Transcript Krish Kumar - The Institute of Municipal Finance Officers

CHANGING ROLE of CFO& ETHICS
INTRODUCTION
• The collapses of Enron, Worldcom, Arthur Andersen, the Arms deal
controversy, the Shabhir Shaik and Jackie Selebi trials and other cases of
fraud and corruption have brought ethics to the front burner.
• The scandals of the 2000’s have left the accounting profession not only
with egg on its face, but dented its reputation as an independent provider
of informed opinion on the state of corporate finances.
• Financial practitioners must have the passion for clean governance, an
uncompromising approach to ethics, and an absolute pride in sustaining
and enhancing the reputation and trust that they have built over the
decades. We need to go back to ensuring strict compliance and pride.
• I am sure that most of you attending this conference are hard working
financial practitioners that do your jobs as diligently as possible. But like
any barrel, we do have a few rotten apples. A recent study on business
ethics points out that the most significant lesson to emerge from the
global economic crisis is that ethics matter.
INTRODUCTION
•What is ethics? It simply involves learning what is right or wrong and
then doing the right thing. However, this is easier said than done.
• Former President Mbeki said : “Nowhere does the Constitution we
celebrate today provide that those who serve in government are
permitted to abuse their power to undermine the objective to secure the
well being of the people of the Republic. Nowhere does it say that any
public representative or official serves in any organ of state in order to
misuse state power to enrich themselves or acquire any benefits that
would otherwise not be due to them according to law”
• A lot of the non-compliance issues have arisen because of the changed
role of CFO’s which has become more diversified
THE CHANGED ROLE OF ACCOUNTANTS / CFO
• The perception exists that accountants are dull grey and boring
people. They play everything by the rule book and are averse to
taking risks
• Herein lies the challenge
• We need to break down this negative and restricting view of
accountants and be seen as positive and effective change agents
• Accountants need to move from being bean counters to business
consultants
• The traditional role of the CFO has changed to incorporate a
multi-faceted individual who is well-rounded to drive every aspect
of the business – not just the finances
“There is no greater calling than to serve your fellow men. There is no greater
contribution than to help the weak. There is no greater satisfaction than to have done it
well.” – Walter Reuther
THE CHANGED ROLE OF ACCOUNTANTS / CFO
• During the 1990’s the role of accountants as scorekeepers and
commentators was emphasized - with Finance playing a
subordinate role in much of the corporate activity that took place
• However, the post-Enron and Worldcom world has created the
need for the Finance function to focus more of its attention on the
wider issues relating to enterprise risk management (ERM), and
so there has been a shift in the focus of accountants and CFO’s
• In terms of ERM, risk and strategy need to be aligned. This
means that once strategy choices are made, the risk responses
must be identified, accountabilities assigned, and
implementations monitored. Thus ERM is integral to strategic
planning and performance assessment
“I envision someday a great peaceful South Africa in which the world will take pride, a
nation in which each of many different groups will be making its own creative
contribution” – Alan Paton
THE CHANGED ROLE OF ACCOUNTANTS / CFO
• Accountants & CFO’s also need to be at the vanguard of
displaying a clean image from an ethical standpoint - need to lead
by example
• The Finance function globally is under immense pressure to
provide much greater transparency of reporting whilst at the same
time reducing the cost of its operations and increase the value it
provides to the organization as a whole
• The public sector and private sectors are faced with challenges
of accountability and transparency with an emphasis on
effectiveness and economy
• Whatever the focus, these drivers create a challenging
environment for the Finance function of today … and more
problems, especially in view of the recent global recession?
“The future belongs to those who understand that doing more with less is
compassionate, prosperous, and enduring, and thus more intelligent, even competitive.”
– Paul Hawken
THE CHANGED ROLE OF ACCOUNTANTS / CFO
• The new roles and associated activities within Finance are seen
as follows :- Scorekeeper
- Commentator
- Diligent Caretaker
- Business Partner
• Accordingly, it is clear that the role of the Accountant has
changed with increased emphasis on corporate responsibility and
increased partnership with the organization
• Accountants need to get out of the back office and add real
value to the day-to-day business operations
“People become really quite remarkable when they start thinking that they can do
things. When they believe in themselves they have the first secret of success” – V. Peale
THE CHANGED ROLE OF ACCOUNTANTS / CFO
• In addition CFO’s are now being called “accountechies”, and in
the future technology projects will consume an even greater
portion of a CFO’s day
• When asked in a recent survey by RHI Resource Management
which area of their role will change the most over the next 5
years, 39% of CFO’s indicated that they will be playing an
expanded role in information system initiatives. Strategic planning
followed with 26% of the response.
