by sustaining a healthy dialogue between the government and the investors community based on renewed confidence, and effective collaboration. The Forum will also provide an opportunity to show success stories of settled investments that brought about the aspired goals of technology transfer, job creation and training for Kuwaiti youth, diversification of the economy, building the pillars of the knowledge economy that fosters innovation and entrepreneurship, which will be leading to achieve sustainable development and welfare.
Tuesday, January 19, 2016
Concept of Skepticism in Internal Audit
Significance of Skepticism in Internal Audit
The International Professional Practices Framework (IPPF) includes the Mission Statement, which in turn indicates the role of the internal audit in “enhancing and protecting the corporate value by means of providing assurance, advice and skepticism while taking risks into consideration”.
The risk-based skepticism depends on an important principle entitled the Professional Skepticism.
Definition of the Professional Skepticism
According to the International Standards on Auditing (ISA), “Professional Skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence, and requires ongoing inquiry whether or not the obtained audit information and evidences purport that there are critical observations arising from fraud.” In other terms, it means that the auditor should undertake a professional assessment, with a skeptical mind, of efficiency and suitability of the evidences obtained throughout the term of the audit task. Indeed, the concept of the “Professional Skepticism” enhances the concept of the “Professional Due Diligence” set forth in the International Standards on Auditing (ISA).
Professional Skepticism is necessary for the skeptical assessment of evidences. It includes the skeptical and in-depth scrutinizing of the contradicting and inconsistent evidences, the credibility of documents and the responses to their inquiries. It includes also the consideration of efficiency and appropriateness of evidences obtained in light of the common conditions. As such, the Professional Skepticism explores certain ways through which internal auditors can be more skeptical.
Relationship between the Professional Skepticism and the International Standards
Professional Skepticism is one of the main requirements for conducting audit works. Many international standards have covered it, including for example:
Elements of the Professional Skepticism
The Professional Skepticism comprises three main elements as depicted below:
Application of the Professional Skepticism
The below exhibit depicts the application levels of the Professional Skepticism and its influence on the quality of audit evidences:
How can the internal auditor be more skeptical?
To be an efficient and skeptical internal auditor is not a coincidence. The internal auditor should consider certain features and habits that should be demonstrated by the internal auditors, and consider also anything that could help him attain success.
Furthermore, the internal auditor should consider the application of all or some of the following suggestions:
Develop your knowledge of the business entity and sector where you operate</strong
The internal auditor should be familiar with the strategic objectives of the business entity as well as the essential change initiatives and the key risks they face, by means of studying the business plans, annual reports, newsletters, briefing notes and other documents.
The internal auditor should be familiar with the market, the activities of the competing companies, the issues raised by the government and regulatory bodies, as well as the influence of technology. They should also visit the relevant websites and social networking sites.
Get to know more people from inside and outside the business entity
The internal auditor should begin with the issues that are most required by the management, and define the positive issues. Audit reports should indicate the successes and the things that go smoothly so that such things can be recognized and recommended to other divisions within the business entity.
They should get better understanding of the risks faced by the executive managers through the internal networks and regular meetings. This should be done in an informal way, especially in terms of the fields and topics that are indicated regularly in the internal audit plan. They should also consider the other formal opportunities like attending the meeting of work teams and training activities, and taking part in change programs. They should work in cooperation with the other assurance parties or seek support or advice from experts from within the business entity.
Be familiar with the new developments in the audit field
The should be aware of the new developments in the audit field not only through the International Professional Practices Framework (IPPF), but also through the guidelines, practical guidance, learning activities, seminars and conferences. The internal auditor should join an audit team that is responsible for certain sector, and keep in touch with other auditors working in the sector. Given the increasingly limited resources, the internal auditor should think in a more critical way of how to get the best results from the assessment process and the continuous professional development with a view to bridge their own gaps in terms of knowledge and development of specialized skills.
