Ali - internship report

SIEMENS Global network of innovation

SIEMENS Pakistan Engineering Company Limited

SIEMENSPAKISTAN ENG. CO. LTD.

Internship Report

Department : Finance &

Controlling

Internship Period : 25th May – 6th July

2009

Prepared for : Mr. MUHAMMAD RAFI

Prepared by : SYED ALI AHMED (INSTITUTE OF BUSINESS

ADMINISTRATION)

Report Prepared by: Syed Ali Ahmed2


PREFACE

As per the requirement of the internship program at Siemens, this report outlines

the details of the training received during the internship period. The internship

program lasted six weeks in which the dynamics of the Finance and Controlling

Department were fully exposed to and assimilated. This report includes all the

major aspects covered during my internship, propounding thorough knowledge of

procedures being followed to complete individual tasks and the policies being

complied. The report comprises of group wise description.



ACKNOWLEDGEMENT

I am highly indebted to you for providing me this priceless opportunity to gain

experience and insight of the workings of finance and accounting of such a huge

business setting.

I would like to thank the following persons and their colleagues for their co-

operation and invaluable support in making this report possible.

Mr. Mehtabuddin (DGM General Ledger Management Group)

Mr. Imran Siddqui (Manager FC and Deputy SOA Officer)

Mr. Wajahat Ahmad (Manager FC and Deputy ICS Officer)

Mr. Danish Noorani (Manager Policies and Guidelines)

Mr. Faisal Mushtaq (Manager Local Accounts & Tax)

Mr. Asghar Sheriff (Manager Cash / Corporate Matters)

Mr. Zafer Javed (Manager Accounts Receivable)

Mr. Rashid Sheikh (DGM Taxation)

Mr. Shakir Hussein (Manager Accounts Payable)

Mr. Imran Saeed (GM Treasury)

Mr. S. M. Iqbal Ali (DGM Corporate Reporting)

Mr. Burhan Yousuf (GM Finance & Controlling)

This report reflects the knowledge attained by the continuous support and

mentoring of the very cooperative and team-working individuals of the

Department of Finance and Controlling. On the spot feedback provided by them

alongside task assignments was instrumental in the learning process.



SIEMENS IN PAKISTAN

SIEMENS was first known in this sub-continent in 1870, with the construction of

the Indo-European Telegraph Line, almost 11,000 km long, from London to

Calcutta by Siemens, United Kingdom. Siemens UK' was headed at the time by

William Siemens, brother of Werner who was one of the pioneers of the industrial

revolution and the guiding spirit of the Siemens company in its formative years. In

the part of the subcontinent that is now Pakistan, the first Siemens office was

established in 1922 in Lahore. Siemens Pakistan Engineering Company Ltd. was

founded in 1953 as a private limited company. In 1963, the Company was

converted into a public limited company and in 1978 it enlisted itself with Karachi

and Lahore stock exchanges.

For 85 years, Siemens has been active in Pakistan, where it holds leading

positions in the three application fields: Energy and Environmental Care, Industry

& Public Infrastructures and Healthcare. The Siemens IT Solutions and Services

Group functions across all three fields. Siemens is the country’s No. 1 supplier of

high-voltage grid stations, switchgear products and systems, power distribution

and power transformers, and network consultancy. The company has also built a

new 220kV Power Transformer factory, and is poised to meet the demand in this

sector nationally and in the region. In fiscal 2007 (October 1, 2006 – September

30, 2007), sales to customers in Pakistan amounted to EUR 230 million. New

orders totaled EUR 280 million. With a workforce of 1,400 employees, Siemens

is one of the most important employers in the country and the largest employer of



engineering graduates in the country. Directly and indirectly Siemens provides

employment to more than 4000 persons across the country.

The Company manages its business and manufacturing activities through its

head office in Karachi and two regional branches at Lahore and Islamabad.

The Department of Finance & Controlling

The Finance and Controlling department is the backbone of Siemens. It handles

the entire finance of the company. It provides necessary information and reports

to all the business units, management, clients, employees, trade creditors and

Siemens AG. These reports help business units to assist them to know the exact

position of their orders, receivables, advances, and their turnover. It also helps

the management to decide on sensitive matters with the help of these reports

and information. Management Information System and journalization are two

major activities of the department of Finance & Controlling.