• CFO’s must get involved in key IT projects, such as a Revenue
Management, HR & Payroll, and GL systems, etc
• Accordingly, in terms of the new expanded role of the CFO
everything that affects the sustainability and viability of an
organization is of importance and concern to CFO’s
THE CHANGED ROLE OF ACCOUNTANTS / CFO
• A key challenge for the CFO of today is performance
management
• The CFO needs to ensure growth and improved productivity of
the entire organization
• Accordingly, performance targets and standards need to be set to
measure productivity
• Further, creativity and innovativeness needs to be at the heart of
everything we do as accountants and CFO’s
• In terms of sustainability the environment is also a concern. We
need to look at the triple bottom line
“The level of consumption that we identify with success is utterly unsustainable. We’re
gobbling up the world” – John Robbins
KEY CHALLENGES FACING CFO’s
• Growing service delivery and infrastructure maintenance
and rehabilitation backlogs
• Powers & functions review
• Poverty and job creation
• Economy, efficiency and effectiveness (including
productivity) .Ensuring growth in rates base
• Debt collection rates
• Risk and internal control
• Cash flow management (daily)
• Financial systems, processes and policies
• Asset management life cycle costing and delivery
DRC/CRC ratio
. Balancing social,economic and development spend
KEY CHALLENGES FACING CFO’s
• Eskom tariff increases,FBE and impact of rising block
tariffs .Credit control and infrastructure in Eskom supplied
areas
• Energy, climate change and green issues
• Vibrant urban economy
• Urban migration – rural development
• Compliance relating to SCM and irregular expenditure
• Water and electricity loss in distribution
• Unfunded mandates
• IT risks and controls
• Housing accreditation
• SCOA (Standard Chart of accounts)
• Review of Equitable share and other major grants
•Continous review of Accounting Standards
CFO & ETHICAL DECISIONS
• As you can see, the role of the CFO has become much more
diversified. The CFO is no longer just a number cruncher. New roles and
responsibilities include SCM, risk, VFM, and performance management
• In addition, the intense pressures of business may not always allow the
CFO the luxury of much time for reflection, and the high stakes may
tempt the CFO to compromise on compliance issues
• Irregular expenditure in terms of non-compliance with SCM regulations
is a key issue facing CFO’s right now
• CFO’s often face difficult ethical dilemmas, for example, housing
standards and the financial viability and sustainability of same
• No doubt, you already have a well developed ethical outlook, however,
how will you respond? If the choice was following the SCM regulations
to the letter of the law, or cutting a corner to expedite housing delivery,
which would you choose?
GFOA CONFERENCE : LESSONS
• A leader must be honest, especially with him/her self, and humble with
others
• A survey was undertaken by Credibility regarding the most desirable
characteristics for leaders versus colleagues with the following results :TOP LEADERS
• Honest
TOP COLLEAGUES
• Honest
82%
• Forward thinking 71%
• Co-operative
71%
• Inspiring
• Dependable
71%
87%
68%
• It is clear that in terms of the above survey, the most desirable
characteristic of leaders and colleagues is by far honesty
“The accomplice to the crime of corruption is frequently our own indifference” –
Bess Myerson
CFO ASIA SURVEY FINDINGS-ETHICS & THE CFO
• More than half the CFO’s believe they are responsible for
promoting an ethical culture in their companies. Some 70% said they
should set a good ethical example, while more than 50% believe that
they should drive integration of ethical values into senior management
decision making.
• Many CFO’s highlighted the impact of ethics on reputation. They
acknowledged that a good ethical culture has now become an imperative,
particularly for the organization’s overall reputation and brand. The
perception of a good ethical culture improves relationships with banks,
investors, suppliers and the organization’s attractiveness as an employer.
• Even as internal controls improve, Asia’s CFO’s still worry about
corporate culture. The change in accounting standards has placed new
operational demands on finance departments. However, CFO’s appear to
have taken in this in their stride and are still focusing on the “big”
picture. More than two thirds of participants said that building an overall
corporate culture of integrity is among their top 3 challenges.
