1 The art of more timely financial reporting ICPAS seminar “Towards a new era in more timely...

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The art of more timely financial reporting

ICPAS seminar

“Towards a new era in more timely reporting”

October 23, 2004

Presented by Dr Raymond Ting, Group Financial Controller

Nucleus Electronics Ltd 2004 Copyright - Nucleus Electronics Ltd. All rights reserved .

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““Corporate governanceCorporate governance is the system by which is the system by which business corporations are directed and business corporations are directed and controlled. The corporate governance controlled. The corporate governance

structure specifies the structure specifies the distribution of rights distribution of rights and responsibilitiesand responsibilities among different among different

participants in the corporation, such as, the participants in the corporation, such as, the Board, managers, shareholders, and spells out Board, managers, shareholders, and spells out the the rules and procedures for making decisionsrules and procedures for making decisions

on corporate affairs”on corporate affairs”

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2002: Year of the Scandal!(Source: Business Week)

2002: Year of the Scandal!(Source: Business Week)

• Enron• CMS Energy• Dynergy• Tyco• Reliant Resources• Computer Associates• Network Associates• Credit Suisse First Boston• Merrill Lynch• iCapital Markets• Trump Hotels

• Global Crossing• Lucent Technologies• Qwest Communications• Worldcom• Adelphia Communications• Edison Schools• Kmart• PNC Financial Resources• Waste Management• Informatics

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-150%

-100%

-50%

0%

50%

100%

150%

Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02

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The Finance Function

8

Changing CFO RequirementsChanging CFO Requirements

August 1982 – March 2000DJIA

11,000

3,000

800

IInitial

Growth

IIConsolidation/Acceleration

1982 1991 2000

Business Partner

Tax Cuts andFree

Trade

U.S. WinsCold Gulf

Wars

Y2K and Internet Bubble

IIIIrrational

Exuberance

March 2000 – December 2003 Corporate StewardDJIA

11,000

9,000

7,000

IIIRestoration of Stability

2000 2002 2004

IBear

Market

IICrisis of

Confidence

Post Y2K and Tight Fed Policy

9/11/01,Enron andAndersen

Sarbanes/Oxley, Public Co. Oversight

Steward

Strategist

CFO

Steward

CFO

Strategist

9

Sarbanes-Oxley Act - Summary

• The Act was signed into law on July 30, 2002 and includes eleven titled sections:

• Title I Public Company Accounting Oversight Board• Title II Auditor Independence• Title III Corporate Responsibility• Title IV Enhanced Financial Disclosures • Title V Analyst Conflicts of Interest• Title VI Commission Resources and Authority• Title VII Studies and Reports• Title VIII Corporate and Criminal Fraud Accountability• Title IX White Collar Crime Penalty Enhancements• Title X Corporate Tax Returns• Title XI Corporate Fraud and Accountability

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• Requires quarterly certification by the CEO / CFO of all companies filing periodic reports under section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 regarding the completeness and accuracy of such reports as well as the nature and effectiveness of internal controls supporting the quality of information included in such reports.

• Requires an annual report by management regarding internal controls and procedures for financial reporting, and an attestation as to the accuracy of that report by the company’s auditors.

Section 302

Section 404

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Aftermath of Enron Accounting Scandal

• Sarbanes-Oxley Act of 2002

• New NYSE Corporate Governance Listing Standards

• New Corporate Governance Rules adopted by SEC

• New Rules and Auditing Standards adopted or proposed by Public Company Accounting Oversight Board

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• “Last year’s Sarbanes-Oxley Act brought the most sweeping changes in corporate governance and financial disclosure for 70 years” (Financial Times, December 1, 2003)

• “Sarbanes-Oxley will be judged as landmark legislation. It is one of the most sweeping reforms since the 1933 Securities Reform Legislation.” (Beth Brooke, Global Vice Chair, Ernst and Young, September 15, 2003)

Importance ofSarbanes-Oxley Act of 2002

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• Signed into law on July 30, 2002

• Applies to publicly held US companies and foreign private issuers and their audit firms

• Establishes Public Company Accounting Oversight Board (PCAOB) to regulate accounting professionals who audit financial statements of public companies

• Provides for significant corporate governance reforms regarding – audit committees and their relationship with their auditors– financial reporting and auditing process

