THE ABACUS | MAY 2018 INTELLIGENCE & INSIGHT FROM CA SRI LANKA 1

MAY 2018 | WWW.CASRILANKA.COM TAX REFORMS: ACCOUNTING PROFESSIONALS’ TURN AT THE WHEEL

ISSN 2279-3860

9 772279 386000 AD THE ABACUS | MAY 2018 1 CONTENTS MAY 2018

Features

15 | Ethics and Disciplinary Committees’ Reviews

16 | Sri Lanka’s international trade ties Situated strategically, athwart the principle sea trade route in the Indian Ocean, Sri Lanka could not but be a part of international commerce. Over millennia, this helped shape the country’s economy, culture and society. Although, historically, agriculture remained the mainstay of the economy, the sheer volume of trade had its effect

20 | Effective audit regulation builds trust, attracts investment: Brian Hunt The Chairman of global audit oversight body IFIAR outlines the growing demands on regulators

28 | Changes to SLFRSs Amendments announced to Sri Lanka Accounting Standards for 2018

31 | Sunny-side up

32 | Good reason to be bullish on listed equities - Frontier Research In recent years, listed equities were eclipsed by fixed income assets; but soon, they’ll ride the bull 2 THE ABACUS | MAY 2018 CONTENTS MAY 2018

40 | The ill-fated road towards a 54 | 4 key steps for CFOs to instill toxin-free nation intergrated thinking and reporting

COVER STORY 43 | Rowena Barrett: Culture shapes innovation and entrepreneurship 56 | Tax reforms: Accounting professionals’ turn at the wheel 46 | Understanding the accountant’s role in corporate governance 60 | Watches of the month

50 | CA Sri Lanka President Jagath 61 | Caves of Mulu Perera’s Vision THE ABACUS | MAY 2018 3

INTELLIGENCE & INSIGHT FROM CA SRI LANKA

An Exciting Opportunity

ri Lanka's accounting profession faces its toughest challenge yet. The new Inland Revenue Act, effective from 1 April 2018, has overhauled a decades-old income tax code and with it an accumulated wealth of expertise on how to plan taxes, and case law on various taxation-related disputes. Both taxpayer and Stax officer are uncertain about the outcome of the new tax code. Some of the rules are Institute of Chartered Accountants of Sri vague, or appear to further burden taxpayers, or don't seem fair. Giving the Inland Lanka (CA Sri Lanka) is one of the largest Revenue powers to interpret whether transactions are tax avoidance schemes and the professional organisations in Sri Lanka in which requirement to pay taxes before appealing are particularly worrisome. 5,400 chartered accountants have obtained In the midst of all this, the country's accounting profession is presented with a gold- membership. The Institute provides insight and leadership to the accountancy and finance en opportunity to make a lasting contribution towards equitable economic growth. The profession in Sri Lanka as well as globally. Our accounting profession can be agents of change as a group and as individuals working in well-qualified members are trained to provide finance divisions of companies or as consultants at accounting firms. financial knowledge and guidance based on Many agree that the good things about the new income tax code far outweigh the the highest professional, technical and ethical standards, thereby assisting communities challenging areas. It's far simpler to understand, promises to make tax filing much easi- and organisations gain long-term sustainable er and plugs many loopholes. The new code also takes into account that investors value economic growth. clarity and stability in tax laws more than exemptions. Ultimately, it's all down to implementation: It can turn into a nightmare with the In- land Revenue and taxpayers disputing every assessment, or it could be a smooth transi- tion where businesses can focus on what they do best and the taxman gets his due. The accounting profession has an exciting opportunity to play a decisive role. It must deal with grey areas with professional tact, but more importantly, the pro- fession can lead the attitude change required for a smooth transition: Paying income taxes is a duty, not a burden. Civic mindedness improves when people contribute a fair share towards maintain- ing public services like education, healthcare and security. They then take real interest in how the country manages its affairs. When a government depends on debt financing, it only burdens future generations, and citizens of today dodge taxes and fail to hold of- ficials to higher standards of accountability – the country has too few income taxpayers to exert that kind of pressure. The new income tax code presents an opportunity to bridge society's trust deficit, which can improve Sri Lanka's prospects by leaps for all citizens. Anything is possible then.

CONTRIBUTORS DESIGN & LAYOUT CA SRI LANKA © 2018 CA SRI LANKA. All rights reserved. No Avanti Samarasekera Indika Sriyan Gammudali 30A, Malalasekera Mawatha, part of this publication may be reproduced Devan Daniel Leyanvi Mirando Colombo 7, Sri Lanka or distributed in any form without the prior Devin Jayasundera Diloshan Leon T : 0094-11-2352000 written permission of the publisher. The views Shamindra Kulamannage F : 0094-11-2352060 and opinions expressed by contributors and E : [email protected] persons featured in Abacus are not those of CA Sri Lanka or the CA Sri Lanka Council CA JOURNAL’S publications con- sultant is Capital Media (Pvt) Ltd., 22, Flower Terrace, Colombo 7. Phone 0112577387 4 THE ABACUS | MAY 2018

PRESIDENT’S MESSAGE

Be the Change

oday, we are experiencing the inculcate them with the necessary entre- fourth industrial revolution, preneurship skills, and business acumen which has brought about monu- to help them have the right set of skills to mental changes to our profes- steer businesses of tomorrow successful- Tsion and the way in which we operate. In ly, while also being future ready. the midst of disruptive technology, dig- itization, cloud computing and artificial The world no doubt is getting very intelligence, the role of the accountant advanced, and as professionals, we has changed drastically that even certain have to keep up with the changes. We accounting functions which we believed no longer have the option of ignoring were inherently human processes, changes, but instead we are compelled to are today being automated. This has embrace these changes and trends if we renewed the need for us to adapt to new are to remain relevant. The technologi- trends, technologies and methodologies, cal revolution is here and it is not going if we are to remain relevant as a group of to stop for anyone, and everyone who specialised professionals. refuse to embrace the change will be left behind. Accountants play a major role in the development of a country and its The journey ahead is not going to economy, and this role is interconnected be a cake walk, but we also need to to driving economic development and understand that disruption has become sustainability of a country. This is why a way of life, and we will continue to see we have a far greater responsibility lying new innovations in the years to come, on our shoulders. We have to be in the which will redefine conventionality and forefront to mitigate frauds which has our job role. Therefore, it is our collec- spiraled in recent years amidst height- tive responsibility to remain relevant, ened competition across the business embrace change, think out of the box, world. and be innovative, if we are to remain an integral part of the business world while We need to ensure we continuously continuing to contribute to the success of evolve in our professional roles, and our country, society and profession. have the ability to face future challeng- es. We need to understand that we Jagath Perera must keep up with time and adapt with President change, if we are to be in demand locally CA Sri Lanka and globally.

At an Institute level, we are increas- ingly focusing on developing our CAs to be an important catalyst in Sri Lanka’s future journey. We are taking necessary steps to ensure that chartered account- ants remain not only relevant but also progressive and have the necessary com- petence and acumen to remain at the top of the game. We are also introducing important elements of creativity, inno- vativeness as well as the critical thinking components to the study programme of our students, while also taking steps to THE ABACUS | MAY 2018 5 PERISCOPE US SEC moves EU works on tax to rein in overhaul targeting cryptocurrency tech firms exchanges

he European Union plans to increase the taxes paid by Ttech giants such as Google, Amazon and Facebook. These companies have irked the larger European countries by re-routing their EU profits to states like Lux- embourg, where taxes are low. It has been proposed to tax corporate digital profits in the states where they are made rather than where the firms are head- itcoin, Ethereum and quartered, which is the case at other platforms used for present. The digital industry wel- Bexchanging cryptocurren- comed the focus on taxing profit to tax corporate revenue as a temporary measure. cies will have to register with rather than revenue. However, A temporary tax could range from 1 - 5% of gross the SEC. The agency stated since the changes could involve a digital revenues. It would be imposed on companies “If a platform offers trading of protracted negotiation process, the with annual global revenues exceeding €750 million digital assets that are securities European Commission has sought and EU digital revenues of €10 million or more. and operates as an 'exchange,' as defined by the federal secu- rities laws, then the platform must register with the SEC as a national securities exchange or Survey shows women be exempt from registration." The SEC warned that many want greater transparency platforms where cryptocurren- cies are exchanged are unreg- istered and potentially illegal. at workplace However, they can appear to global survey of professional women be legitimate. According to the showed that 45% believe an employee’s agency, "Many platforms refer A diversity status (gender, ethnicity, age, to themselves as 'exchanges,' sexual preference) can be an obstacle to career which can give the misimpres- progression in their organisation. Just over half sion to investors that they are (51%) agreed that employers are doing enough to regulated or meet the regula- advance gender diversity. tory standards of a national According to Pricewaterhouse Coopers (PwC), securities exchange." the survey involved 3,600 professional women Early this year, SEC Chair- to ascertain their career development experienc- man Jay Clayton expressed es and aspirations. It reveals that more women concern over the potential for actively seek promotions and pay raises. In fact, price manipulation on crypto- of the 41% of women promoted in the past two currency exchanges. He said years, 63% negotiated for a promotion. that many digital tokens he had PwC global chairman Bob Moritz emphasized seen were actually securities the importance of combining transparency with and should be regulated as actions to curb gender stereotypes and subcon- such. scious biases. 6 THE ABACUS | MAY 2018

PERISCOPE US government ‘No deal’ Brexit scenario backs internet will be costly taxes in court battle Cost of ‘no deal’ Brexit £31 billion £27 billion EU companies UK firms

K and European a situation would cost EU companies face losses companies around £31 Uamounting to £58 billion and UK firms around billion annually if Brexit £27 billion. “These in- talks collapse without a new creased costs and uncertain- trade deal in place. This is ty threaten to reduce profit- the conclusion of a study by ability and pose existential consultancy firm Oliver Wy- threats to some businesses,” man and law firm Clifford the report stated. The worst Chance. hit industries would be The report implies that Britain’s financial sector and both sides would be affected EU’s automotive sector. by new tariffs in the absence The UK is due to leave of a trade agreement. Such the EU in March next year.

