Ethical Lens 1

Ethical Lens

October 2017

In this issue

Corporate reform

Integrated Thinking

Non-Compliance with Laws and Regulations (NOCLAR)

Offshore financial centers

Artificial Intelligence on diversity

CIMA Roundup of responsible business issues — October 2017

1 Ethical Lens

© 2017 Association of International Certified Professional Accountants. All rights reserved. CIMA and The Chartered Institute of Management Accountants are trademarks of The Chartered Institute of Management Accountants and are registered in the United Kingdom and other countries. The design mark is a trademark of the Association of International Certified Professional Accountants. 978-1-85971-848-3.

Ethical Lens 1

2 News

UK Government announce governance reform

2 Reports and events

CIMA Integrated Thinking

2017 Global risk oversigh

Global Knowledge Gateway

IESBA ethical requirements

NOCLAR

4 Reporting

IMF governance gaps

Tackling tax evasion

Integrated Reporting

5 Responsible business

Offshore financial centres

Driving corporate cultures

Cost of misconduct

AI and employment diversity

Improving financial accountability

A year on from Wells Fargo

Developing a sustainable future

Business leaders advice

Six types of money launderers

The only way is ... ethics

9 More from CIMA Ethics

Fighting illegal business practices

Ethics support guide

9 Helplines and support

Ethical webcasts

CIMA ethics helpline

UK legal helpline

Contents

3 IFAC

2 Ethical Lens

The latest CIMA Global Academic Research Program focuses on Integrated Thinking, ways in which the purpose and business model can be aligned to market opportunities and sustainable performance. Long-term value creation is at the heart of Integrated Reporting, it refers to an inclusive process of decision-making, management and reporting based on a range of factors that affect an organisation’s ability to create value over time.

The study suggests that financial experts play a very important role in implementing Integrated Reporting as they manage processes to collect data, provide narratives, interpretation and analysis.

Access the Global Academic Reasearch Program

UK Government announce corporate governance reform

News

Reports and events

The UK government announced a set of corporate governance reforms to enhance the transparency of businesses to: shareholders, employees and the general public. The Association of Certified Professional Accountants welcomes these proposals and efforts to improve corporate governance.

The Association is pleased to see the proposals are closely aligned with its response to the Government green paper, focusing on maintaining corporate governance on a principle rather than rules based approach. The UK government intend to bring the reforms into effect by June 2018.

CGMA Magazine highlights how the reforms aim to improve accountability and public trust. This is by making executive pay more transparent and giving employees a voice in the running of organisations.

The CGMA Magazine highlights three of the key measures as part of the reform:

• Pay ratios – listed companies would be required to disclose and justify pay ratios between chiefexecutives and the average UK worker annually

• Shareholder opposition to executive pay deals – objections of executive pay packages by 20% or more ofthe shareholders would be published on a register and overseen by the Investment Association

• Employee voice - companies would assign a non-executive director to represent employees and report onhow directors have taken interests into account

Access the full article and see The Association’s response

CIMA Integrated Thinking

2 Ethical Lens

In order to understand the current state of risk management process globally, CGMA surveyed 586 executives on ways their organisations approach risk oversight. The resultant report summarises the perspectives and provides an overview of the current state of the enterprise-wide risk oversight.

It finds that organisations must enhance their risk oversight by building robust processes, competencies and capabilities – and due diligence is necessary to ensure they are in place.

Access the full CGMA Report

2017 Global risk oversight

Ethical Lens 3

IFAC

The IFAC Global Knowledge Gateway provides insight, ideas and information from around the globe related to ethics, governance, sustainability and a range of other areas. You can find out more about the Gateway in this short YouTube animation.

Latest on the Global knowledge Gateway:

• Tackling corruption

• Blockchain Solutions for finance

• Impact of technology on talent

• Millennials and accounting

• Corruption and accountability

Visit the IFAC Global Gateway

Latest from the IFAC Global Knowledge Gateway

The International Ethics Standards Board for Accountants (IESBA), have published an exposure draft on the proposed revision to the Code of Ethics: Proposed Revisions to the Code Pertaining to the Offering and Accepting of Inducements. The exposure draft strengthens the provisions with regards to the offering and accepting of inducements by professional accountants in business and public practice. It also strengthens the understanding of laws in relation to gifts and hospitality.

IESBA invite stakeholders to comment on the Exposure Draft by 8 December 2017 by visiting the Ethics Board’s website: www.ethicsboard.org

Access the IESBA Exposure Draft

IESBA proposes revised ethical requirements

IFAC’s International Ethics Standards Board for Accountants (IESBA), have recently introduced a new international ethics standard: Responding to Non-Compliance with Laws and Regulations. It sets out a framework to guide professional accountants of what actions to take in the public interest when they become aware of a potential illegal act committed by a client or employer, including issues of fraud and bribery.

Read about CIMA and AICPA responses to NOCLAR

Non-compliance with Laws and Regulations (NOCLAR)

4 Ethical Lens

The UK Government will be introducing new legislation from October 2017 that will hold relevant bodies criminally liable where they fail to prevent the facilitation of tax evasion. The UK Government has issued guidance that outlines the prevention procedures HMRC expects firms to put in place. This legislation will form Part Three of the Criminal Finances Act 2017.