Identify a senior manager who is willing to be a mentor and sponsor
The mentor is a person who provides ongoing support, is willing to face the challenges and with whom the internal auditor can share the problems and ideas. It is preferable that such person should have experience in training and guidance, and it is not necessary to be a senior auditor or to be in regular contact with a senior manager. It is preferable to be a person that does not work with the auditor or being audited by them.
Look at situations from a different point of view
The internal auditor should look at situations from a different point of view. They should put themselves in the place of the customer, vendor or regulatory body, think of the expected way of performing the procedures as well as the types of behaviors they are expected to come across. Does the business entity abide by and respect their values?
Find parallel sources
The internal auditor should find a link between what they see and hear during the audit process and compare the same with similar situations. For example, the internal auditor should consider the pros and cons of the methodology followed by the business entity in dealing with the customer complaints, and compare the same with the other business entities they have dealt with (Benchmarking). Professional Skepticism can be obtained from other more irrelevant parallel sources.
Ask more questions
This attitude will help develop a comprehensive understanding of the way and reasons of performing tasks in a certain way. The internal auditor should ask easy and simple (content-free) questions to encourage the individuals to express their view in general and not to compel them to accept his own views. It is very important to literally listen to other individuals. Noteworthy is that the word Audit is derived from the Latin word that means “a person who eavesdrop”.
For the purpose of in-depth survey and research on specific issues, the internal auditor should apply a simple way that he feels satisfied with and that fulfills the requirement. The internal auditor should consider using the method of six useful questions; i.e., what, why, when, how, where and who, or the method of five questions beginning with the word “why” that will assist him in identifying the causes and effects, some of which will be linked to the attitudes and behaviors that form the common culture of that field.
Do not consider things as intuitive or taken for granted
The discussion of the way procedures are performed, and speaking about the risks and problems that face individuals are a good way to get a variety of opinions, but do not accept everything without scrutinization. The internal auditor should concentrate the audit testing to establish an evidence on what happens in reality and in particular with regard to managing the key risks or in case of divergence of views on what is happening and why. Evidences and results of interviews and discussion should be documented to support the recommendations of the audit.
Identify the attitudes and relationships
The internal auditor should use audit software and reporting tools that enable them to undertake the statistical analysis in order to detect the problems that individuals may not be aware of.
This is usually used to identify the gaps or recurrence in records. However, the current availability of huge data and powerful analytics tools provide the ability to explore data and evaluate the results from different points of view to develop new relationships, patterns and links. This area is very technical, but the emergence of huge data enables the internal auditors to develop certain skills and/or work in cooperation with information technology experts to attain the level of skepticism.
Change the way of reporting the message
The internal auditor should critically examine the internal audit reports to ensure that the structure of reports and the used language help convey the message and key opinions.
Are the reports concise, clear and focused on topic? The internal auditor should think of what the readers of the internal audit reports want to know or be familiar with, and what they should do to mitigate the risks.
The International Professional Practices Framework (IPPF) includes the Mission Statement, which in turn indicates the role of the internal audit in “enhancing and protecting the corporate value by means of providing assurance, advice and skepticism while taking risks into consideration”.
The risk-based skepticism depends on an important principle entitled the Professional Skepticism.
Definition of the Professional Skepticism
According to the International Standards on Auditing (ISA), “Professional Skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence, and requires ongoing inquiry whether or not the obtained audit information and evidences purport that there are critical observations arising from fraud.” In other terms, it means that the auditor should undertake a professional assessment, with a skeptical mind, of efficiency and suitability of the evidences obtained throughout the term of the audit task. Indeed, the concept of the “Professional Skepticism” enhances the concept of the “Professional Due Diligence” set forth in the International Standards on Auditing (ISA).
Professional Skepticism is necessary for the skeptical assessment of evidences. It includes the skeptical and in-depth scrutinizing of the contradicting and inconsistent evidences, the credibility of documents and the responses to their inquiries. It includes also the consideration of efficiency and appropriateness of evidences obtained in light of the common conditions. As such, the Professional Skepticism explores certain ways through which internal auditors can be more skeptical.