CFO ASIA SURVEY FINDINGS-ETHICS & THE CFO
• 60% of CFO’s cite time and effort as the greatest hurdle to
establishing best ethical practice, an indication of intensifying
pressures on the CFO role. Likewise almost 50% said that they struggle
to balance the needs of ethical practice with company culture. Greater
regulatory scrutiny and calls for transparency and the CFO’s
responsibilities to implement best practice have increased the demands
on CFO’s and they are feeling the pinch
• Juggling regulations and codes with the realties of doing business
at the coalface is a struggle. Even the most ethically-aware companies
find their standards challenged on a daily basis.
• Over 50% of CFO’s report that organizations have processes in
place to assess adherence to their ethical policy. This clearly shows
that organizations now recognize the importance of ensuring they have
ethical practices.
CFO ASIA SURVEY FINDINGS-ETHICS & THE CFO
When asked to select the most important issues surrounding ethics, the
following were identified :• Creating a culture of integrity
32%
• Implementing a code of conduct or ethics
17%
• Ensuring objectivity in financial reports
10%
• Fraud prevention
9%
• Assessing level of adherence to the Code
6%
• Resolving or removing conflicts of interest
6%
• Different cultures and values
6%
• Tracking actual or suspected fraud / theft
5%
• Tracking bribery
4%
• Other
5%
THE CODE OF CONDUCT
• The question should be asked whether municipalities have made a true
effort to develop codes of conduct that are aligned to their unique
function?
• The acceptance of a code of conduct is a very central part of being a
professional.
• It guarantees the public that professionals in local government adhere to
the highest professional standards and are committed to serving the
public to the best of their ability.
• Unfortunately codes of conduct often become no more than useless
pieces of paper. They do not succeed in becoming living documents.
• A code of conduct is useless if it does not reflect the values that guide
professionals, and does not address practical work-specific concerns and
problems
“Corruption is like a ball of snow, once its set a rolling it must increase”–C. Colton
SOME PRACTICAL ISSUES FOR US
• Excessive hospitality
• Bribes and public perception
• Service suppliers actually do research into the financial affairs of
officials they are dealing to identify the “hot button” they need to press
• Kick backs, free holidays and expensive gifts
• Compliance with SCM regulations – irregular expenditure
• Declarations / conflict of interest – business interests
• Wasteful and fruitless expenditure
• Unauthorised expenditure
• Rolling of cash
• Housing irregularities
WHAT CAN BE DONE
• Strong internal controls and checks
• Lifestyle audits
• Regular price tests and anti-fraud reviews to ensure no collusion with
suppliers
• Report cases to the police. Apparently less than 50% of fraud or
corruption committed is reported in fear of negative publicity
• Inculcate a culture of whistleblowing - a fraud & corruption hotline.
• Screen staff properly when employing in terms of prior criminal
records, credit problems, previous employer, etc.