Sarbanes-Oxley Act of 2002

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Aftermath of Enron Scandal

New NYSE Corporate Governance Listing Standards• On February 13, 2002, Chairman of SEC asked NYSE to review its

corporate governance listing standards

• BOD of NYSE appointed Corporate Accountability and Listing Standards Committee to review current listing standards and make recommendations

• On June 6, 2002, Committee presented NYSE BOD with report recommending significant changes in how NYSE-listed companies are governed

• On August 1, 2002, NYSE approved Committee‘s recommendations

• On August 16, 2002, NYSE sent recommendations to SEC for approval

• On November 4, 2003, SEC approved new corporate governance rules

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Pre-Enron Corporate Governance Standards Listed companies must have a minimum three-person audit committee composed solely of independent directors.

Existing definition of “independence” precludes any relationship with the company that may interfere with the exercise of director's independence from management and the company.

Three year cooling-off period for former employees of the company and business relationships.

Requires all audit committee members to be financially literate and at least one must have accounting or related financial-management expertise.

Audit committee charter must provide that audit committee and board of directors have “ultimate“ authority to retain and terminate independent auditors

Requires shareholder approval of equity compensation plans for directors, but broad-based plans are exempt

Requires board of directors to adopt and approve a written charter for audit committee, which must be reviewed annually.

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Selected Final Recommendations of NYSE Corporate Accountability and Listing Standards Committee

Comparison with Current Rules

Final Recommendation Current Rule

Independent directors must comprise a majority of board of directors.

No existing requirement.

Listed companies must have audit, compensation and nominating/corporate governance committees, each composed entirely of independent directors.

Listed companies must have a minimum three-person audit committee composed solely of independent directors. No existing rules requiring compensation and nominating committees

Non-management directors must meet without management in regular executive sessions.


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For a director to be deemed "independent," the board must affirmatively determine the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).

Existing definition precludes any relationship with the company that may interfere with the exercise of director's independence from management and the company.

Prohibit audit committee members from receiving compensation other than directors’ compensation fees

No existing restrictions

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Former employees of company or auditors of company – and their family members – may not be considered independent until five years after their employment ends.

Three year cooling-off period for former employees of the company and business relationships.

Every listed company must have an internal audit function


Require chair of audit committee to have accounting or related financial-management expertise.

Requires all audit committee members to be financially literate and at least one must have accounting or related financial-management expertise.

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Grant audit committee sole authority to hire and fire independent auditor and approve any non-audit relationship with independent auditor

Audit committee charter must provide that audit committee and board of directors have “ultimate“ authority to retain and terminate independent auditors

Require shareholder approval of all equity compensation plans.

Requires shareholder approval of equity compensation plans for directors, but broad-based plans are exempt

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Require companies to adopt and disclose corporate governance guidelines, codes of business conduct, and charters for their audit, compensation and nominations committees.

Requires board of directors to adopt and approve a written charter for audit committee, which must be reviewed annually. No existing rules requiring compensation and nominating committees, corporate governance guidelines, or codes of business conduct.

Any waivers of codes of business conduct for directors or executives must be disclosed.


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Each listed-company's CEO and CFO must certify annual financial statements

No existing requirement .

Each listed-company's CEO must certify annually that he/she is not aware of any violation by the company of NYSE corporate governance standards.

No existing requirement .

NYSE may issue a public reprimand letter for violation of a corporate governance standard, in addition to the existing penalty of delisting.

No current provision for a public reprimand.

The NYSE urges every listed company to establish orientation program for new board members.

No such recommendation has been made previously.