France to invest heavily to become AI hub tates should be allowed In a court brief, Solicitor to collect sales tax from General Noel Francisco said, Sonline retailers, the US “In light of internet retailers’ government has urged. Backing pervasive and continuous virtu- traditional retailers, it asked al presence in the states where the Supreme Court to uphold their websites are accessible, $1.85 a South Dakota law that would the states have ample authority billion compel big internet retailers to require those retailers to to pay sales taxes even if they collect sales taxes owed by their to be invested in AI by 2022 don’t have a brick-and-mortar customers.” presence. This might involve According to the govern- rance plans to pump The report is dubbed “AI reversing a ruling made over ment, the existing situation 1.5 billion euros ($1.85 for Humanity.” 25 years ago that prevented imposes a competitive disad- Fbillion) into artificial “[Artificial intelligence] states from imposing taxes on vantage on in-state retailers intelligence by 2022 in is a technological, econom- merchants unless they had a and encourages the state’s an effort to compete with ical, social and obviously physical presence. citizens to take their business America and China. ethical revolution, Macron The legal battle pits South elsewhere. The move is spearheaded said. “This revolution won’t Dakota against online retailers A report from the Govern- by French President Emma- happen in 50 or 60 years, Wayfair Inc., Overstock.com ment Accountability Office nuel Macron, who hopes to it’s happening right now.” Inc., and Newegg Inc. The reveals that state and local gov- turn France into a “start up DeepMind, IBM and Mi- companies insist that online tax ernments could have collected nation.” It follows a report crosoft recently announced rules should be set by Congress. up to $13 billion more last by the famous French plans to open offices in Though the online retailing year had they been permitted mathematician and Fields France to focus on AI re- giant Amazon is not directly in- to impose sales tax on online Medal winner Cedric Villani search. The country is also volved in the case, the outcome merchants and other that laid out plans to stanch experiencing a groundswell could impact on its business. remote sellers. the brain drain to the US. of AI start-ups. THE ABACUS | MAY 2018 7

Pay More attention Increasing to customer Amazon plans satisfaction – IBE audit to offer bank Report regulation accounts in costs worries partnership with ICAEW financial survey report from the Insti- he Institute of Chartered Accountants in institutions tute of Business Ethics (IBE) England & Wales (ICAEW) has expressed A suggests that boards appear to Tconcern over rising audit regulation costs. pay relatively less attention to certain It stated that this had led to some audit firms issues that might provide important questioning the value of staying in the public insights on culture. These include interest entity (PIE) market. customer complaints, supply chain According to the institute, the operation 45% data (including payment terms and and audit quality review levies of the Financial of respondents were open to grievances), social media records and Reporting Council (FRC) impose a cost on UK using Amazon as their primary exit interviews. business and impacts negatively on competi- banking account It was noted that two fifths of tion in the audit market. boards don’t receive information on Chief Operating Officer of ICAEW Vernon commerce giant Ama- customer satisfaction, while only Soare expressed dismay over the FRC’s attitude zon is negotiating with a fifth get data on the supply chain of not prioritizing the cost of oversight and reg- Efinancial institutions relationship. IBE’s Associate Director ulation. He said, “There is a point at which high including J.P. Morgan Chase to Peter Montagnon said, “It is important regulatory costs will impair market fundamen- help launch accounts targeting to join the dots. A company whose tals and negatively impair outcomes, particu- the younger generation. An staff, suppliers and customers are larly if regulatory costs cause participants to Amazon-branded account is all broadly happy is likely to have a drop out of the PIE market.” a possibility though the com- robust culture. But even if only one of pany, which will not become these groups is unhappy, the risk of a bank. ethical problems is high.” Saudi Arabia and SoftBank A recent survey revealed to build world’s largest that around 45% of respond- ents were open to using Ama- EU targets US solar project zon as their primary banking goods in case of account. It has been reported that the tech giant is consider- trade war 100,000 ing creating a product similar Jobs created to a checking account for cus- rom T-shirts and cosmetics to tomers. If the venture comes bourbon whiskey, the EU has audi Arabia and SoftBank Group are to fruition, it will expand Fdrawn up a target list of 100 planning to build a $200 billion solar Amazon’s impressive portfo- US goods that would be taxed if the Spower development that could supply lio, which currently includes US levies import tariffs on steel and 200 gigawatts in Saudi Arabia by 2030. It grocery stores, shipping and aluminium. It is estimated that these underscores the kingdom’s increasing em- digital assistant Alexa. goods are worth €2.8 billion. phasis on clean energy. A top strategist at GBH The list includes motorcycles, To be located in the Saudi desert, the pro- Insights said that the un- jeans, corn, orange juice, consumer ject would be about 100 times larger than derlying goal is to increase goods and industrial products. the next biggest proposed development and Amazon’s Prime membership American companies have strongly more than double what the global photovol- by cross-selling to existing criticized trade barriers. Levi Strauss taic industry supplied in 2017, it has been J.P. Morgan customers, which recently stated, “Unilateral tariff revealed. “It’s by far the biggest solar project could lead to more initiatives. impositions risk retaliation and desta- ever,” said CEO of SoftBank Masayoshi Son. A notable benefit for Amazon bilizing the global economy, in which He believed that it would cut electricity costs would be limiting the fees paid case American brands, workers and by $40 billion, while creating as many as for payment processing. consumers will ultimately suffer.” 100,000 jobs. 8 THE ABACUS | MAY 2018

PERISCOPE Accounting firms listed among Sri Lankan business leaders plan large capital top companies for female investments executives

Proportion of women at the higher echelons number of accounting firms in 75% the US have been included in this of respondents said their firms were A year’s list of ‘Top Companies for likely to make a significant capital Executive Women.’ Deloitte and EY investment in 2018 reached the upper rung, making it into the “Top 10” organisations for female orporate Leaders in Sri Lanka including 29% leadership. The ranking was undertaken chief executives are optimistic about women at boards by the National Association for Female the business climate in the next several Executives (NAFE). C months, according to a recent survey. It also found NAFE President Betty Spence stated that most plan large capital investments. that their scrutiny of women’s progress In its first CEO survey on Sri Lanka, the Oxford at US companies provides a dependable Business Group said, “Following the severe floods barometer for measuring the movement and drought that weighed on growth in 2017, of women into top leadership positions C-suite executives appear to be generally optimis- in the private sector. She said that with tic that clearer skies are ahead.” 30% women at only 29% of boards and 30 % Over half of the respondents predicted an C-suite members of C-suite members, the association con- economic growth of 4 -5% this year. This is broadly tinues to work with their top companies in line with the Central Bank’s forecast of 5 - 5.5 % to speed women’s headway. and the Asian Development Bank’s prediction of 5%. Significantly, nearly 75% of respondents said their firms were likely to make a significant capital Sri Lanka investment investment in 2018. forum lures investors Central Bank doesn’t expect market interest rate hike sian-based investors have re- sponded favourably to a Sri Lanka investment forum in Singapore. $7.9 billion A Sri Lanka’s estimated official reserves According to the Colombo Stock Ex- change (CSE), pitches were made by 17 listed companies and 12 stock broking he Central Bank has stated that a market entities. interest rate increase is not expected in the Speaking at the event, Prime Minister Tnear term. It pushed back against specu- Ranil Wickremesinghe said the country lation fuelled by media reports claiming that it was undertaking economic reforms. He expects a rise in domestic interest rates. emphasized that a recent free trade deal “The recent movements in headline inflation, with Singapore will benefit investors in core inflation, inflation expectations, broad the city-state. He said the agreement was Industry, S. Iswaran believed the deal money growth, credit expansion, expansion in part of a broader strategy of looking east will strengthen bilateral ties. He said economic activity as well as the international to renew trade relationships. the positive news surrounding the reserve position do not justify the view that a “This FTA is our first agreement with agreement has led to an uptick in rational market would also expect an increase in a South East Asian country – and we interest from Singaporean companies interest rates,” the Central Bank said. envisage this as a first step towards closer to partner Sri Lankan companies to It also stated that official reserves are currently integration with the Regional Compre- invest in opportunities in the island estimated at around $7.9 billion compared to $6 hensive Economic Partnership agree- and to use Sri Lanka as a hub to billion at end-2016. The improvement in ment,” Wickremesinghe stated. expand into the broader South reserves is recorded on both quantitative and Singapore’s Minister of Trade and Asian region. qualitative aspects. THE ABACUS | MAY 2018 9

Research firm cites Push ahead with Vision Sri Lanka in cautionary tale about China 2025 – IMF Staff Mission new Inland Revenue Act and the Central Bank’s Roadmap towards inflation target- ing represent landmark reforms and their 4.4% successful implementation is critical going Projected real GDP forward. growth for 2018 Some key priorities were highlighted. These include advancing fiscal consol- he IMF staff mission that idation through revenue mobilization, visited Sri Lanka recently a more robust fiscal rule, and stronger Turged the authorities to SOE governance; modernizing monetary, push ahead with their Vision financial and exchange rate policy frame- ri Lanka provides a cautionary tale about 2025 strategy. The strategy works; and accelerating growth-enhanc- over-reliance on China-backed infrastruc- would support the island’s ing structural reforms. Sture development, according to the Oxford rapid and inclusive growth According to the mission, real GDP Business Group. The research firm’s Asia Region- through ambitious structural, growth is projected to rise to 4.4% in al Editor Patrick Cooke noted how the country macro-economic and social 2018. Inflation is projected to revert to formally handed over 70% control of Hambantota reforms. around 5% by the end of the year, as food Port to Chinese interests on a 99-year lease because The mission said that the prices stabilize. it couldn’t service the loans acquired from Chinese state-controlled entities to build the $1.3 billion maritime complex. Cooke said Chinese acquisition of equity in Regulate foreign auditors in India, strategic assets from countries unable to honour says Supreme Court their debt commitments is making other emerging nations in the Belt and Road Initiative (BRI) cross- hairs nervous. He pointed out that skeptics have questioned China’s motives. There are concerns that the BRI will in reality provide the Asian giant with excessive leverage over the emerging economies of Asia- Pa- cific and foster unhealthy dependence on Chinese investment, loans, contractors and technology.