• Watch out for sole suppliers
• Watch out for staff with gambling habits, having affairs, excessive
overtime, refusing a promotion, not taking leave
• Reconciliations must be up to date
• Gift registers, declaration of business interests, access to Persal system
INTERNAL CONTROL IS KEY TO
ACCOUNTABILITY
• Internal control represents an organization’s plans, methods and
procedures used to meet its missions, goals, and objectives and serves as
the first line of defence in safeguarding assets and preventing and
detecting errors, fraud, waste, abuse and mismanagement
• Cost benefit is an important concept to internal control considerations
• Expedient to link the internal control assessment and reporting process
to the budget to analyze the impact of corrective action on resources
• Emphasize the early warning capabilities of the process to ensure
timely actions to correct weaknesses identified
“Honesty is the recognition of the fact that
the unreal is unreal and can have no value,
that neither love nor fame nor cash is a value
if obtained by fraud” – Ayn Rand
INTERNAL ACCOUNTING CONTROL
• Cash receipts : Ensure all cash received, deposited and reconciled
• Cash disbursements : Ensure that cash is disbursed only upon proper
authorization of management, for valid purposes and are properly
recorded
• Petty cash : Ensure that petty cash and other working funds are
disbursed for proper purposes, are safeguarded and properly recorded
• Payroll : Ensure that payroll disbursements are made only upon proper
authorization to bona fide employees, related legal requirements are
complied with, and properly recorded
• Grants, gifts and bequests : All received and disbursed must be
properly recorded
• Asset management : acquisition and disposal
• Accounting Procedures Manual : Policies and procedure for handling
financial transactions are best recorded in such a Manual, describing the
tasks and who is responsible for them. Facilitates smooth turnover in
financial staff
IRREGULAR EXEPENDITURE & SCM
• E-Procurement
• ISO 9001 accreditation of SCM processes
• Procurement scheduling
• Additional due deligence assessments on tenders above a value to be
determined
• Need clarity from NT on SCM regs s116(3),s32,s33,etc
• Access to Persal re employees in the service of State
• 100% prepayment audit of all payments
• Pay and leave checks and controls
• Pre-screening of expenditure in terms of checklist
• Pre-budget checks on all expenditure
AUDITING
• Auditor-General does an excellent job
• Auditor’s management letter is an important indicator of the adequacy
of your internal accounting control structure and the degree to which it is
maintained
• The queries raised in the management letter must be taken seriously
with detailed responses and action plans to address same
• All weaknesses identified must be addressed as a matter of priority
• Management letters are there to safeguard us
• In addition, we should be focusing on risk management and we should
be prioritizing risk and ensure that the necessary controls and systems are
effected to mitigate these controls
“Integrity is telling myself the truth. And honesty is telling the truth to other
people.” – Spencer Johnson
FINANCIAL MANAGEMENT SYSTEMS
• Need variance reports to identify any possible dishonesty/unethical
conduct
• There needs to be quick action to nip the unethical behaviour in the bud
to stop other individuals from taking a chance
• Enhanced financial management systems provide for improved
accountability
• Greater scope for rigorous scrutiny and oversight
• This will certainly serve to discourage unethical behaviour
“Even the most rational approach to ethics is
defenceless if there isn’t the will to do what is right” –
Alexander Solzhenitsyn
MFMA
The Act introduces a number of developments which have the effect of
ensuring ethics and preventing fraud and corruption :• Its provisions for internal control that take risk assessment into account.
• Supply chain management has been tightened up in a number of ways.
• Then there are the sanctions that the Act introduces under Chapter 15.
• The Act encourages greater transparency.
“Have the courage to say no. Have
the courage to face the truth. Do
the right thing because it is right.
These are the magic keys to living
your life with integrity”- W.
Clement Stone
MFMA
• Section 61 provides that the fiduciary responsibilities of accounting
officers. Section 61(1) provides what the accounting officer must do :
- act with fidelity, honesty and integrity and in the best interests
of the municipality in managing its financial affairs
- disclose all material facts which are available to him/her which
may influence decisions
- seek to prevent any prejudice to the financial interests of the
municipality
• Section 61(2) then provides what the accounting officer may not do :-
- act in a way that is inconsistent with the duties assigned to
accounting officers
- use the position or privileges or confidential information for
personal gain or to improperly benefit another person
MFMA
Section 173 provides that the following actions are now considered to be
offences by accounting officers:• Deliberately or in a grossly negligent way :
- contravening a provision of the Act or failing to comply with a
duty imposed by the Act
- failing to take reasonable steps to implement the supply chain
management policy
- failing to take reasonable steps to prevent unauthorised,
irregular or fruitless and wasteful expenditure
- failing to take reasonable steps to prevent corruptive practices in
the management of assets, receipt of money or the
implementation of the supply chain management policy
• Deliberately misleading or withholding information from the AuditorGeneral about any bank accounts, money received or spent
• Deliberately providing false or misleading information in a document
submitted to the Auditor-General or made public
SYSTEMS ACT
The Systems Act provides a code of conduct for all municipal staff
members, and covers the following issues :• Commitment to serving public interest
• Personal gain
• Disclosure of benefits
• Unauthorised disclosure of benefits
• Undue influence
• Rewards, gifts and favours
• Council property
• Payment of arrears
• Participation in elections
• Sexual harassment
“Live so that when your children think of
fairness and integrity, they think of you.” –
H. Jackson Brown Jr
SYSTEMS ACT
In particular, I would like to highlight Section 4 of the Code which
provides as follows :
• A staff member of a municipality may not :- use the position or privileges of a staff member, or confidential
information for private gain or to improperly benefit another
person
- take a decision on behalf of the municipality concerning a
matter in which that staff member, or that staff member’s spouse,
partner, or business associate, has a direct or indirect personal or
private business interest
• Except with the prior consent of the Council a staff member may not :- be a party to a contract for the provision of goods and services,
or the performance of any work for the municipality
- obtain a financial interest in any business of the municipality
- be engaged in any business, trade or profession other than work
of the municipality
IMFO CODE OF CONDUCT
• Adhere strictly to the accounting standards and requirements for local
government as published by the Institute from time to time.