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Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002

Decision MakerCEOBoa

rdOvers

eer ArchitectIn

spec

tor

CFO

Shareholder Principal

Management Leader

Business Developer

CommercialInnovator

Performance Owner

Tactical Pilot

Strategic Conductor

Strategic Planner

Capital Optimizer

Analyzer and

TranslatorStakeholder Manager

Recorder and

Reporter

Risk Manager

Policy Enforcer

Compliance Regulator

Policy Authorizer

Financial Auditor

Risk Assessor

Business Examiner

Management Advisor

Shareholder Ambassador

PerformanceManager

Fiduciary

Checks

Balances

Purpose

Strateg

ist

Plan

ner

Steward

Governor

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Meeting Stakeholder Expectations

ExecutiveManagement

Board ofDirectors

CEO

CorporateStaff

AuditCommittee

Business LineManagement

CustomersRatingAgencies

Creditors Suppliers

Investors

• Portfolio contribution• Performance

management• Sustainable growth• Corporate risk

• Sarbanes-Oxley • SEC reporting• Financial markets• Public interest

FinanceFunction

SEC andRegulators

Finance Function Stakeholders

• Governance• Stewardship• Control

• Strategic Vision• Insightful Analysis• Continuous Innovation

Stakeholder Expectations

• Independent fiduciary • Business partner

• Reporting Integrity

External Drivers Internal Drivers

Required Finance RoleRequired Finance Role

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Benefits to Client

Identifying and resolving root causes of delays and errors

Elimination of redundant and non-value added steps

Documenting and formalizing responsibilities to allow for cross-training, enhanced communication and accountability across departments

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Enhancing the Monthly Closing Process

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Reducing the Time for the Accounting Close

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Month-End Close Redesign

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Close Process Improvement

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Adoption of US Reforms in SingaporeAdoption of US Reforms in SingaporeThe Trickle Down EffectThe Trickle Down Effect

Leading companies not waiting for rules.

US Multi national corporations

Local public listed companies

VC financed companies and entities with public accountability

Private Companies(Owner Managed Entities)

?? ?

? ? ? ?

32

Management information system

Data

Information

33

Accounting KnowledgeAnd Skills

General Business Knowledge and Skills

Record Keeping and

Reporting

Accounting Decisions Requiring Judgment

Understanding

Transactions

Comprehensive Understanding

Of Business Environments

Teaching, Understanding, Competency

1

4

3

2

CPA TRAINING

CPA LEARNING

EXPERIENCE

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• Agree reporting structure

• Agree skill sets

• Agree scheduleReporting H

Joint ventureSubsidiary D

Subsidiary CSubsidiary BSubsidiary A

Subsidiary F

Subsidiary G

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• Document centric

• Low frequency

• Limited details

• Low useability

• Data centric

• High frequency

• Detail rich

• Highly informative

The financial Report “The annual report of the 21st century will not be annual and it will not be a report: it will be an up to date informative, permanent dialogue”

Alan Benjamin (IACW)

Trend

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Financial Supply Chain

Shareholders

Government

Banks

Customers

CompanyCompany

BusinessProcess

BusinessPartners

Consolidate

General ledger

Management reports

Adjustments

Financial Statement

Audit

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Demands increase

More infoMore infoMore frequentMore frequent

More detailMore detail

IAS/IFRSIAS/IFRS

Basel IIBasel II

SustainabilitySustainability

Audit FileAudit File

EMUEMU

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Implementation issues

Applying Accounting rules

Impact local chart of accounts

Reduced time to report

Increased level of detail

Controllability

Internal Transparency

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Issues Financial Supply Chain

COMPLIANCE REPORTING(SGX-ST)

Reportingdeadline

Quarterly = 45 days

Full year = 60 days

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Issues Financial Supply Chain

REPORTING DEADLINE

Time toRelease results via MASNET

4 days4 days

3 - 4 days3 - 4 days

8 8 DAYSDAYS

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More timely reporting is needed for

Speed

Reduce costs

Efficiency

Reliability

What really mattersTypically

Transparency and reliablity

Optimize financial supply chain

Virtual close & real time monitoring

Rebuild trust and confidence

Instantly find the business data needed

Cross border comparison & analysis

42

Trends in reporting

• Financial Reporting….

• Faster• Broader• Deeper

today

tomorrow

Real time Beyond

tomorrow

43

THE BALANCE OF NATUREOR

(AN ANALOGY OF MANAGEMENT AND AUDITING)

List of Characters: Business Equivalent:(1) Rhino (1) Management(2) Tickbird (2) Auditors,(3) Tick (3) Inefficiencies

Ineffectiveness, Fraud, Waste, and Abuse

The Tickbird sits dutifully on the rump of the Rhino eating the Parasites that drains the blood of the Rhino. The Rhino tries to swat the Tickbird and would kill him if he could.