Former Uber CEO forms new investment fund 10 – 100 Startup magic growth stage

ormer Uber CEO Travis Kalanick is starting a new investment fund called 10100. It will fo- Fcus on financing initiatives that create jobs. ndia’s Supreme Court feels that for- was tarnished with accusations of Intended areas of investment include real estate, eign auditors in the country need money laundering. e-commerce and emerging innovations in India Ito be reined in. It has called on The Supreme Court said the gov- and China. The nonprofit efforts will initially con- the central government to regulate ernment could form a committee of centrate on education and the future of cities. the firms, warning that letting them experts to explore regulating multi- Media reports indicate that Kalanick is likely continue unchecked could hurt the national accounting firms operating to invest in startups with between 10 and 100 economy. in India. It felt that a void in this area employees (the magic growth stage). He referred Some months ago, the Indian could have an adverse impact on to the new venture as “home to my passions, weekly Outlook revealed how the the existing chartered accountancy investments, ideas and big bets.” chartered accountancy profession profession as a whole. 10 THE ABACUS | MAY 2018

PERISCOPE OECD says China hits 128 US Switzerland must do more to fight bribery in products with tariffs business tariff concessions is a legitimate action Impact of China’s tariffs adopted under WTO rules to safeguard 2011 - 24 137 - 2016 China’s interests.” It called for dialogue and negotiation to resolve differences $3 billion between the two countries. Switzerland - active investigations into worth of US imports money laundering and foreign bribery Following the announcement, an edito- rial in the popular Chinese tabloid Global he Organisation for Economic Coopera- Times stated, “Even though China and tion and Development (OECD) has urged n retaliation for US duties on the US have not publicly said they are in Switzerland to do more to prosecute foreign aluminium and steel imports, a trade war, the sparks of such a war have T China has raised tariffs by up bribery and protect whistleblowers. It called I already started to fly.” for “effective, proportionate and dissuasive” to 25% on 128 US goods. The Increasing trade tensions between the sanctions in cases of foreign bribery, and suggest- tariffs will affect about $3 bil- world’s two largest economies have led ed the urgent adoption of “an appropriate legal lion worth of US imports. The to fears of a trade war that will affect the framework to protect private sector whistleblow- affected products include wine, global economy. US president Donald ers.” frozen pork, scrap aluminium, Trump has announced plans to impose Switzerland has convicted just six individuals steel pipes, and certain fruits tariffs on about $50 billion worth of and five companies since 2012. However, there and nuts. Chinese products in retaliation for the had been 137 active investigations into money The Chinese finance ministry alleged theft of intellectual property from laundering and foreign bribery in 2016, up from said, “China’s suspension of its American companies. 24 in 2011. The OECD noted that Switzerland is particular- ly susceptible to foreign corruption for various reasons. These include the export-driven nature Melrose acquires British of the economy with a focus on financial transac- tions and pharmaceutical products. The country engineering giant GKN has long been associated with shady financial dealings. Price for the purchase of GKN by Melrose FRC calls for inquiry to £8 billion break up top accountancy ontroversial investment firm house with a market capitalisation firms Melrose Industries succeeded of over £10 billion and a tremendous Cin its bid to take over British future.” he Financial Reporting Council (FRC) has engineering firm GKN, which it BBC reported that the Labour suggested that a break-up of the UK’s top valued at £8 billion. Party called Melrose a “short-termist Taccountancy firms could end conflicts of in- Though the bid won the backing asset-stripper” and condemned the terest. Chief Executive Officer of the FRC Steven of 52% of GKN shareholders, it was deal. The investment firm special- Haddrill called for an inquiry into whether the not welcomed by the firm’s staff and izes in turning around troubled top firms should have to spin off their auditing unions who expressed concern over manufacturing businesses and arms into separate businesses, The Guardian long-term projects that could be selling them. reported. affected. It was feared that Melrose According to BBC, GKN has had The measure could strike at the leading may only look at short-term projects a hand in making everything from accountancy firms’ dominance in auditing the and the possibility of asset stripping. Minis to Spitfires. It noted that accounts of big companies, boosting competi- Chairman of Melrose Christopher GKN’s businesses cover aerospace tion and eradicating conflicts of interest. Miller said, “We are delighted and and automotive engineering, with its The overwhelming majority of companies grateful to have received support Driveline division making systems listed on the FTSE 350 were audited by a few from GKN shareholders for our plan for around half the world’s passen- prominent accountancy firms. to create a UK industrial power- ger cars and light trucks. THE ABACUS | MAY 2018 11

Link Sri Lanka’s mobile money SpaceX gains transfer systems, suggests study approval for 4,425-satellite broadband network

study on how finance and technology economic activity as a driver of growth. can improve the development impact Covering Bangladesh, Nepal and Sri Aof labour migration has called for Lanka, the study noted that, despite bank greater coordination of the country’s two account penetration differences between mobile phone money transfer systems. It these countries, regulations across all three stated that this could facilitate the expan- markets are converging on a more condu- he Federal Communications sion of distribution networks in rural areas. cive environment for money market agents. Commission (FCC) has granted According to the study by the Asian De- Among the measures suggested were devel- approval for SpaceX to launch velopment Bank Institute, the Organisation oping more instruments and infrastructure T a network of over 4,000 satellites for Economic Co-operation and Develop- for e-payments and agent banking, and blanketing the world with broad- ment, and the International Labour Organ- creating a transparent legal framework and band. isation, regulators are looking to digitalised regulations for digital finance. The FCC said it was the first approval of “a US-licensed satellite constellation to provide broadband New agency to regulate privatised services using a new generation of low-Earth orbit satellite technolo- plantation firms in Sri Lanka gies.” The proposed service, which he government plans to establish may be called Starlink, is likely a new agency to regulate priva- to benefit people in remote areas Ttised plantation firms to “protect and developing nations. However, the interests of the state.” several satellite internet providers, Twenty three state-run plantation including OneWeb and Spire, have companies that had been expropriated opposed it over concerns that it will were privatised in the 1990s. At the crowd both spectrum and orbit. time of privatisation, they were mak- SpaceX stated that these satellites ing losses, with taxpayers’ money used At present, the state oversees the firms through will enable the “provision of high- to pay salaries. the plantations management monitoring unit speed, high-bandwidth, low-la- The plantations companies have a of the plantations ministry. However, Minister tency broadband services that are 'golden share', which prevented the of Plantation Industries Navin Dissanayake pro- truly competitive with terrestrial new owners from fully diversifying posed the establishment of a separate agency alternatives.” According to a report land use and achieving optimum to regulate the privatised plantations through in the Wall Street Journal, SpaceX returns. Approvals on requests to their remaining lease periods. The cabinet expects to sign up over 40 million diversify activities have been pending has approved the preparation of a draft law to subscribers to its broadband service Resources by Unspalsh / Freepik Unspalsh by Resources for years, industry sources said. regulate the firms. by 2025. 12 THE ABACUS | MAY 2018