• Members serving in local or related authorities must observe the laws
relating to those authorities, in particular any provisions concerning
disclosure
• At all times the interests of the employing body are paramount and
under no circumstances may a member seek to benefit from any profit or
commission arising directly or indirectly from a transaction in which the
authority has an interest
• As regards gifts & hospitality, members will adhere to the provisions of
the MFMA
• The duty of the member is to promote the financial well being of the
organisation they serve and, when necessary, to advise openly and clearly
upon the financial consequences of any proposed course of action
IMFO CODE OF CONDUCT
• Members must comply with all legal requirements and ensure that the
law is applied in all activities with which they are directly concerned or
of which they may have knowledge
• Confidential information should only be divulged to those persons
entitled to receive it.
• The use of confidential information for the private advantage of the
employee or another person or body is a breach of trust
“I can do no other than be reverent before everything
that is called life. I can do no other than to have
compassion for all that is called life. That is the
beginning and the foundation of all ethics”- Albert
Schweitzer
SANCTIONS
• The Code must be accompanied by stringent sanctions to be effective –
“give it some teeth”.
• In this regard, s174 of the MFMA provides that any accounting officer
convicted of an offence under s173 of the Act (as alluded to earlier) is
liable to
- imprisonment for a period of up to 5 years
- an appropriate fine determined in terms of the applicable
legislation
“It is curious – curious that physical courage should
be so common in the world, and moral courage so
rare.” – Mark Twain
CONCLUSION
• We need to bring back the pride and passion into the local government
financial workplace.
• A great leader has courage to fulfill one’s vision which comes from
passion and not position.
• Strong management required – I urge you to get rid of the bad apples!
• Financial staff need to set the example and lead the way – be the
torchbearers when it come to ethics, honesty and transparency.
• Strictly adhere to the IMFO code of conduct
• Need to get back to days of strict SCM and financial compliance
• Do we need to become “boring & grey” again?
• Finally, our President, Mr Chris Nagooroo, has in his Presidential
address quoted a small extract from a speech by our Minister of Finance
on fraud and corruption, but I’d like to share with you the full extract:
CONCLUSION
“Let me share with you our increasing concern about corruption in
government. We are in danger of becoming an “extractive” society where
a few who are incentivised by self-interest, seek only to “extract” for
themselves benefits from the state at the expense of the vast majority of
poor people. Some civil servants have created businesses in one guise or
another so that they can benefit from crooked tender processes.
Businesses on the other hand collaborate and bribe these civil servants to
steal from the state. It is time that the majority of honest civil servants,
civil society and business people took a firm stand against the extractive
behaviour of the few. Help us to generate a vigorous debate on, and a
rigorous look, at the creation of an ethical culture within all our
organisations. CONTD…..
CONCLUSION
Ladies and gentlemen, I raise these issues because I believe that I am in
the midst of people who can help us turn the tide against corruption. I
raise these issues with you for I believe that recent events call for critical
reflection on the role of your profession. We need to remind ourselves
that all professions, including accountants, have social and altruistic
responsibilities.
I would also urge you not to recoil from the task of undoing the harm
that years of oppression and discrimination have done to South Africa.
Those of you who have been activists in our country will know how
much sacrifice it took for us to free South Africa from the shackles of
apartheid. We need to continue the struggle to free our country from the
tendencies of selfish individualism, short-termism, and the unquenchable
thirst for easy wealth. To be an agent of change means facing opposition
and resistance, and yet going on, with one’s eyes fixed on the bigger
prize of a country where all, especially the vulnerable, are provided for.”
THE END
“Integrity is doing the right thing, even if nobody is looking”