Relationship between the Professional Skepticism and the International Standards
Professional Skepticism is one of the main requirements for conducting audit works. Many international standards have covered it, including for example:
- The International Standard on Auditing (ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing) emphasized the necessity of planning for and conducting the audit on the basis of the Professional Skepticism throughout the entire phases of the audit process, which include the following:
- The phase of assessing engagement acceptance;
- The phase of performing risk assessment procedures;
- The phase of obtaining the audit evidence; and
- The phase of evaluating the audit related evidences and work papers.
- The International Standard (IASE3000) regarding the tasks related to the non-financial information, issued by The International Federation of Accountants (IFAC). It is applied to the audit of the internal control, sustainability and compliance with the laws and regulations. The Professional Skepticism requires the auditor to be alert to the following:
- The audit evidences in contradiction with other obtained evidences.
- The information that leads to inquiring about the authenticity of documents and the procedures of response to inquiries, which will be used as audit evidence.
- The cases that could indicate a potential fraud.
Elements of the Professional Skepticism
The Professional Skepticism comprises three main elements as depicted below:
- The attributes: the qualifications of the auditor, i.e., knowledge, skills, and capabilities.
- The actions: the tools and methodologies adopted by the auditor to undertake the Professional Skepticism; including risk assessment methodology, quality of audit evidences, methodology of analyses and evaluation of information and document, etc.
- The mindset: the auditor’s psychological features which require neutralism, credibility, and independency in the course on undertaking the Professional Skepticism.
Application of the Professional Skepticism
The below exhibit depicts the application levels of the Professional Skepticism and its influence on the quality of audit evidences:
How can the internal auditor be more skeptical?
To be an efficient and skeptical internal auditor is not a coincidence. The internal auditor should consider certain features and habits that should be demonstrated by the internal auditors, and consider also anything that could help him attain success.
Furthermore, the internal auditor should consider the application of all or some of the following suggestions:
Develop your knowledge of the business entity and sector where you operate</strong
The internal auditor should be familiar with the strategic objectives of the business entity as well as the essential change initiatives and the key risks they face, by means of studying the business plans, annual reports, newsletters, briefing notes and other documents.
The internal auditor should be familiar with the market, the activities of the competing companies, the issues raised by the government and regulatory bodies, as well as the influence of technology. They should also visit the relevant websites and social networking sites.
Get to know more people from inside and outside the business entity
The internal auditor should begin with the issues that are most required by the management, and define the positive issues. Audit reports should indicate the successes and the things that go smoothly so that such things can be recognized and recommended to other divisions within the business entity.
They should get better understanding of the risks faced by the executive managers through the internal networks and regular meetings. This should be done in an informal way, especially in terms of the fields and topics that are indicated regularly in the internal audit plan. They should also consider the other formal opportunities like attending the meeting of work teams and training activities, and taking part in change programs. They should work in cooperation with the other assurance parties or seek support or advice from experts from within the business entity.
Be familiar with the new developments in the audit field
The should be aware of the new developments in the audit field not only through the International Professional Practices Framework (IPPF), but also through the guidelines, practical guidance, learning activities, seminars and conferences. The internal auditor should join an audit team that is responsible for certain sector, and keep in touch with other auditors working in the sector. Given the increasingly limited resources, the internal auditor should think in a more critical way of how to get the best results from the assessment process and the continuous professional development with a view to bridge their own gaps in terms of knowledge and development of specialized skills.
Identify a senior manager who is willing to be a mentor and sponsor
The mentor is a person who provides ongoing support, is willing to face the challenges and with whom the internal auditor can share the problems and ideas. It is preferable that such person should have experience in training and guidance, and it is not necessary to be a senior auditor or to be in regular contact with a senior manager. It is preferable to be a person that does not work with the auditor or being audited by them.
Look at situations from a different point of view
The internal auditor should look at situations from a different point of view. They should put themselves in the place of the customer, vendor or regulatory body, think of the expected way of performing the procedures as well as the types of behaviors they are expected to come across. Does the business entity abide by and respect their values?