PERISCOPE

Global oil and gas needs to Startup Brazil invest trillions, says plans to bring moves to Aramco CEO disclosure to harmonize cryptocurrency legislation ing demand and offset the industry natural decline in developed fields. with OECD Addressing a conference in Houston, USA, Nasser norms noted that since the oil price 20 slump of 2014-2016, the million industry has lost investments barrels worth one trillion dollars. He stressed that future invest- ments “will only come if in- New capacity required vestors are convinced that oil Brazilian authorities daily in next 5 years will be allowed to compete and officials from on a level playing field, that the Organisation audi Aramco CEO Amin oil is worth so much more, for Economic Co- Nasser has said that and that oil is here for the operation and Sover the next 25 years, foreseeable future.” Development (OECD) the global oil and gas sector It has been estimated that have launched a needs to invest over $20 20 million barrels of new ca- programme to explore trillion. He believes this is pacity will be required daily harmonizing the necessary to meet increas- in the next five years. essari, a startup in country’s international New York, intends tax and transfer pricing Mto increase finan- legislation with OECD cial disclosures in the norms. Brazil made a German carmakers lead foggy crypto market. It has formal request to join attracted early-stage seed the OECD last year. investment into electric cars funding from many inves- The programme will tors, including Anthemis examine the legal Group and Blockchain and administrative Capital. framework of the Messari CEO Ryan Selkis’ €4.7 €335 €19 Brazilian transfer billion million million aim is to create a financial pricing system Germany United States Japan disclosure database for and analyze its crypto assets. According to implementation. It Forbes, he wants to create a will study the pros nder pressure to em- globally during the past two free, open-source reposito- and cons in the brace low-emissions years. US manufacturers ry for cryptocurrency data; Brazilian approach Utechnology, German trailed far behind with €335 this would make it easier while exploring carmakers have topped the million, while Japanese com- for investors to differentiate options for greater world in electric vehicle in- panies spent just €19 million. serious crypto projects from alignment with the vestments. They have left US EY car expert Peter Fuss scams. OECD’s international and Japanese manufacturers said the importance of elec- Selkis, who has been accepted standard – the way behind. tric-powered cars will grow called a “clear-eyed realist,” OECD Transfer Pricing According to a study by considerably in the medium regards Messari as vital to Guidelines. Such consultancy EY, German car- term. raise crypto to a legitimate alignment would be makers Volkswagen, Daimler He argued that this will asset class. At present, necessary if Brazil is to and BMW announced compel automakers to the crypto market lacks join the organisation. investments on electric cars ratchet up spending on the transparency and amounting to €4.7 billion technology. standardization. THE ABACUS | MAY 2018 13

Record high for global Pioneering mergers and acquisitions accounting solution launched $1.2 trillion by Host Analytics

yPlan – a pioneering collaborative plan- Mning, budgeting and forecasting tool – has been released. Created by cloud- based enterprise manage- ment software maker Host Global mergers and acquisitions in Q1 2018 Analytics, the solution targets business owners. Accountants lobal mergers and acquisitions macroeconomic environment in Europe will thus be able to focus on reached $1.2 trillion in the first has created greater confidence to get more strategic responsibilities. Gquarter of this year. It was spurred things done.” CEO of Host Analytics by faster economic growth in Europe and Data indicates that merger and acqui- Dave Kellogg stated, “Up to US tax reform. Other contributory factors sition deals are generally getting larger. now, the industry has failed were strong debt and equity markets, and Although the number of deals fell by 10% to address this pain. When growing corporate cash coffers. to 10,338, their value rose 67% year-on- we surveyed our customers, According to Reuters, Anu Aiyengar year in the first quarter of 2018. The big they shared that they dread of JPMorgan Chase stated that the clarity deals in this period included the purchase this process, and some went on tax has unclogged some of the M&A of Fortune 100 company Express Scripts as far as to say that they would activity that was strategically imperative, Holding by health services organisation rather have a root canal than but companies were waiting for the right Cigna ($67 billion) and the acquisition of work on their budget.” financial timing. Borja Azpilicueta of HSBC energy company Innogy SE by German Kellogg added, “We Holdings was quoted as saying, “The better utility E.ON SE ($38.5 billion). decided to take a fresh look at this problem and solve it. Our team is proud to be the first to create this type of solution, and will continue to lead as African regulator forum the innovators in our indus- try.” established A chief financial officer was quoted as saying, “By he African Forum of Independent IFIAR as a means to strengthen audit demystifying the mechanics Accounting and Auditing Regula- regulation in Africa, and develop regula- of budgeting and forecasting, tors (AFIAAR) has been established tory and legislative provisions in African MyPlan will foster greater T buy-in of budget owners who by regulators from 11 African nations. countries to a level where they can attain The countries are Botswana, Ethiopia, international membership to the global will now be more empowered. Lesotho, Malawi, Mauritius, Mozambique, forum.” Benefits will also accrue to Namibia, Tanzania, South Africa, Zambia CEO of Public Accountants and Au- the finance function, as less and Zimbabwe. ditors Board (PAAB) Zimbabwe Admire effort will need to be invested According to The Accountant, the Ndurunduru said, “In the context of the in converting budget owners’ forum was established with the intention development of our continent, this is a ideas into dollars and cents.” to formalise efforts for collaboration and momentous initiative for Africa as it will He added that the prospect strengthening of independent auditing, be one of the keys to increasing invest- of cultural enhancement and and where relevant, accounting regula- ment in our economies, public protection efficiency in financial planning tion across Africa. It also stated, “The and contributing to the development of and analysis is exciting. AFIAAR initiative was endorsed by the the continent.” 14 THE ABACUS | MAY 2018

FRC seeks Reporting concepts revised by involvement in senior new IFRS framework expenses), as well as financial posi- hires of top firms tion (assets, liabilities, and equity). It also contains guidance for reporting financial performance. “As defined in the new conceptu- al framework, assets and liabilities focus on a company’s rights and responsibilities. The framework also states that financial statement preparers’ decisions about what information to report about assets, liabilities, income and expenses evisions to concepts should be based on what is useful to for reporting assets, investors,” the journal stated. Rliabilities, income and Chairman of the International expenses have been included Accounting Standards Board (IASB) in a new conceptual frame- Hans Hoogervorst said, “The revised work for IFRS. conceptual framework will greatly According to the Journal of assist the board when developing Accountancy, the framework IFRS standards.” He added that it emphasizes that investors will also help other stakeholders to need information about finan- better understand the concepts that cial performance (income and underpin the standards.

Europe backs task force on climate-related financial disclosures he Financial Report- Economia stated that the ing Council (FRC) new approach would focus statement supporting the Johan Van Overtveldt said, “We T– the UK’s financial on five areas – leadership Task Force on Climate-re- need to support the creation of regulator – wants to be and governance; values Alated Financial Disclo- the right market infrastructure involved in the hiring of and behaviour; business sures (TCFD) has been signed to finance the battle against candidates for prominent models and financial by Pan-European stock ex- climate change and pollution. A positions at the biggest soundness; risk manage- change Euronext, the Financial few weeks ago, our government accountancy firms. ment and control; and Services and Markets Authority set the example by launching In a strategy and budget evidence on audit quality, in Belgium, the National Bank our first green bond here in report, the regulator stated including from the FRC’s of Belgium and the Belgian Belgium for a total amount of that it would report to programme of audit quali- Minister of Finance. €4.5 billion.” firms on how candidates ty reviews. Chief Executive TCFD Chair and UN special He added that the financial for important roles such Officer of the FRC Stephen envoy for climate action, Mi- sector should incorporate the as independent non-ex- Haddrill said, “While we chael R. Bloomberg said, “More costs related to climate change ecutives, heads of audit don’t have convention- transparency will drive capital and pollution in their own mod- and ethics partners at the al regulatory powers to to companies that are miti- els of credit and market risks. top firms meet its experi- address weaknesses in gating risks posed by climate The Accountant reported that ence, skills and attributes corporate reporting, we change and capitalizing on the the European Commission’s criteria. will, through this strategy opportunities it presents. Busi- Action Plan on Sustainable “We do not have specific period, ensure boards are nesses have strong incentives to Finance specifically proposes

powers in this regard and aware of their governance lead the way on climate change, incorporating the TCFD recom- Samuel Zeller on Unsplash by Photo will look for the firms’ and reporting require- and better data will help them mendations into the evolving cooperation in doing so,” ments. Where we find do more and act faster.” EU corporate disclosure and the FRC said. failings, we will act.” Belgian Minister of Finance, reporting regime. THE ABACUS | MAY 2018 15

Ethics and Disciplinary Committees’ Reviews

Ethics Committee Disciplinary Committee

From December 2017 to March 2018, the Ethics Committee Out of the 5 Disciplinary Committee inquiries brought forward received 4 new complaints. These are currently receiving the from November 2017, investigations on 2 complaints were attention of the Ethics Committee. concluded and 3 are currently in progress.

Summary of complaints received from December to Summary of cases brought forward to 2018 March 2018

A letter was received from an association under SLAASMB has directed a re-audit of a listed 1 the caption ‘Auditing of Listed Companies’. 1 company, as the original audit conducted by The Ethics Committee reviewed the letter, a firm of chartered accountants was found to deliberated and decided to revert back only be not in compliance with auditing standards. after the relevant ministry comments on this A prima facie case of professional misconduct matter. was established under Section 20 Rule 1.1 of the Act. The Disciplinary Committee inquiry is ongoing. A complaint was received on 16 January 2018 2 in relation to the age limit of a directorship of a professional member under the caption The circulation of derogatory emails by a ‘General Inquiry’. An official complaint form 2 member threatening the Council and the was sent out to the complainant. This matter is President in relation to a decision implemented currently being attended to. by the Council. A prima facie case of professional misconduct on the part of the member concerned was established under A complaint was received against a professional Section 20 Rule 1.9 of the Act. The Disciplinary 3 member alleging that, while being a financial Committee inquiry is ongoing. manager of a company, the member had misappropriated the company’s money and committed financial fraud of approximately Failure of an auditor to present the audit Rs80 million. This matter is currently being 3 opinion and the audited financial statements attended to. of a client in compliance with the accepted format and standards. A prima facie case of professional misconduct on the part of the A complaint was received against a professional member concerned was established under 4 member in relation to information that was Section 20 Rule 1.1 of the Act. The Disciplinary publicly dessiminated by him at a press Committee inquiry is ongoing. conference. This matter is currently being attended to. 16 THE ABACUS | MAY 2018

Sri Lanka’s international trade ties

Situated strategically, athwart the principal sea trade route in the Indian Ocean, Sri Lanka nternational commerce had a large part to play in the history and culture of this could not but be a part of island, dating back to prehistoric times. The Valahassa Jataka relates that the international commerce. IYakkhini inhabitants of Sirisavatthu lured and captured shipwrecked merchants, sometimes Over millennia, this helped marrying them. Archaeological evidence of foreign trade goods from Anuradhapura, shape the country’s Sigiriya and Ibbankatuwa suggests a thriving Iron Age agriculture-based civilisation, of economy, culture and which only hints come down to us through an- cient documents. The products and markets society. Although of this culture would have attracted mer- historically agriculture chants, many of whom settled down – a story repeated by later generations of traders, such remained the mainstay of as Moors, who settled and married local women. the economy, the sheer Sindbad the Sailor volume of trade The stories of Sindbad the Sailor in ‘1001 had its effect Nights’ take place in the seas around Sri Lanka. The name Sindbad suggests a person originating in Sindh, indicating that Sindhis By Vinod Moonesinghe may have been involved in trade with the island from early times! The people who traded across the Indian Ocean, ranging from Egyptians to Chinese, must have been a fairly mixed lot, with a cosmopolitan culture. The first traders to have arrived on these shores may have been the Indo-Aryan THE ABACUS | MAY 2018 17 18 THE ABACUS | MAY 2018

Berenike and Myos Hormos on the Red Sea, suggesting the involvement of mer- chants from this region in trade with Egypt and Palestine.