The vigilant Tickbird maintains his position, unwanted and misunderstood, on the rump of the Rhino.

44

High & Low Context Cultures

• Chinese• Korean• Japanese• Vietnamese• Arab• English• North American• Scandinavian• European

• High-Context Culture

• Low-Context Culture

45

Most important drivers shaping a

firm’s strategic options fall into

twotwo categoriesFirm’s competitive

capabilities and market position

Nature of industry and competitive

conditions

Matching Strategy to a Company’s Situation

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Product Development

& Mgt

SourcingRFP/

Tender

Contract Negotiation

& Mgt

Purchasing & Payables

Mgt

Scheduling &

Production

Inventory Mgt

Customer Order and

Billing

Receivables Management

Customer Relationship

Mgt

Planning & Forecasting

Sales & Marketing

Contract Negotiation

& Mgt

Customer Service &

Supply CA

SH

Supplier Relationship

Mgt

AN

AL

YS

IS &

ST

RA

TE

GY

CA

SH

PA

YA

BL

ES

RE

CE

IVA

BL

ES

jIN

VE

NT

OR

IES

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The Business Model

Compliance

Management

Market

Financial report

Competition Stakeholders

Costs structure

Sales and marketing

Com

mer

cial

dec

isio

n Financial reporting

Business analysis model – “the wheel of fortune”Business analysis model – “the wheel of fortune”

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Anything so fundamental as implementing a new or

different strategy involves aligning the organization’s

culture and structure with the requirements for competent

strategy execution.

49

A clear view of the situation, the problems and the options is a pre requisite to support:

Financial situation, cash needs, recent & forecast performance, security, risks & sensitivities

Financial Issues

Strategy

Markets & Products

Processes

Organisational Issues

For survival, turnaround and growth

Competitive positioning & competitive advantage

Core competencies & value chain efficiency

Management & structural reviews

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Employees are …………..

• The eyes, ears, mouth and conscience of the organisation

• Eyes/ears pick up intelligence

• Mouth delivers believable messages (ideally with e-mails)

-150%

-100%

-50%

0%

50%

100%

150%

Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02

Insi

der t

radi

ng

expo

sure

s

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Customs duties

Transfer pricing issues

A=L+OE-R+EA=L+OE-R+E

PROFIT AND LOSS ACCOUNT

Sales X

Purchases (X)

Manufacturing (X)

Overheads (X)

Financing (X)

Profit X

Tax charge X

Profit after tax X

BALANCE SHEET

Tangible assets X

Intangible assets X

Net current assets X

X

Capital X

Reserves X

Funding debt X

X

VAT and sales taxes

Cross border issues

Location of activities

Treasury

Foreign exchange

Funding

Location and exploitation of intellectual property

Cross border issues

Profit repatriation flows

Monetising tax assets

Trade debts

Liabilities

Property taxes

Employee taxes

International executive taxation

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There is no formula to “calculate” significance, however, there are general guidelines:

• Quantitative factors:– Value of transactions– Volume of transactions

• Qualitative factors:– Risk of significant misstatement of a financial

statement element in the absence of internal controls.

Management ultimately decides significant controls.

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Operational Controls

Compliance Controls

Control

Evaluationand Attestation Process Improvement

and Control Integrations

Re-architecture of Risk and Control

Reporting

Real TimePerformanceand ControlReporting

BusinessInfo-StructureOn Demand

Process TransformationCO

NT

RO

LS

IM

PR

OV

EM

EN

T

PROCESS IMPROVEMENT

Risk & Performance Optimization

in leading edge companies

57

PricewaterhouseCoopers LLPAvoid going too low

The Corporate Life Cycle©

LIQUIDATION

DEMISE CURVE

IDEA

M/A ACTIVITY

GOING PUBLIC

RAPID GROWTH

TURNAROUND / EXIT

MATURITY

IN TROUBLE,NOT AWARE

LOST CONTROL

LOST THE BUSINESS

IN TROUBLE BUT IN CONTROL

Timely reporting/pace of change

STEEP PACE OF CONSTANT CHANGE IN A VERY COMPETITIVE ENVIRONMENT

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Corporate Governance:Good intentions are not enough

Punitive consequences

…personal liability, even for negligence

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Corporate Governance is a Burning Issue