Overall the Finance & Controlling department is divided into several groups

which are as follows:

Policies and Guidelines Group

General Ledger Management Group

Accounts Payable group

Accounts Receivable group

Cash Management Group

Treasury Department

Taxation Group

Sarbanes – Oxley Act Group

Financial Reporting Group

Foreign and Local Management Reporting Group

Corporate Controlling Group



Each group has been assigned a specific task. The respective group leaders are

responsible for the group activities that they have been assigned to. Information

for various groups is compiled for reporting purposes and continuous interaction

among the groups keeps the smooth workflow. Processed Information from

various business units are verified (which has been parked with the SAP

system), from the evidences send by them to Finance & Controlling Department,

and then is posted or booked into the system for integration.

Policies and Guidelines Group

International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) are used as a basis for rules and regulations used in Siemens around the globe. However, since these standards leave room for assumptions and discretion at some instances it can lead to different reporting methodologies and data can be rendered inconsistent. To overcome such issues SiemensAG has developed its own Financial Reporting Guidelines, in which they have defined the parameters for procedures and guidelines. These Financial Reporting Guidelines are used in Offices, Business Constructions and Contractual Businesses working under Siemens AG around the globe. It governs internal regulations, any change in the policies by Siemens AG is sent to all its offices through circulars notifying the change. Each office insures it as being justified and practically implemented according to its working conditions. In case of default in any Office, the justification has to be given for the same and has to be notified to Siemens AG.



General Ledger Management Group:

General ledger forms the basis of the business accounting end product, the

financial statements. It is the prime accounting journal, which summarizes and

presents each individual accounting head and makes it possible for the

management to keep track of the performance and activities. General Ledger in

Siemens is maintained in the SAP computerized environment. Each individual

head and record is given a system-generated code by which that is identified and

integrated or normalized.

Responsibilities of the General Ledger group include:

Maintaining General Ledger

Keeping records for Valuation of Reserves & Reconciliation

Keeping records for orders

Keeping records and pooling Common expenses

Keeping records for accrued expenses

Keeping records for foreign currency valuation

Maintenance of General Ledger:

General ledger is central to all accounting activities in the business; any

information that the company accounts for becomes the part of General Ledger

before finally released on financial statements. Maintaining General Ledger is

very important and is carried out through the use of control procedures over

computerized inputs. Records are updated, reports are generated and balances

are tallied. Closing procedures are closely monitored, it carried out on the last

day of the closing month closing month, after which entries into the closing month



are locked for postings. Balances from different groups for information entering in

the general ledger are confirmed and reconciliation is demanded from various

groups for differences. In the department of Finance & Controlling various

information are posted to the system including cash and bank transactions, sales

invoices, suppliers’ bills. Any correction, amendment or transfer is done through

journal vouchers called the booking vouchers. At the end of the each month,

allocation of common expenses to various BU’s are charged from the common

expenses pool according to the Strict control procedures are being followed, BU

sends respective documents to the department of FC for journalization and

authorization, and then documents are being checked with the parked

information pertaining to that individual transaction or activity, after verifying the

transaction it is posted into the live SAP system for integration. Every effort is

made to ensure that any error is not made, but if there is an error in the BU’s

provided information or error made by the FC, than booking vouchers are used

for reversal, transfers, and correction of errors and for special natured

transactions.



Accounts Receivable Group

The basic working of the Receivables Department can be categorized under the

following three heads:

1. Trade Receivables

2. Taxes

3. Reports

1. Trade Receivables

There are four types of receivables in which the Receivable Department deals in:

Accounts Receivable

Commission Receivable

Earnest Money/ Security Deposits

Debit Notes

Accounts Receivable:

Sales by Siemens Pakistan are made in cash as well as on credit. So for the

credit sales, the amount has to be received from the clients. This amount is

termed as receivables.

Commission Receivable:

Commission income is another source of income for Siemens Pakistan.

Those materials which are not available in Pakistan are imported and

provided to clients. Siemens Pakistan acts as a communication and

coordinating bridge. As a result of this service, Siemens Pakistan gets

commission income. All that record is maintained by the Receivables

Department.