“The largest ships” The vessels used by the Indo-Aryan traders appear to have been yathra-dho- nies, traditional outrigger sailing vessels used until the 20th century. The term dhoni, apparently originating from Telugu, may be related to Persian dani (yacht), Gujarati tarani (vessel) and Sin- hala tarani (raft). Stylised representa- tions of these sailing vessels appear on early potsherds and inscriptions. In (Top) Stylised representations of ancient the 3rd century BC, Greek ambassador sailing vessels appear on early potsherds and to Pataliputra, Megasthenes men- inscriptions tioned wooden ships built to transport (Left) The arrival of Prince Sinhala elephants from Sri Lanka to Kalinga (Vijaya),mural from Ajanta (modern Orissa). By the late Anuradhapura period, Sri Lankan ships grew to quite a size. The 9th century Chinese scholar Li Zhao, in his Tan Guoshi Bu (Supplement to the state history of T’ang), wrote that ves- (Prakrit)-speaking people who probably tell of Tamil traders. Many have Indo-Ar- sels from Sri Lanka were the largest of originated in Gujarat, known for its yanised names, suggesting a cosmopoli- those visiting Guangzhou and Vietnam, shipping from early times. While Sri tan trading culture. with stairways for loading and unload- Lanka’s foundation-legend from the The Brahmi script, ancestor to both ing. ancient chronicles tell of the Indian the Sinhala and Tamil writing systems Unfortunately, the ancient chronicles, prince Vijaya, who married the Yakkhini (as well as to a host of others, rang- being more concerned with matters Kuveni, according to the Divyavadana, a ing from Devanagari to Khmer), first ecclesiastical than secular, give us very compilation of Sanskrit Buddhists tales, appears in Sri Lanka and South India. few clues about commerce. However, the legendary prince-colonist came Some authorities consider that it devel- we do know from them that the main from merchant stock. The Mahayanist oped from Phoenician-related scripts. If entrepôt for trade with India, Jambu- Alokiteshvara Gunakarandavyuha Sutra so, merchants trading with the Middle kola (modern Sambilthurai) came to be also describes the migrant leader as a East must have made regular visits to replaced by Mahatittha (Mantai). Most merchant-prince. this region. ports stood at the mouths of rivers, The Prakrit-speakers settled in Sri The Bible mentions that King Solo- for example Uruvela at the mouth of Lanka, merging with the indigenous mon received peacocks from “Tarshish” the Kala Oya, Salawata (Chilaw) on population to form the Sinhalese, and through traders from Phoenicia and the Deduru Oya, and Kirinda on the their language, Elu, which later devel- Sheba (modern Yemen). The Maha- Kirindi Oya. However, others came up oped into Sinhala, came to be known vamsa also says that the 4th Century in natural harbours: Gokanna (modern as the “island language”— this label BC King Pandukabhaya laid out a Yona Trincomalee) and Galle. surviving in the related language of the quarter. Yona, derived from “Ionia”, re- Maldives, Dhivehi Bas. Similar commu- fers to Greeks or Hellenised Asians, but Godavaya nities of traders seem to have settled in in this instance possibly refers to West- Ships depended on the monsoons, South India, possibly even taking over Asian merchants. After Alexander the and a voyage from Guangzhou to the Pandya kingdom. Great, Greeks did begin trading here, Baghdad could take up to two years. as did the Romans later – evidenced by Cosmopolitan culture Therefore, it made sense to have a tran- many caches of Roman coins found all shipment port in-between. It is possible Later on, the Mahavamsa mentions over the island. that the port of Godavaya (Gota Pabbata the Damila (Tamil) rulers Sena and Gut- On the other hand, samples of Pattna) fulfilled this need between the tika, “sons of a freighter who brought Brahmi, in both Prakrit and Tamil, have 1st and 10th centuries. Situated at the horses hither”, while stone inscriptions been discovered at the sites of ancient old mouth of the Walawe River, it also THE ABACUS | MAY 2018 19

fulfilled the task of shipping locally pro- duced goods from the hinterland. A German team excavated the site and discovered a jetty made of stone pil- lars up to 3.50 metres high, a customs house and the remains of an ancient monastery, as well as clay lion-seals used by customs officials, Roman coins, beads, bangles, pottery (including ceramics originating from China, the Middle East and Rome), bricks show- ing guild marks and richly decorated roofing tiles. Obviously, a prosperous international port stood here, a fact affirmed by stone inscriptions. Archaeological examination of a (Top right) Sindbad the Sailor, the Episode wrecked ship discovered off Godavaya, of the Whale, by Edmund Dulac, dated between the 2nd century BC and Sindbad the Sailor by Gustave Dore the 1st century AD (the oldest in the Indian Ocean) has revealed a great deal about trade at that time. Among the finds were large storage and cooking pots, stone benches, grinding stones, and glass and iron ingots. The glass has tentatively been identified as originating from South India. However, the iron seems to have been produced by Ruhu- from as early as the time of Kautilya. may have been in transhipment and na smelters – iron furnaces have been Pearls also featured in the island’s re-export. In the 6th century, Persian discovered upriver at Ridiyagama and trade with China. The embassy to merchants bought silks in the island, Samanalaweva. Claudius had mentioned trade between crowding the Byzantines out, who had Sri Lanka and China. Until the Ming dy- to buy silk from here in South India. Staffordshire to Zaiton nasty, Sri Lanka may have been the ter- The ports of the island were reportedly Among the goods exported through minus for ships plying from Guangzhou, jammed with ships from India, Persia Godavaya were dark red garnets. In Yangzhou and Quangzhou. The famed and Ethiopia. 2009, an amateur British treasure-hunt- Chinese navigator Zheng He sailed from Such an abundance of shipping drew er in Staffordshire discovered a hoard of the last-named, known to Europeans the attention of criminal elements, and objects, mainly weapons-related, dating as “Zaiton”, and settled here the Sri piracy remained a threat to merchants from about 600 AD. The treasure con- Lankan prince he abducted – whose for centuries. Most pirates were from tained some 3,500 cloisonné garnets, descendants live there to this day. Gujarat, Kerala or the Coromandel and it is likely that the gems originated coast. However, some were indigenous: Transhipment in Sri Lanka – illustrating how far the the Chola king Senkuttuvan came hither country’s trade links extended. Trade in ancient times involved most- to defeat a pirate king, while Ibn Battuta The island was known as “Ratnad- ly luxury goods. Sri Lanka imported relates that Arya Chakravarthi was a veepa”, from the abundance of gems silks from China; horses, perfume and notorious pirate. Apart from piracy which it exported. Most of the trade glass from India; wine and corals from and the weather, restrictions on trade appears to have taken place with India, the Mediterranean; and superior-quality appear to have been limited to customs which remained, until the 18th century, ceramic goods from all over. Apart from tariffs and other taxes. This position one of the two largest economies in the gems, pearls, iron and elephants, the changed with the arrival of the Portu- world. Merchants traded ivory, both islanders exported rice, ginger, honey, guese in 1505. The European occupiers unworked and carved, with India and beryl, amethyst, gold, silver, chanks, sought to create a monopoly on trade Myanmar. Megasthenes wrote of the tortoise shells, spices and muslin cloth. with the island, ending the consensual export to India of Sri Lankan elephants, The cinnamon trade did not receive a freedom of the seas that existed until reporting them to be larger, more mention until the 12th century – possibly then. This signalled the end of over powerful and more intelligent than the because the source of this valuable spice two millennia during which trade was mainland variety. Pearls from the Gulf remained a closely-hidden secret. conducted for the benefit of all. of Mannar fisheries also gained fame However, the bulk of trade volume 20 THE ABACUS | MAY 2018

Effective audit regulation builds trust, attracts investment: Brian Hunt The Chairman of global audit oversight body IFIAR outlines the growing demands on regulators