Part Three, ‘Corporate offences of failure to prevent facilitation of tax evasion’, aims to overcome the previous challenge in attributing criminal liability to relevant bodies for the criminal acts of employees, agents or service providers.

Baker McKenzie outlines some considerations that financial organisations should take up, ahead of the legislation:

1. Review existing financial crime and Anti- Money Laundering policies

2. Understand what reasonable preventative procedures will look like within your organisation

3. Review client risk profiles and those Politically Exposed Persons (PEPs)

4. Review the role of agents and third parties, falling under associated persons

5. Understand the broad reach of the legislation, by facilitation of UK and foreign tax offences

6. Review of Terms of Business Agreements

7. Enhance monitoring and surveillance

Access further legislation consultation information

Tackling Tax Evasion

International Monetary Fund (IMF) identify governance gaps

Reporting

The International Monetary Fund (IMF) reassessed their approach to tackling governance issues related to corruption. The Fund recognised that systemic corruption poses a direct threat to sustainable and inclusive growth, contributing to the neglect of health, education and equality.

The review made at the request of the IMF Financial Committee found there has been significant progress in the IMF’s contribution to governance and corruption across its operations. This has been shown in its country reports and IMF programs.

Alongside this, the Fund has identified areas in which its engagement can be strengthened: by establishing a better method of assessing the extent of corruption; developing more concrete policy advice to help governments tackle corruption; providing assessments on the cost of corruption; and ensuring even-handed treatment of corruption issues across countries.

Access the full IMF Policy Paper and Human Rights Watch response

Ethical Lens 5

Watch Matt Olsson, IFAC’s Small and Medium Practices Committee Deputy Chair, review the importance of integrated reporting and how businesses are driven by integrated thinking. He addresses how integrated reporting allows businesses to look at the value they create, both economically and socially and use a holistic approach to drive this forward for the long term. Mr Olsson highlights how companies are using integrated reporting to showcase their value creation showing they are future ready.

Watch the IFAC video

Integrated Reporting

Responsible business

Offshore financial centresResearchers at the University of Amsterdam report how offshore finance is not the exclusive business of exotic small islands far away. Countries are increasingly becoming conduits that channel financial corporate investment from authorities to tax havens, including larger economically developed countries. The research states how five countries of larger economies act as conduits for offshore financial centres, they account for 47% of corporate offshore investment from tax havens. The largest conduit is Netherlands who lead the way with 23% of its corporate investment ending up in tax havens, followed by United Kingdom with 14%, Switzerland 6%, Singapore 2% and Ireland 2%. Whilst the pressure on tax avoidance continues, how can large tax havens globally be limited? Access the full research

Driving corporate culture with valuesIn a short IFAC video, Nicole Kissun, Partner, Technical Standards Group at BDO, highlights the importance of values in driving corporate culture. In her video she focuses on the significance of flexibility and trust within and between her team, and how this is showcased throughout the company. Access the full video and CGMA Internal Trust Report

6 Ethical Lens

Artificial Intelligence (AI) algorithms have been used by researchers to illustrate the diversity at the top of the world’s corporate ladder. What did they find? There are a lot more steps to take.

The researchers compiled pictures of top executives from 500 of the largest companies in the world, which consisted of over 7,200 photographs from 38 countries. The AI programme was set to detect age, race and gender profile against the general population. The study found:

• 21.2% of corporate executives in the study were female

• 22 companies had no women on their boards, with a majority of these being firms in Asia

• Nearly 80% of the corporate executives in the study were white, with 3.6% black and 16.7% Asian

• The median age across all corporate executive in the US for the study was 52

The research, although not completely precise, highlights the importance of recognising diversity within ones organisation. This should promote active efforts to encourage a more diverse and equal working environment, and highlight the ability for AI to do so.

Access the New Scientist article

Artificial Intelligence used to track employment

The Guardian report that over the five years between 2012-2016, the cost of compensating mistreated customers for 20 of the world’s largest banks reached £264 billion, according to research conducted by the Conduct Cost Project Research Foundation.

The project looks at the banks that spent the most on misconduct cases. The top five banks include: Bank of America, JP Morgan, Morgan Stanley, Royal Bank of Scotland, and Lloyds Banking Group.

The money set aside by the banks for misconduct was used to settle fines and other costs incurred from regulatory and legal claims. In comparison to the previous five-year period (2008-2012) the cost spent on misconduct rose 32%, which illustrates how the consequences of misconduct for banks continue.

Access the full article

Cost of misconduct for banks on the rise

Ethical Lens 7

Wells Fargo, the international banking and financial services company, came under intense scrutiny after it was revealed they had been driving up stock values. This was through cross selling and opening accounts in customers’ names without their permission or knowledge.

One year later the organisation has been proactive in addressing the issues including: submitting to investigations; removing its CEO and other implicated staff; clawing back executive bonuses; transforming its board; and simplifying its formally decentralised structure.