Earnest Money/Security Deposits:

When Siemens Pakistan works for a particular client, it deposits

security/earnest money as guarantee that it will complete the job in hand by

keeping in view all the terms and specifications mentioned in the contract. If

that isn’t the case then that security would be seized by the client. On job

completion, the security deposited needs to be collected. This is the

responsibility of the receivables Department.

Debit Notes:

Debit notes are those expenses on which both the parties agree at the time of

entering into the contract. For example, if Siemens Pakistan is carrying out a

job, then expenses like travelling, food, accommodation, etc. would be the

responsibility of the client. These expenses would be reimbursed from the

client. The collection of these debit notes is the responsibility of the

Receivables Department.

2. Taxes

Taxes are also collected by the receivables department.

3. Sales Tax

The receivable of sale tax is a process in which the company has to collect tax

from the clients to whom sales are made on behalf of the government. There are

a few companies which pay tax on their own and deposit a certificate to Siemens

for the record.

There are two requirements for sales tax:

a) Services



Job completion Certificate is a must which is a proof that Siemens has

rendered services as per to the requirements of the client.

b) Supply of Goods

When the goods are supplied to the client and gets his approval in this

regard, sales tax can be collected from that particular client.

3. REPORTS

The Receivable Department prepares the following reports:

(a) Age Analysis

(b) Advances

(c) Sales Report

(d) Export Sales

(a) Age Analysis :

The age analysis report shows after how much time a specific payment from

a particular customer is expected to be received.

Specific Allowance:

In specific allowance, the delay in the payment by the client is checked. The

management creates provision for bed debts against each receivable. If the

receivable amount isn’t collected within 1080 days overdue, it is usually

written off.



Discounting

In this procedure the management decides to apply different factors on

receivables falling in different time period category. Mostly 1-1.5 years, 2-2.5

years, etc. This is applied on those receivables which aren’t due right now.

General Allowance

In general allowance the management decides the provision of bad debts. A

fixed percentage is applied to the overall sales.

(b) Advance Report :

If the company receives advances for sales from the clients, then these

advances are adjusted in the receivable account.

(c) Sales Report:

The sales report is the report through which the company gets to know the

receivables related to the sales.

(d) Export Sales Report :

Through export sales report, the company gets to know the foreign currency

receivable.



Accounts Payable Group

The payables section deals in the following types of payments

Payment to vendors

Payment for custom duties

Payment for utility bills

Salaries & facilities of employees

TYPES OF PURCHASES

General Purchase

Material Purchase

General Purchase:

The items that fall under this head are like stationary etc.

Material Purchase:

The major purchases made by the company fall under this category, items include

purchase of machinery, spares, tools etc.

FOREIGN PAYABLE

The BU gives the specifications of the material it needs to the commercial department.

The commercial department after finalizing all the specifications regarding that purchase

issues a purchase order. A liability is generated in case of Usance LC. The Payment has

to be made according to the terms and conditions of the agreement.



Siemens Pakistan deals with various foreign suppliers including Siemens AG,

from where standard products are being purchased for production.

There is a need of a middle party to ensure the safety of transaction, as there is a

number of steps involved before the consignment finally reaches Siemens stores,

and that party is Siemens’ bank, and that of vendor’s.

Cash Management Group



The functioning of cash department can be classified into two categories:

Corporate

Cash Transactions

Corporate:

Share transactions (issuing, transferring, etc) are the major area of corporate

section.

In 1978, the shares of Siemens were floated in the market for the first time. From

1978, Siemens was listed in Karachi Stock Exchange (KSE).

The distribution of shares of Siemens Pakistan can be categorized in the

following two heads:

Siemens Germany

Local Shareholders

Since Siemens Pakistan is a public company, therefore filing of returns is a

compulsion as required by the Companies Ordinance and any major change

needs to be reported immediately. It is mandatory.

Cash Transactions:

Siemens Pakistan does not encourage cash transactions of large amounts.

Transaction of Rs. 5,000 or more needs to be done through cheque. There are

also some restrictions from the Income Tax authorities.

Payments like electricity bill, telephone bill and other utility bills etc. are however

done through cash. All expenses which fall under the category of cost of goods

manufactured need to be paid in cash.



There are 4 cash outlets of Siemens Pakistan i.e. in Karachi, Lahore, Islamabad

and Quetta.