Audit regulators from over 40 countries Audit is not Excerpts of the interview: converged on Colombo in February this necessarily about year to sharpen their oversight skills and Q: Why is audit regulation im- enhance regulatory processes with the corruption or portant? aim of lifting investor confidence in capital fraud, but I think Hunt: IFIAR was established in 2006 markets. we need to look at and Sri Lanka joined a year later when The event was the 12th Annual Inspec- the wellbeing of the SLAASMB became a member. Audit regula- tion Workshop of the International Forum broader society tory bodies from 52 countries are members of Independent Audit Regulators (IFIAR), of IFIAR. which counts audit regulatory bodies from Part of IFIAR’s mission is to collaborate 52 countries as its members, including the and share best practices and information Sri Lanka Accounting and Auditing Stand- among member regulators, so that we build ard Monitoring Board (SLAASMB). our capabilities to effectively inspect audit IFIAR Chairman Brian Hunt says the firms and thereby enhance investor confi- global body’s mandate is to share knowl- dence in capital markets. edge of the audit market environment and In April 2017, IFIAR adopted a new gov- practical experiences of regulators, pro- ernance structure and appointed a board mote collaboration in regulatory activities of directors. Earlier, the chairman and vice and provide a platform for dialogue with chairman would meet to plan out activities, other international organisations which but now we have a permanent secretariat have interests in enhancing audit quality— based in Tokyo. With what we have today including investors. we will maintain that corporate memory According to Hunt, audit regulators and so we are quite excited about that. have a responsibility to enhance public Audit is not necessarily about corrup- trust in financial systems and investor con- tion or fraud, but I think we need to look fidence in capital markets. To do this, they at the wellbeing of the broader society. must be independent of the profession, Confidence in capital markets is critical, so reach out to investors to keep abreast of we need to ensure that financial statements their expectations and engage businesses to are appropriately audited and companies improve internal controls and processes. behave in an appropriate manner without THE ABACUS | MAY 2018 21

Perspective 22 THE ABACUS | MAY 2018

breaching public trust. This is why audit While auditors all the critical details, not just detecting regulation is so important. If there is typically don’t fraud or mismanagement. This is why it’s mistrust in capital markets and financial important that audit regulators reach out systems, then you have a major problem in make forecasts, to investors so they can perform effective the economy. they can and do inspections of audit firms. Audit regulators It’s encouraging that SLAASMB is inde- take deep dives can engage audit and investment commit- pendent and supported by the government, into areas that’ll tees of public companies so that the neces- which is the case in Canada, Japan and even have a material sary processes are in place to facilitate and the UK. The core of IFIAR’s mandate is to enhance the work of external auditors. enhance investor confidence in markets. future impact on a Investors are demanding transparen- Sri Lanka wants to attract foreign business cy from regulators too, and this can be a investment and IFIAR can help by working challenge. There are issues a regulator can closely with SLAASMB to enhance audit directly handle with audit firms, but there oversight, because investors want to know may be times it must go public. Regulators they can trust the financial information can have transparent audit inspection given to them. It’s all about building confi- methodologies. Instead of going from cover dence. to cover of an audit report, they can focus on risk areas and go deeper. When this Can you give us a sense of how happens, audit quality and consistency are investors are increasingly asking better captured. Investors can follow these for independent audit? steps and this is something IFIAR will work Hunt: Investors are really interested in how to enhance over the next few years. There a company will generate cash and profita- are investors around the world who don’t bility in the future. Auditors, on the other even realise that there is a body regulating hand, look at the back-end of businesses the work of audit firms. The challenge is and give investors an opinion based on a to reach out to them so that we can create historical view of how successful it has been dialogue about improving audit quality. generating cash and profits. So investors are It’s not about going through files, like I said increasingly asking auditors to look beyond before. It’s about being smart, identifying the historical context. and mitigating key risks across the business While auditors typically don’t make cycle, and investors can help in creating forecasts, they can and do take deep dives effective audit processes. into areas that’ll have a material future We already conduct an inspection sur- impact on a business. For instance, they vey of audit firms in member countries and can look at the order books of retail and set targets for improvement. One in three manufacturing companies and ensure that audit reports has a problem, and this needs their forecasts, projects and budgets are not to come down. based on wild speculation. We reported findings in 45 % of audit Investors see the financial audit as a work surveyed across IFIAR member coun- foundation. If auditors do their work and tries; this needs to come down to 40 %. demonstrate strong industry expertise, the Nine of the biggest IFIAR member countries true and fair view of a company becomes reported 39 % and we need to reduce this deeper and broader. This gives investors to 30 %. As audit regulators we are com- more confidence. For example, a bank mitted to improving quality because it’s opens a savings account and issues a debit critical for economic wellbeing and investor card and credit card, so is that three trans- confidence. actions or one? Or, a retail store may have different methods to account for its store What do you mean by findings? and online sales; an auditor needs to make Hunt: This is where we feel not enough sense of these nuances and also ensure key audit work has been done to justify an audit risks are identified and mitigated. opinion that has been given. This does not In this regard, investors are asking for always mean financial statements have to be more transparency from audit firms. They adjusted and restated, often management want to know that auditors are capturing have got that right, it’s just that we feel the THE ABACUS | MAY 2018 23

auditors have not done enough to justify Most audit firms in Sri Lanka. I must add here that, in terms their opinions. recruit staff straight of the inspections, we appreciate the Sri The survey is just one way to measure Lanka Accounting and Auditing Standards audit quality, and IFIAR has been doing that out of business Monitoring Board’s standards. for seven years. school, but going This ensures that regulators are not If audit firms had only one client, they forward they will influenced by the profession. In Canada for will have the resources and time to do a have to understand example, out of 11 members of the regulato- great job. Being consistent across a portfo- software and ry board, only four can have a background lio of several clients is challenging, but it working at an audit firm, provided it’s after must be done. be able to write a one-year cooling period. It’s not just the In the past, audit firms managed their algorithms and board; the majority of staff have to come work per engagement. However, we believe code from outside the audit profession. Board that firms need to manage their businesses members and staff that come from the audit and how they look at risks across the port- profession are prevented by law from in- folio and not by client basis. specting audit firms that they had relation- We started with a 47 % deficiency ships with. rate, and now we are at 40 %, so there is improvement, but we need to be lower. What important trends do you The survey is one method to measure audit see in the audit profession? quality. We need others. For instance, the Hunt: I think the one that usually comes up consistency of execution and business pro- is around technology and how that is going cesses need to be evaluated. to impact the audit. There’s a lot of discus- It’s not just the auditor. A good audit sion around this and how auditors should requires companies to have effective audit equip themselves for the future. committees and chief financial officers. Not much has changed in the last 15 There’s a lot of work that needs to take years or so of what we audit. But companies place for an external audit to be successful. have changed. Businesses have changed It’s not just the files but business processes dramatically. and having systems in place to monitor key The audit may be a foundation, but risks and identify issues before they become going forward there will be other areas that issues. From IFIAR’s point of view we try to auditors don’t usually give an opinion about talk about these things, sharing best prac- that will suddenly matter. For example, tices and methodologies with members, so what is going to be the impact of artificial regulators can look deeper into inspections intelligence or block chain on how an audit and inspection results. is performed? In an era of big data, auditors need to know how to extract relevant infor- What does your latest survey mation and sample them. say about auditor independence, Audit firms are investing in technology and also how important is it for to give them these capabilities, but it’s not regulators to be independent of happening in a mass scale. When we did the profession? audit inspection we found that sometimes Hunt: There are a number of violations the technology is inappropriately used or where audit independence is concerned. even overused so the analytics don’t make The large firms are getting better at moni- any sense. toring independence, but then that’s a chal- Most audit firms recruit staff straight lenge if you look at the big six firms. I think out of business school, but going forward they are building systems. It’s not an easy they will have to understand software and task but it is being done and we don’t see be able to write algorithms and code. Audit some of the violations which we used to. firms are gearing up for that, but it will take For regulatory bodies, to be a member time. of IFIAR they need to be independent from Audit regulators need to keep pace with the profession. One way to do this is to these developments so that they can do a ensure that the oversight body is embedded better job to ensure quality standards are in legislation, as is the case with SLAASMB maintained. 24 THE ABACUS | MAY 2018

Update Renewed boost for CA Sri Lanka’s training partner portfolio

The training partner portfolio Ltd., Jetwing Travels (Pvt) training partners to develop ification. Practical training is of the Institute of Chartered Ltd., Litro Gas Lanka Ltd., the students’ professional one of the most unique fea- Accountants of Sri Lanka (CA Maga Engineering (Pvt) Ltd., skills, ethics and attitudes, in tures of the CA programme, Sri Lanka) received a fresh Metecno Lanka (Pvt) Ltd., addition to providing them and students must complete boost recently with 16 top Nations Trust Bank PLC, Nor with the necessary technical three years of practical companies coming onboard Lanka Manufacturing Colom- exposure. training before qualifying as to provide practical training bo Ltd, Orient Insurance Ltd., The 16 companies repre- chartered accountants. for the institute’s business and Singhagiri (Pvt) Ltd., Trendy- sent the Non-Public Practice CA Sri Lanka’s practical corporate level students. wear Adhikarigama (Pvt) Ltd., Organisations, and join a training scheme has been Accordingly, Ansell Lanka and Wickramaratnes (Pvt) portfolio of over 600 existing revamped; the new training (Pvt) Ltd., Business Promoters Ltd.,received training partner approved training partner requirement has been de- & Partners Engineering (Pvt) recognition certificates from organisations of CA Sri Lanka. veloped in line with interna- Ltd, Co-operative Insurance CA Sri Lanka President Jagath The new companies will tional accounting education Company Ltd., Dutch Lanka Perera at a ceremony held at provide practical training to standards and based on Trailer Manufacturers Ltd, the institute recently. aspiring chartered account- stakeholder expectations from Hemas Hospitals (Pvt) Ltd., Speaking at the event, Per- ants who are following the future professional chartered Hovael Constructions (Pvt) era emphasized the need for globally recognised CA qual- accountants. THE ABACUS | MAY 2018 25