U.S.: The Sarbanes-Oxley Act (June 2002) requires you to:– Meet aggressive deadlines for financial reporting– Be personally liable for accuracy of your numbers– Face steep fines, jail time, de-listing of your company even for

negligence in reporting (not just for willful deception)

International Accounting Standard to reconcile geographical differences in reporting by 2005:

– European Union, Australia, Singapore to adopt IAS– U.S. FASB and IAS letter of intent to align– Streamlined reporting process, especially for multi-nationals– Align external and internal reporting

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Board Oversight Is Only The Tip of The Iceberg

• From the board room to the cubicle – it’s everybody’s business

• Requires strategic alignment and operational efficiency at all levels

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Set Up Your Business Processes For Compliance

• Ensure you have access to accurate, timely and relevant information

• Establish robust processes to ensure failsafe internal controls

• Enforce policies and procedures,and ensure trained staff

• Comply efficiently, not at the cost of profit

63

Business Systems Bring Efficiency To Compliance

• Automation reduces risk of errors• Prevents circumvention of controls• Reduces processing costs• Captures the state of your business at any

time• Provides vehicle for training and education

on time at low cost• Let’s you monitor skills and awareness of

your staff

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Business Systems: the “Engine” of Solid Business Practices

• Visibility: reduce risk through timely, accurate, relevant, consistent information

• Control: enforce policies and procedures through automated processes

• Efficiency: automate to maximize speed and accuracy

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Good Governance Requires Best Practices Across Your Enterprise

Visibility

Control

Efficiency

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VisibilityAccess to Timely, Accurate, Relevant Information

• Gain an accurate view of purchases, payments and outstanding commitments

• Maintain a single, global view of entire company’s financial activity

• Timelier access to accurate workforce information worldwide

• Visibility into sales pipeline, customer satisfaction, market shifts, etc..

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ControlAffect Change Quickly

Track suppler performance and ensure that the supply base delivers according to purchasing business goals

• Define roles and responsibilities for procedures and set measurement criteria for compliance

• Establish, document, communicate, policies & procedures. Enforce training requirements for staff at all levels

• Incent best behavior with automated incentive compensation

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EfficiencyMinimize Administrative Overhead Costs

Purchase product traceability to minimize the risk of product recalls and warranty services costs

• Centralize finance and administrative functions

• Make education available through multiple channels

• Repeatable and scalable marketing, sales, and customer service processes

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Corporate Performance Management: Complete and Integrated Business Intelligence

Visibility

Control

Efficiency

Real-time enterprise view of your operations

Automate and integrate

Establish measurements, set targets, and execute

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Information Technology: Single Source Of Truth

Visibility

Control

Efficiency

Centralization for consistency of information

Automate to lower costs and minimize errors

Workflow enforces best practices

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BO

AR

D

AU

DIT

OR

CE

O/C

FO

Visibility

Control

EfficiencyBusiness Systems

Information Technology

ACHIEVETIMELY REPORTING DEADLINES

8 CALENDER DAYS FROM MONTH END

72

Close Your Books With Confidence

Reduced Close Time

7

8

8

20

0 10 20 30

ST Eng

SNP Corp

Nucleus

Qian Hu

3 Q 2004result

Days to Close

73


Reduced Close TimeFY 2004

8

8

8

8

6

5

5

6

0 5 10

1 Q

2Q

3Q

4Q

Actual days

NELdeadline

Days to Close

74


Reduced Close Time

57

50

15

8

0 20 40 60

2001

2002

2003

2004

NELreportingdeadlines

Days to Close

75


Reduced Close Time

11

46

73

247

0 100 200 300

<= 45 days

45 - 60

61 - 75

76 - 90

SGX - 377FY2003reporting

Days to Close

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Corporate GovernanceYou Are Accountable

• To your shareholders and all stakeholders

• To your CEO and Board of Directors

• To your company’s employees

• To the SGX or other regulatory agencies

• Principles-based accounting standards

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Is Compliance Worth the Trouble?

1 Improve Business Processes

2 Protect Market Value

3 Avoid Costs of Non-Compliance

4 Raise the Standing of Finance

78

Conclusion

DJIA

15,000

12,000

9,0002004

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