Cash voucher indicates:

(a) Nature of expense

(b) Amount of expense

(c) Name of the client

(d) Signature of the issuer

(e) Signature of the payee

(f) Signature of the authorized person who calls for the payment

The cash vouchers are both filed in manually as well as kept in company’s

computer system. Thus the company possesses both the hard copy as well as

the soft copy of the vouchers.

The cash vouchers of transactions carried out in Lahore and Islamabad are being

send to Karachi on a daily basis. Since cash transactions in Quetta are

comparatively less so they send it weekly.

The following two audit requirements regarding cash vouchers are essential:

(a) It should be properly filled like account no., amount, signature of the

concerned persons, etc.

(b) Accounting codes must be properly allocated.

The major stress is laid on accounting codes. This is due to the fact that if code

isn’t right, then financial reports will carry some sort of discrepancy. Financial

reports will no doubt be balanced but the figures in the respective accounts will

not tally with the figures in actual. By employing accounting codes, everything fits

into its place in the most appropriate and smooth manner.

Since Siemens Pakistan is working on different projects, site cash transactions’

also take place. There is a project leader for every project. Only the project

leader can withdraw cash for site expenses on behalf of the whole team that is



working on a particular project. The site expenses are reported to the Company

for the reimbursement of cash. However necessary documentary proof like

purchase receipt, etc. needs to be attached.

Following are the common types of site expenses:

Transportation/Fuel

Toiletries

Accommodation/Hotel

Electricity, gas bills

Telephone/Mobile

Food



Treasury Group

The primary function of the treasury is to assist the company in:

i. Maintaining an effective level of liquidity and efficient utilization of resources;

ii. Complying with the regulations of the SBP for foreign exchange transactions.

Coordination and dealing with banks is the most important area of concern for the

Treasury Section. Arrangement of guarantees and running finance, opening of LCs, etc

are some of the areas in which Siemens Pakistan consistently deals with banks. So a

healthy relationship with banks is a must.

Currently, Siemens Pakistan deals with a lot of banks, some of them are

Standard Chartered Bank

Muslim Commercial Bank

Union Bank Limited

Deutsche Bank

ABN Amro Bank

Citibank

Hong Kong and Shanghai Banking Corporation Limited

Letter of Credit

Letter of Credit (LC) is a bank’s written guarantee made on behalf of buyer to pay to the

seller a given some of money provided that the documents presented meet the terms of

the letter of credit and are presented within a specified time and at a specified place.



Issuing a Documentary Credit

Contract

Advice of Documentary

Documentary Credit

Credit Application

Documentary Credit

The buyer and seller enter into a sales contract providing payment for documentary

credit. The buyer gives instructions to his bank i.e., the Issuing Bank, to issue a credit in

favor of the seller i.e. the Beneficiary. The Issuing Bank asks another bank, usually in the

country of the seller, to advise and perhaps also to add its confirmation to the

documentary credit. Finally, the advising or confirming Bank informs the seller that the

credit has been issued.

Parties to the Letter of Credit

1. Buyer (Applicant)

2. Seller (Beneficiary)

3. Issuing Bank

4. Advising Bank

Other parties, if any, which facilitate the documentary credit are:


SELLER

ISSUING BANK

ADVISING BANK

BUYER


(a) Negotiating Bank

(b) Reimbursing Bank

(c) Second Beneficiary

The Documentary Credit is a facility provided by banks to facilitate international trade

transactions. It guarantees payment and assures all the contracting parties that the Issuing

Bank or the Confirming Bank, if any, will honor its obligations provided that the terms

and conditions of the documentary credit are met in the desired and most appropriate

manner.

Benefits of Documentary Credit

It satisfies the financing needs of the seller and the buyer by providing the bank’s

credit standing. In case of documentary credit, the seller no longer needs to rely on

the willingness and capability of the buyer to make the payment.

Documentary Credit Application requires the full name and address of the seller, the

amount of the documentary credit, a brief description of the goods, details of

documents required, etc.

Arrangement of Loans

Loans are taken from banks so that the business units can cover all their costs which are

incurred in the production of goods demanded by the clients.

Types of Loans



1. Short-Term Loans

The loans which are taken for a period of 1 year or less are termed as short-term

loans.

2. Mid-Term Loans

The loans which are taken for a period of 1-10 years can be classified as mid-term

loans.