CA Sri Lanka’s YCAF takes CA Sri Lanka awards diplomas for accounting professionals to enhance lead in guiding young their IT security skills chartered accountants

CA Sri Lanka, which has infrastructure & emerging been at the forefront in technologies; information training accounting profes- systems assurance services; sionals to enhance their IT governance & management security knowledge, recent- of enterprise information ly introduced the Diploma technology; risk manage- in Information Systems ment and compliance Security, Control & Audit reviews; protection of The Young Chartered Ac- Loretta Gunawardene, Andrea (DISSCA) for accounting information systems infra- countants Forum (YCAF) of Jayathilake, Director of Smart professionals to successfully structure and information CA Sri Lanka has taken the Quest (Pvt) Ltd, and Suran enhance their IT security assets; systems develop- lead to inculcate the necessary Wijesinghe, Group Financial skills. ment: acquisition, mainte- skills among young chartered Controller of John Keells Hold- During the 24th DISSCA nance and implementation, accountants to help them ings PLC, who shared insights certificate awarding ceremo- software audit and mock achieve success as globally into the necessity for agile ny, 15 students who success- test; business continuity sought-after professionals. and vibrant leadership in the fully passed the exams were management; and pro- In this endeavour, YCAF digital era. awarded the diplomas. fessional opportunities in recently organised a career The workshop was followed DISSCA is conducted in information technology. guidance workshop to help by a panel discussion on the collaboration with the Insti- The programme has young chartered accountants expectations of the corporate tute of Chartered Account- been specially designed for transit from trainees to fully world by young chartered ants of India (ICAI). managers and supervisors fledged finance professionals accountants, which gave To date, the annual of audit firms and internal and excel in their careers. insights on the most sought-af- programme has trained auditors requiring a func- The workshop was con- ter questions asked by young hundreds of accounting pro- tional level understanding ducted by a pool of renowned professionals. The panel mem- fessionals including man- of computer auditing in an resource personnel and was bers comprised Chaaminda agers, supervisors of audit information systems envi- designed with a view to equip Kumarasiri, Chairman of H C P firms, internal auditors, ronment that requires an young chartered account- Consulting (Pvt) Ltd., Yogen- accountants and financial understanding of informa- ants with the desired skills drapasath Sathiyaseelan, Head controllers to enhance their tion systems security and and attitudes required in the of Finance at Supreme Global expertise in information controls. current context. The workshop Holdings (Pvt) Ltd., andVin- systems security, control Professionals with a covered inherent powers of dya Cooray, Sector Financial and audit. degree from a university or professional presence, the Controller – Destination DISSCA covers pertinent a professional qualification importance of grooming and Management Sector at John areas relating to enhancing such as CA, CIMA, ACCA, etiquette, and how to get rid of Keells Holdings PLC. The dis- IT security for accounting CMA, banking and finance, interview jitters. cussion was moderated by Jani professionals. The pro- CIM or any other recognised The sessions were con- Ganeshan, Finance Manager of gramme covers a primer on qualification can follow the ducted by executive coach Ceylon Cold Stores PLC. information technology in programme. 26 THE ABACUS | MAY 2018

Update Jagath Perera inducted as 24th President of CA Sri Lanka

Jagath Perera was ceremo- nially inducted as the 24th President of the Institute of Perera plays Chartered Accountants of Sri a significant Lanka (CA Sri Lanka) on 8th role across the February 2018 in the presence international of a distinguished gathering including Prime Minister Ranil accounting Wickremesinghe, senior gov- arena, serving ernment officials and business in a number of leaders. committees of the A leading figure in the accounting profession, Perera Confederation is a fellow member of CA Sri of Asia Pacific Lanka with a wealth of experi- Accountants ence including in risk consult- ing and forensic accounting. (CAPA) and the He is presently a Partner of South Asian KPMG in Sri Lanka. Federation of He has served on the CA Sri Accountants Lanka Council as a member since 2010, and was the (SAFA) Institute’s Vice President from 2016 to 2017. At the institute, he chaired the Operational Review Committee, Exami- nations Committee, Student Training and Development Committee, SMP Capacity Building Task Force, sub-com- mittee to review and recom- mend the institute’s minimum allowances to trainees, and (SAFA). He is a member of nepura. He is a member of the he has served as a Council the sub-committee to revise CAPA’s Public Sector Financial Association of Certified Fraud Member of CA Sri Lanka since the institute’s practical train- Management Committee and Examiners, USA, and the 2014, and chaired the Stat- ing guide. Perera also served SAFA’s Professional Ethics & Institute of Internal Auditors, utory Accounting Standard as an alternate chairman and Independence Committee, USA. He has presented papers Committee and Examinations member of various other the Small & Medium Practices at both local and international Committee of the institute, committees of the institute. Committee and the Sustaina- conferences on the subjects of apart from his role as the He was also chairman of bility Development Goals Task combatting fraud and white alternate chairman of the the sub-committee for the Force. He is also a director of collar crimes. Audit Faculty and Operational development of professional the Sri Lanka Accounting and Meanwhile, Manil Jayesin- Review Committee. accountancy organisations in Auditing Standards Monitor- ghe was elected as the Vice Jayesinghe currently serves Sri Lanka. ing Board (SLAASMB) and a President of CA Sri Lanka. He as a board member of the Perera also plays a signif- commission member of the is the Head of Assurance/Sen- International Accounting icant role across the inter- Securities and Exchange Com- ior Partner at Ernst & Young Education Standards Board of national accounting arena, mission of Sri Lanka. Sri Lanka. the International Federation serving in a number of com- A former student of Ananda A fellow member of CA of Accountants (IFAC), and as mittees of the Confederation College, Colombo, Perera has Sri Lanka and a member of a consultant to the Audit Com- of Asia Pacific Accountants a Bachelor of Science in Busi- the Chartered Institute of mittee of Listed Companies. (CAPA) and the South Asian ness Administration from the Public Finance & Accountancy He is a past member of the Federation of Accountants University of Sri Jayewarde- (CPFA) - London, Jayesing- board of CIMA Sri Lanka. THE ABACUS | MAY 2018 27

Ananda College wins at CA Sri Lanka’s 2018 Business Plan Competition

Ananda College battled against Addressing the students, seven other top schools in the Deputy High Commissioner of country to win the champi- the Australian High Commis- onship at the 2018 Business sion in Colombo, Tim Hug- Plan Competition grand finale gins, who was the chief guest, of CA Sri Lanka, organised to said entrepreneurs are an help cultivate entrepreneurial important segment in society, skills among students. and they are going to be very The Ananda College team critical to Sri Lanka’s economy will fly to Brisbane, Austral- as they are the people who ia, in May 2018 to represent will underpin the next stage of Sri Lanka at the BlueShift Sri Lanka’s growth while creat- International Business Case ing new sectors. “You are the Competition organised by next generation of Sri Lankan the QUT Business School of business and you should be the Queensland University of confident in your strengths Technology. and the ability to compete The first runner-up was globally,” he said. Dr. Nandana Pathiranage, petition was QUT Business Richmond College of Galle, Over 30 schools repre- Senior Lecturer in Account- School, while the competition while Visakha Vidyalaya of Co- senting Colombo, Gampaha, ing; Professor Peter Green, was organised in association lombo was adjudged second Galle, Kurunegala, Kandy and Professor and Head, School of with the Sri Lanka and runner-up. The other teams Jaffna took part in the regional Accountancy of the Queens- Australia Chamber of that took part in the grand levels, which was open to land University of Technology Commerce (SLACC). finale were St. Benedict’s Col- students sitting for the GCE (QUT); and Andrew Paltridge, During the grand finale, a lege, Bandaranayake College, Advanced Level examination Assistant Dean (International) memorandum of St. John’s College, Mahamaya in 2018 or 2019 from the com- of the QUT Business School. understanding was also signed Girl’s College and Maliyadeva merce stream in English medi- The strategic partner for between QUT, SLACC and CA College. um. The panel of judges were this year’s Business Plan Com- Sri Lanka. 28 THE ABACUS | MAY 2018

Focus On - Technical Changes to SLFRSs Amendments announced to Sri Lanka Accounting Standards for 2018

A Sri Lanka's annual publication of Sri Lanka Account- Excerpts of some of the changes are as follows: ing Standards (SLFRSs) deals with several amendments 01. SLFRS 9: FINANCIAL INSTRUMENTS effective from 01 January 2018 including in the areas of C SLFRS 9 includes requirements for recognition and measurement, financial instruments, revenue from contracts with custom- ers, share-based payment transactions and foreign currency impairment, de-recognition and general hedge accounting. This advance payments. Standard will largely replace the provisions of LKAS 39 Financial Instruments: Recognition and Measurement. Salient features: (i) Three categories of Financial Assets, based on the measurement basis, i.e. • Amortised cost THE ABACUS | MAY 2018 29

• Fair value through other comprehensive income (FVTOCI) SLFRS 9 and SLFRS 15 will bring several consequential amend- • Fair value through profit or loss (residual) ments to other Accounting Standards. (ii) Classification of debt instrument is dependent on both: 03. ANNUAL IMPROVEMENTS TO SLFRSS 2016 • The contractual cash flow characteristics of financial assets The narrow scope amendments to the following SLFRSs from the • The entity’s business model objective for managing financial Annual Improvements 2016 will be effective from 01 January 2018. assets (i) Amendments to SLFRS 1 First-time Adoption of Sri Lanka (iii) Exception is no more available to measure investments in equity Accounting Standards instruments that do not have quoted prices in active market at cost. Short-term exemptions in paragraphs E3–E7 of SLFRS 1 are deleted, (iv) Allow trade receivables that don’t have a significant financing because they have now served their intended purpose. component to be measured at undiscounted invoice price rather (ii) Amendments to LKAS 28 Investments in Associates and Joint than fair value. Ventures (v) Loan losses need to be accounted using “Expected Credit Loss Clarified that the election to measure at fair value through profit or model”. loss an investment in an associate or a joint venture that is held by an entity that is a venture capital organisation, or other qualifying 02. SLFRS 15: REVENUE FROM CONTRACTS WITH entity, is available for each investment in an associate or joint ven- CUSTOMERS ture on an investment-by-investment basis, upon initial recognition.