Find parallel sources
The internal auditor should find a link between what they see and hear during the audit process and compare the same with similar situations. For example, the internal auditor should consider the pros and cons of the methodology followed by the business entity in dealing with the customer complaints, and compare the same with the other business entities they have dealt with (Benchmarking). Professional Skepticism can be obtained from other more irrelevant parallel sources.
Ask more questions
This attitude will help develop a comprehensive understanding of the way and reasons of performing tasks in a certain way. The internal auditor should ask easy and simple (content-free) questions to encourage the individuals to express their view in general and not to compel them to accept his own views. It is very important to literally listen to other individuals. Noteworthy is that the word Audit is derived from the Latin word that means “a person who eavesdrop”.
For the purpose of in-depth survey and research on specific issues, the internal auditor should apply a simple way that he feels satisfied with and that fulfills the requirement. The internal auditor should consider using the method of six useful questions; i.e., what, why, when, how, where and who, or the method of five questions beginning with the word “why” that will assist him in identifying the causes and effects, some of which will be linked to the attitudes and behaviors that form the common culture of that field.
Do not consider things as intuitive or taken for granted
The discussion of the way procedures are performed, and speaking about the risks and problems that face individuals are a good way to get a variety of opinions, but do not accept everything without scrutinization. The internal auditor should concentrate the audit testing to establish an evidence on what happens in reality and in particular with regard to managing the key risks or in case of divergence of views on what is happening and why. Evidences and results of interviews and discussion should be documented to support the recommendations of the audit.
Identify the attitudes and relationships
The internal auditor should use audit software and reporting tools that enable them to undertake the statistical analysis in order to detect the problems that individuals may not be aware of.
This is usually used to identify the gaps or recurrence in records. However, the current availability of huge data and powerful analytics tools provide the ability to explore data and evaluate the results from different points of view to develop new relationships, patterns and links. This area is very technical, but the emergence of huge data enables the internal auditors to develop certain skills and/or work in cooperation with information technology experts to attain the level of skepticism.
Change the way of reporting the message
The internal auditor should critically examine the internal audit reports to ensure that the structure of reports and the used language help convey the message and key opinions.
Are the reports concise, clear and focused on topic? The internal auditor should think of what the readers of the internal audit reports want to know or be familiar with, and what they should do to mitigate the risks.
Friday, January 1, 2016
Capital Markets Authority (CMA): Reminding Companies to submit their Annual Reports
Kuwait Capital Markets Authority issued Circular No. 1 of 2016 dated 5 January 2016 to the Chairmen of Board of Directors, regarding the annual report of the licensed persons. The Circular reads:
“We would like to draw your attention to the provisions of Article 5-7 of Volume XVI of the Executive Regulations of Law No. 7 of 2010 concerning the Establishment of the Capital Markets Authority and the Regulation of the Securities Activity, as amended, which emphasizes that Compliance Officers shall prepare an annual report to the Board of Directors of the licensed persons. The report shall include all actions taken to implement the policies, procedures, internal controls as well as any proposals to enhance the effectiveness and efficiency of such actions. In addition, a copy of such report shall be submitted to the Capital Markets Authority.
Therefore, you should abide by the above mentioned provisions and provide the Offsite Supervision Department at CMA with that report, inclusive of all actions taken throughout the reporting year, latest by 1st of March of each year.”
“We would like to draw your attention to the provisions of Article 5-7 of Volume XVI of the Executive Regulations of Law No. 7 of 2010 concerning the Establishment of the Capital Markets Authority and the Regulation of the Securities Activity, as amended, which emphasizes that Compliance Officers shall prepare an annual report to the Board of Directors of the licensed persons. The report shall include all actions taken to implement the policies, procedures, internal controls as well as any proposals to enhance the effectiveness and efficiency of such actions. In addition, a copy of such report shall be submitted to the Capital Markets Authority.
Therefore, you should abide by the above mentioned provisions and provide the Offsite Supervision Department at CMA with that report, inclusive of all actions taken throughout the reporting year, latest by 1st of March of each year.”