3. Long-Term Loans

The loans which are taken for a period of more than 10 years are called long-term

loans. This type of loan is usually taken for capital expenditures like land, equipment,

building, machinery, etc. and for investment purposes.

Siemens Pakistan generally takes short-term loans for running finance.

Forward Cover

Forward Hedging is a tool through which the company minimizes the possible losses

from exchange rate fluctuations. Since Siemens Pak is involved in trade internationally, it

has to deal with a lot of foreign currency transactions. Exchange Rates keep fluctuating

everyday and the company has to take account of that. The Company negotiates a fixed

exchange rate with the bank that deals with that currency and than payments are made

and receivables are converted through that exchange rate.

For example, if a company enters into a contract now but the payment is to be made after

6 months, then by forward hedging, it will come to know the amount it has to pay after 6

months because no matter what the prevalent exchange rate is, the company will always

trade with the agreed upon rate.



Thus by employing forward cover, the company comes on the safe side and then sets

prices accordingly as it will come to know the exact cost. Hence it is less risky as it

covers the risks of devaluation, inflation, etc.

Bank Guarantees

Bank guarantee is the irrevocable undertaking of a bank to pay to the beneficiary a

certain amount of money if the expected result of a transaction doesn’t occur or the third

party doesn’t conform to the specifications of the contract.

Guarantees are subject to the laws of the country in which the bank issuing the guarantee

is located.

One of the responsibilities of the treasury department is to arrange bank guarantees for

business units.



TAXATION GROUP

The Taxation group at siemens looks after the taxation issues of the company. They

calculate the annual Taxation liability, tax expense, tax returns and related matters.

They functions provided by the taxation department are:

Preparation of Sales Allocation for final tax computation

The total sales of Siemens Pak are first classified under different heads on the basis of

profit centers to identify normal sales and sales falling under FTR. The working is

prepared on a quarterly basis to facilitate the preparation of quarterly computation of the

income tax liability and the annual income tax return and the amount of provision to be

made in quarterly, half yearly and annual financial statements. This report shall be

reviewed by the authorized personnel.

Computation and Payment of advance tax liability and filing of quarterly advance tax return

Provision for Taxation/Deferred Taxation

Income tax liability shall be calculated / booked on monthly basis through the Sitax package available on Siemens Intranet. Sitax calculates the effective tax rate for the company based on the budgeted figures. The monthly provisions are made by applying their effective tax rate to profit before tax figures. However, a detailed computation of taxable income, tax liability and deferred taxation shall be prepared in accordance with the ITO 2001 on a quarterly basis which shall be approved by the authorized personnel and figures in Sitax shall also be updated on the basis of this working.

Preparation of Annual Tax ReturnThe taxation department also calculates the annual tax return of SPAK. For that computation and supporting information are forwarded to the tax consultants for review. The consultants shall prepare the annual tax return on the prescribed format and the same shall be approved in accordance with the signature mandate.

Monthly and annual tax reporting package to SAG

Preparation of quarterly/annual statements under the income tax law



Consulting and advising on matters pertaining to income taxThe Taxation Department also advises the top management of Siemens Pakistan on issues pertaining to income tax regulations of Pakistan. It provides consulting and advising services to them as well as to SAG for tax issues.

FINANCIAL REPORTING GROUP

Local Financial Statements

Quarterly and Yearly Financial Statements

This group is responsible for the Preparation of Quarterly and Yearly Financial Statements of Siemens PAK. For this purpose, a trial balance, grouped according to the local presentation requirements, shall be obtained from the ‘general ledger’ group. Financial statements are prepared in accordance with the recognized accounting framework including disclosure and presentation requirements of International Accounting Standards, the Fourth Schedule to the Companies Ordinance, 1984 (the Ordinance) and other applicable regulations and guidelines.

Coordination in annual audit and second quarter (half yearly) review

A letter signed by the authorized personnel shall be sent to the auditors usually including the following:a. Dates of pre audit meetings.b. Dates of furnishing schedules.c. Target dates for completion of audit fieldwork.d. Dates of initialling the financial statements and rendering the initialled auditors’ report.