The revelations concerning Wells Fargo continue as in these last few months more reports on the amount of individuals who could have been affected continue to rise. Despite this, The Economist reports that Wells Fargo has achieved good results in comparison to its peers in the industry, as customers continue to bank with them and deposits have risen.

However, the company continues to be associated with the scandal; as investigations continue it proves to be a prime example of the scrutiny financial organisations go through for unethical behaviour. Ultimately the scandal created a turn in strategy- it now states that shareholder returns are only the last of six “core” values, after innovation, community service and others.

Access the full article here

Improving Financial Accountability

Developing a sustainable future

A year on from Wells Fargo scandal

There is a crucial need for better performance and greater accountability in public financial management systems. Even as countries are working to crack down on corruption by reducing the incentives the Chartered Institute of Public Finance and Accountancy (CIPFA) note that more can be done. CIPFA note five key ways to improve performance and accountability: 1) Ensuring accrual accounting- looking at not only cash flow, but also assets and liabilities that provide a more accurate picture of the financial organisation 2) Apply a whole systems approach to improve scrutiny- bringing together the key elements into a single framework, ensuring functions work in an effective and coherent manner 3) Reduce tolerance of corruption through big data and analytics 4) Publish public government financial statements 5) Plan for reform - allowing governments to effectively achieve change Access the full article here

In the latest Financial Magazine article Peter Bakker, President of the World Business Council for Sustainable Development, states the companies should start developing their business models for a sustainable future. Mr Bakker, previously the Chief Executive of TNT N.V, the Dutch express delivery and mail group, saw the financial benefits in running a sustainable business after creating a strategy to reduce emissions across the company’s aircraft and vehicles. The initiative led the company to be a world-leader in corporate social responsibility and highlighted the importance of long-term value creation.

Access the FM article

8 Ethical Lens

The defence and security organisation, BAE Systems, has identified six criminal types responsible for money laundering around the world. In order to help businesses to recognise possible threats, BAE Systems’ subject matter experts analysed customer data and identified the people most commonly involved in money laundering. They are:

• White collar fraudsters or organised crime

gangs

• Leaders withholding power and wealth in their countries for personal gain

• Bystanders who do not facilitate crime, but allow it to continue

• People on international watch lists who could be corrupted or facilitate corruption for a price

• ‘The Sharks’ who enable crime by helping the movement of illicit funds through the banking system, profiting themselves along the way

• Legitimate-looking businesses that exist to launder money

CIMA Members in Practice must comply with the current anti-money laundering (AML) regulations, or equivalent if practising outside of the UK. CIMA’s AML guidance provides further resources, information and training. Read the full article

Business leaders advice: Don’t do bad things

The only way is … ethics

Six types of money launderers

Reputation is key, whether that of people or business. The reputational damage experienced by Bell Pottinger emphasises how no company is immune. Bell Pottinger, an international Public Relations firm well known for its cliental and founders has recently gone into administration. It comes after an investigation which found it implemented secret campaigns to stir up racial tensions in South Africa. The Guardian note that many organisations face an organisational problem of delivering in the short term for investors- rather than developing a long- term strategy to protect their reputation. This creates a culture where bad things are side-lined by seniors in the hope that they will stay uncovered for the remainder of their tenure. The breakdown of the PR firm illustrates the reputational damage organisations face, and the importance of – not doing bad things. Access the full article here

An ethical business culture can be more powerful than one based entirely on enforcement, as indicated by Executive Director of Supervision, Jonathan Davidson.

In the financial services industry ‘fear and money’ remain the primary tools of motivation. In order to change behaviour of individuals involved in misconduct, financial penalties are not enough. They only put a price on breaking the rules and allow individuals to justify them accordingly.

Building an ethical culture in organisations can lead to greater employee engagement, better teamwork and more innovation. The CGMA discussion report on Internal Trust also highlights the importance of encouraging a positive organisational culture that is open and honest.

Access the full article

Ethical Lens 9

Access all CIMA webcasts and responsible business videos. They include interviews, animations, seminars and guidance on ways that CIMA members have dealt with ethical dilemmas.

LAW Express - for CIMA members and students in the UK and Europe. This service gives access to information online at no charge, and a low cost professional legal advice phone-line.

• Find information about CIMA’s helplines and support at www.cimaglobal.com/helplines

• Access the Code and all ethics resources at www.cimaglobal.com/ethics

• Alternatively, send your ethics query in an email to ethics@cimaglobal.com

Watch the Financial Management Magazine video highlighting how management accountants are leading the fight against illegal business practices. You can also access further webcasts on ethics and responsible business. Access the ethical webcast here

The support guide provides an overview of the ethics support and resources that are available to you, and where to find them. It includes research reports, and interactive tools to help better your understanding of the code, and what it means to you. Access the Ethics Support Guide

This free confidential helpline offers ethical guidance and assistance with applying the Code of Ethics, available to all CIMA members and students.

What do you think about Ethical Lens? Share your thoughts in our feedback survey or contact ethics@cimaglobal.com

CIMA Ethics Helpline

UK Legal Helpline

Ethics Support Guide

Helplines and Support

The fight against illegal business practices Ethical Webcasts

More from CIMA Ethics Helplines and Support