Deliverables relating to annual financial statements shall include the following:

a. Auditors’ report to the members.b. Auditors’ review report to the members on the company’s statement of compliance

with the best practices of the code of corporate governance.c. Balance sheet.d. Profit and loss account.e. Statement of changes in equity.f. Cash flow statement.g. Notes to the financial statements.

The second quarter condensed financial statements shall be subject to a limited scope review in accordance with the requirements of the Companies Ordinance, 1984 and other corporate law requirements.



The deliverables relating to the second quarter condensed financial statements shall include the following:a. Auditors’ review report to the members.b. Balance sheet.c. Profit and loss account.d. Statement of changes in equity.e. Cash flow statement.f. Notes to the condensed financial statements.

Approval of financial statements by the Board of Directors

The financial statements are forwarded to the Company Secretary for onward submission to the Chief Financial Officer, the Chief Executive, the Audit Committee and the Board of Directors along with the following documents:a. Reasons for significant variations.b. Ratio analysis.c. Comparison of investments made with the budgeted and last year’s figures.d. Capital expenditure or sale of fixed assets.e. Provision for obsolescence in stock and for doubtful accounts receivable.f. Number of employees of the company.g. Any other information required or considered appropriate.

The financial statements shall be signed by the CEO and CFO before being placed before the audit committee.

Credit Management

The group is also involved in credit management, or more specifically in Employees Funds Management. They maintain three kinds of funds:

Provident Fund and Special Assistance Fund Gratuity Workers Profit Participation Fund

Signature Mandate

Signature Mandate comprises of the following: Signature Mandate Regulations Activity Catalogue (Annexure A) – This annexure lists all the activities of

different BU’s for which an authorization would be required. List of Persons authorized to sign as per signature mandate (Annexure B) – This

annexure lists down the specific persons who are authorized as signatories for various activities.

Limits of individuals to sign offer / contract, LoAs and related documents (Annexure C) -



List of fixed deputies (Annexure D) – The signature mandate has also defined who would deputize for a signatory at times when that signatory is on leave.



FOREIGN AND LOCAL MANAGEMENT

REPORTING GROUP

Corporate reporting section develops the financial reports of the company. The

reporting is done in two forms:

Local Reporting

Report to the Principle company i.e. Siemens AG

The above two reports are made on monthly basis and presented to the

management. The report that is sent to Germany is first transferred into a

program known as esprit. This program gives Siemens Pakistan a front end only

as the data base server is in Munich, Germany. In this way Siemens AG can

consolidate the accounts worldwide and report it to NYSE every quarter as

required by the Security Exchange Commission New York.

There are two segments in reporting:

Legal Consolidation

Management Reporting

Legal Consolidation

This part of the reporting section deals with the Trial balance as well as all the

annexure supporting the trial balance.

Management Reporting

The management part of the reporting section deals with the segmental

reporting. This report is made independently on different products or a single

industry etc.



The Flow of Data

The data is picked up from the general ledger in the trial balance format. The

reporting department presents the Financial Statements according to the

required format and then finally it is posted in the esprit to report it to Siemens

AG.

Contents of the Monthly Report

Following are the some contents of the report

Business Results

Major new orders & Turn Over

Exports

Ratio and Graphical Analysis

Balance sheet

Fund Flow Analysis

Investment

Accounts Receivable age analysis & advance record summary

Inventory

Employees

The Corporate Reporting Group of Finance & Controlling Department is a major

group. It provides company wide information to both the local management and

to the parent management, and thus forms a bridge between Siemens Pakistan

and Siemens AG to convey the performance of the company on monthly,

quarterly and on annual basis.

On the other hand individual business units and divisions report their

performances to the business units and divisions of the parent company.



In the monthly report, which is also called reporting folders; there is a summary

and analysis of each and every activity of the business. These reports contain

details of the business results, major new orders and turnovers, exports, ratio

analyses, balance sheet, funds flow analyses, investment, account receivable

age analyses, advances received, inventory, valuation reserves, employees,

comments on business figures, comments on overheads etc.

Corporate Reporting group facilitates, coordinates and provides guidelines in

budget preparation activity to business units who prepare these budgets.

Management reviews all the budgets of various business units and approves

them, and foresees that whether the targets set by the business units are

realistic.

The various tasks performed by the Corporate Reporting Group include:

Budget Compilation and analysis of business figures

Forecast compilation & Analysis of business figures

Monthly, Quarterly and Annual Results Preparation

Reporting to Local And parent management

Transmission to Siemens AG

Balance sheet and income statement and their annexure, with other reports on

company’s performance and others such as employees’ report etc. become the

part of both forms of reports. Same format is followed for monthly, quarterly and

annual results.



SERBANES OXLEY ACT GROUP

In 2001, the corporate world was hit by unprecedented financial scandals. Two major companies Enron and Worldcom were found to be involved in frauds related to financial reporting. It was found that management of these two firms fraudulently overstated their companies’ profits leading to fraudulent financial reporting. The top executives were convicted of fraud and the companies were heavily fined and subsequently dissolved. The failure of Enron and Worldcom shook investors’ confidence and lead to grave concerns regarding Internal Controls over Financial Reporting.

The Sarbanes-Oxley Act (SOA) was enacted in the US in 2002 to address the issue of internal controls over financial reporting. Every company listed on the New York Stock Exchange (NYSE) has to follow the SOA. Since Siemens AG is listed on the NYSE and Siemens Pakistan’s accounts are consolidated with SAG, the law indirectly applies to SPAK as well. The two main sections of the SOA are section 302 and section 404.

Section 302 requires that the principal officer of the company issues an External certification that the financial statements are complete, correct & sound based on the control procedures practiced by the company. Section 404 (a) states that the company should establish and maintain an adequate internal control over financial reporting. The company should also do an assessment of the effectiveness of its internal controls over financial reporting. Section 404 (b) states that the company’s independent auditors are required to attest to, and report on, such internal control assessment accomplished by the management.

To comply with the requirements of the SOA, Siemens AG has devised a global strategy to ensure that it has a sound system of internal controls and is compliant with the requirement of the SOA with respect to internal controls over financial reporting. For this purpose Siemens AG has issued an ICFR Manual which binding on all Category 1 Siemens companies. The ICFR Manual states 8 steps for implementation of internal controls over financial reporting which, being a Category 1 company, are binding for SPAK.

The 8 Steps are briefly discussed as below:

Identification of Significant Accounts, disclosures and Locations

Siemens AG determines significant account and disclosures for SOA. SPAK reviews it and finalizes the same. Significant locations are identified based on materiality.



Identifying and Mapping of Significant Classes of Transactions (SCOTS) and related Processes

The company makes a chart where it identifies the processes and links it with SCOTS.

Documentation of relevant processes

Based on the step above, the company documents all the relevant processes in the form of flowcharts.

Identification and documentation of Risks, related Assertion and Controls

After documenting all the related processes, the company needs to identify and document all the points where there are considerable chances of malpractices. The company document all related processes showing the risk points, the risks involved and the controls that should be there.

Evaluation of Design & Operating Effectiveness of Controls

After the controls have been designed, they must be tested to ensure that they are fulfilling their objectives. Design Effectiveness of controls means that the controls are designed in a manner that it is devoid of any loopholes and that it would be effective. Operating Effectiveness of controls measures whether the controls have been implemented or not. It basically means that the controls designed by the company are put into operation. To test the design and operating effectiveness of SOA controls, SOA Testers are employed at every significant Location. The job of a SOA Tester is to ensure that the Sarbanes Oxley Act is being implemented in both substance and form, and that the controls deployed by the company are designed adequately and working effectively in producing reliable financial information.

Evaluation of ICFR at the Company Level

Company level controls are documented and evaluated to ensure that they are in accordance with the requirements of the ICFR Manual.

Evaluation of Internal Control Deficiencies

After controls have been tested, they should be evaluated at a specified date to ascertain any deficiencies in those controls. If deficiency is reported, the SOA team is responsible to remediate and eliminate the same.



Final Management Assessment and Internal Certification

At the year end, the management assesses if there are any uneliminated deficiencies and the implementation of ICFR. The management reports is assessment to SAG.



CORPORATE CONTROLLING GROUP

The primary function of the Corporate Controlling Group (CCG) is to assist the

company’s management in execution of its control over fiduciary and financial

reporting duties. CCG focuses on the financial reporting lines of different BUs of

the company to ensure their fair presentation and review their status of

compliance with financial reporting guidelines.

The group carries out the following functions.[

Order Cost Controlling (OCC) Review

On a monthly basis, OCC reports shall be extracted from Spiridon prior to the

month end. These reports reflect all the orders of Siemens Pakistan. There are

three forms of OCC Reports. Percentage of Completion (POC), Complete

Contract Manufacturing (CCM) and Standard Products (SDI). The monthly report

is reviewed for any discrepancies. Following are the discrepancies that are

generally identified during the review of OCC report.

Cost Discrepancy – the sum of actual and committed cost is greater than

plan cost;

Cost of Sales Discrepancy – cost of sales is not appearing correctly in

proportion to the revenue recognized;

Cost of sales should not exceed plan cost;

Progress Billing – Billing should not exceed order value;

Order Value and Plan Cost Discrepancy – Order is opened but order

value or plan cost is not there;

Excessive Accruals – Accrual is the difference between cost of sales and

actual cost. Accruals should not exceed 5% of the plan cost. If it does

exceeds 5% then either the actual cost should be increased or the accrual

should be reversed;



Loss Orders – When the plan cost or sum of actual and committed cost is

greater than the order value, there exists a loss order. Whenever a loss

order is identified, an accrual has to be made for that loss;

High irrelevant cost appearing in the order.

The discrepancies, if any, identified is forwarded to BA heads of relevant BUs for

required action.

Liquidity Damages (LD) Provisioning

Liquidity damages are the penalties paid for failing to honor contractual

commitments. These provisions are based on the terms and conditions of the

contract. The company makes a LD provision at the start of the contract. If the

Liquidity Damage is utilized then a utilized reversal is made and if the Liquidity

Damage is not utilized then an Unutilized Reversal is made. Unutilized reversal is

made in two cases. Firstly, if the supplier doesn’t charge any LD even though the

company has made late shipments. Secondly, if the company makes timely

delivery to the customer the provisioned amount is reversed.

Inventory Valuation Reserve

If inventory in hand exceeds a certain amount, then a reserve (provision) needs

to be created to account for risks associated with holding that amount of

inventory.

There are 3 kinds of risks associated with inventory.

i. Quantity – holding a large quantity of inventory has its own risks. There

are increased storage and maintenance costs. Provisioning on Quantity

risk is based on the depletion span of inventory. Depletion Span is

calculated by dividing last year’s quantity consumed by the value of the

closing stock. If the depletion span is between 0.5 and 1, a reserve of 20%

of the inventory amount is created. If it’s between 1 and 1.5, a reserve of

40% is created and if it’s 1.5 or above a reserve of 60% is created.



ii. Price – Price differentials during the time inventory is at hand is a risky

proposition. Provision for price risk is based on the Net Realizable Value.

iii. Technical – There are also technical risks associated with keeping a large

inventory at hand like security. A 90% provisioning is done for this risk.

Hedging

Siemens Pakistan is involved in a lot of hedging activities. All its transactions are

hedged. The Corporate Controlling Group makes a provision for gain and loss for

that forward cover. The provision is based on the mark-to-market method which

is “Booking Rate – Market Rate”.

Excess Cost Provisioning

When sales are greater than billing there is excess cost and when sales are less

than billing there is excess billing. A Provision of 1% is made for excess cost.

Transfer Pricing

Transfer pricing refers to the pricing of contributions (assets, tangible and

intangible, services, and funds) transferred within an organization. For example,

goods from the production division may be sold to the marketing division, or

goods from a parent company may be sold to a foreign subsidiary. Since the

prices are set within an organization (i.e. controlled), the typical market

mechanisms that establish prices for such transactions between third parties may

not apply. The choice of the transfer price will affect the allocation of the total

profit among the parts of the company. This is a major concern for fiscal

authorities who worry that multi-national entities may set transfer prices on cross-

border transactions to reduce taxable profits in their jurisdiction. This has led to

the rise of transfer pricing regulations and enforcement, making transfer pricing a

major tax compliance issue for multi-national companies.



Summary

The workings of Finance and Controlling Department are among the necessities,

for the business of Siemens Pakistan. Being the most important central

department of the organization, Finance and Controlling Department is

supporting all the business activities and is helping in maintaining smooth

workflow.

I experienced a very good and disciplined business atmosphere, where no one

exceeds his limits and tries to give his best within the constraints where every

individual works in a team to achieve the corporate goal.


Ali - internship report

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