SLFRS 15 introduces a five-step model for revenue recognition and measurement while replacing the following pronouncements: 04. OTHER AMENDMENTS TO EXISTING SLFRSS (a) LKAS 11 Construction Contracts; (i) Amendments to SLFRS 2: Classification and Measurement of (b) LKAS 18 Revenue; Share-based Payment Transactions (c) IFRIC 13 Customer Loyalty Programmes; The amendment introduces narrow scope amendments to SLFRS 2 (d) IFRIC 15 Agreements for the Construction of Real Estate; Share-based Payment to clarify the classification and measurement (e) IFRIC 18 Transfers of Assets from Customers; and of share-based payment transactions. It provides requirements on (f) SIC-31 Revenue—Barter Transactions Involving Advertising the accounting for: Services. • the effects of vesting and non-vesting conditions on the meas- urement of cash-settled share-based payments; This SLFRS Bound Volume – 2018 also incorporates the Clarifica- • share-based payment transactions with a net settlement tions to SLFRS 15 adopted in October 2016. feature for withholding tax obligations; and Salient features: • a modification to the terms and conditions of a share-based (i) SLFRS 15 introduces a new contract-based five-step model/ payment that changes the classification of the transaction analysis of transactions, focusing on transfer of control for the from cash-settled to equity-settled. timing and amount of revenue under two approaches to recognise (ii) Applying SLFRS 9 with SLFRS 4: Insurance Contracts revenue: at a point in time or over time as follows: This amendment intends to address the temporary accounting Step 1 - Identify the contract with the customer consequences of the different effective dates of SLFRS 9 Financial Step 2 - Identify the performance obligations in the contract Instruments and the forthcoming Insurance Contracts Standard. Step 3 - Determine the transaction price This amendment provides two options for entities that issue insur- ance contracts within the scope of SLFRS 4 as follows: Step 4 - Allocate the transaction price to the performance obli- gations • an option that permits entities to reclassify, from profit or Step 5 - Recognise revenue when (or as) the entity satisfies a loss to other comprehensive income, some of the income or performance obligation expenses arising from designated financial assets (the "overlay approach"); (ii) Significant judgment is required with extensive disclosure requirements for all companies • an optional temporary exemption from applying SLFRS 9 for entities whose predominant activity is issuing contracts within (iii) The impact will vary between entities. the scope of SLFRS 4 ('’temporary exemption'’).

30 THE ABACUS | MAY 2018

05. IFRIC 22: FOREIGN CURRENCY CODE OF BEST PRACTICE ON TRANSACTIONS AND ADVANCE CORPORATE GOVERNANCE CONSIDERATION 2017 IFRIC 22 clarifies the accounting for transactions that include the receipt or payment of advance consideration The Code of Best Practice on Corporate Gov- in a foreign currency. It covers foreign currency transac- ernance 2017 builds on the previous codes to tions when an entity recognises a non-monetary asset or strengthen best practice in governance in the con- non-monetary liability arising from the payment or receipt text of global developments relevant to Sri Lanka, of advance consideration before the entity recognises the emerging contemporary matters of governance related asset, expense or income. It does not apply when and challenges with greater importance to the Sri vv an entity measures the related asset, expense or income Lankan capital market. on initial recognition at fair value or at the fair value of the Some of the key changes in the updated code are: consideration received or paid at a date other than the date of initial recognition of the non-monetary asset or - Board composition non-monetary liability and need not to be applied to in- - Expansion of board responsibilities come taxes, insurance contracts or reinsurance contracts. Please visit www.slaasc.lk to view IFRIC 22. - Expanding provisions of directors’ training and their authority to seek expert advice - Specimen Audit Committee Charter and 06. STATEMENT OF ALTERNATIVE enhanced role for the Audit Committee on TREATMENT (SoAT) ON THE FIGURES IN THE internal controls and risk reviews INTERIM FINANCIAL STATEMENTS - Introduction of a Related Party Transaction The Council of the Institute of Chartered Accountants of Committee in line with the provisions of the Sri Lanka (CA Sri Lanka) has decided to issue the State- Colombo Stock Exchange ment of Alternative Treatment (SoAT) on the Figures in the Interim Financial Statements. - A requirement for reporting on Cyber Security and impact from the Internet of things The objective of issuing this SoAT is to grant a relief in the preparation of interim financial statements in accordance - A requirement for Environment, Society & Gov- with LKAS 34 Interim Financial Reporting for the first fi- ernance (ESG) reporting nancial reporting period beginning on or after 01st January 2018, in applying SLFRS 9 Financial Instruments that is to - Expanding Corporate Reporting to include; be effective from then onwards in the Sri Lankan context. Integrated reporting considerations, annual In recommending this SoAT for adoption in Sri Lanka, internal controls and risk reviews, CEO and CFO the Accounting Standards Committee has considered declaration, compliance with Code of Conduct several requests received from the preparers for such a & Ethics and fair value of Property, Plant and relief which will provide additional time horizon for smooth Equipment. implementation of SLFRS 9. The Code of Best Practice on Corporate Govern- Accordingly, the entities that prepare the interim financial ance 2017 will be effective for financial periods statements as per LKAS 34 may continue the application of beginning on or after 1 January 2018. LKAS 39 Financial Instruments: Recognition and Meas- urement with disclosures on impact to the Statement of Comprehensive Income for the period, if SLFRS 9 has been applied during the financial year commencing on or after 1 January 2018, provided that such determination of impact being impracticable, that fact shall be disclosed.

Sri Lanka Accounting Standards Bound Volume – 2018 incorporates all the above amendments and new SL- FRSs. You may also visit the official website on Account- ing Standards Committee to view the latest version of SLFRS Bound Volume. THE ABACUS | MARCH 2018 31 SUNNY SIDE UP We’ve listed out the best-looking sunnies to wear into the summer season – which in Sri Lanka is all year long!

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POLO RALPH LAUREN PH 3096 Inspired by tradition and refinement, RAY-BAN RB 3538 189 the polo classic collection brings This unisex Clubmaster-inspired style is avail- authentic style to daily life. These able in a range of colours with matte or shiny metal frames are comfortable, sleek finishes. The mirror lenses act like a one-way and come in vintage-inspired colours, mirror, decreasing the amount of light passing with a subtle metal “polo” logo at the through the lens and making it ideal for extra head of the temples. The non-polarised, sunny days. Wickramarachchi Opticians; 100% UV protection coated lenses are Rs37,500 in sophisticated gradient to complete the stylish look. Wickramarachchi Opticians; Rs37,500

OAKLEY JAWBREAKER™ POLARIZED When it comes to sunglasses, Oakley is hard to beat. Meeting the demands on world-class athletes, Oakley’s innovation reached a peak with the Jawbreaker™ Polarized. The design allows surge ports to let in cooling airflow, Unobtanium® components for a comfortable and secure fit, and interchangeable lens using Switchlock™ technology for vision optimization. Available in seven different colours and lens options, you can choose your preferred aesthetics to ensure the correct lens for your type of riding. Open Road Equipe; Rs30,000

PRADA SPS 04S Initially released in 2016, these MAUI JIM MJ291 MC- Prada Sport sunglasses are part of the Linea Rossa range. This GREGOR POINT pair is in rubber black (colour The tortoise frame McGregor Point code: DG0-5S0), with 100% UV features anti-corrosive spring hinges protected grey lenses. Vision and HCL® Bronze lenses, which are Care; Rs27,500 versatile in changing conditions with a warm tint. The lightweight frame is also comfortable enough for long hours of wear. Vision Care; Rs60,000 32 THE ABACUS | MAY 2018

GOOD REASON TO BE ON LISTED EQUITIES FRONTIER RESEARCH In recent years, listed equities were eclipsed by fixed income assets, but soon they’ll ride the bull

rontier Research is bullish on listed equities, with interest rates easing and consumer demand picking up in 2018. Two years ago, the firm, which Fspecializes in macroeconomic and industry-specific research, advised clients not to invest in listed equities. Now it’s asking them to do so. The All Share index of the Colombo Stock Exchange fell 10% over a 33-month period to end-September 2017, and most investors took cover in high-yielding fixed income assets. These included government and corporate securities and bank fixed deposits, which also enjoyed tax concessions. During the first nine months of 2017, most fixed income funds returned between 7% and 15%, while listed stocks returned 3%. However, Frontier Research believes that this year, listed equities will give better returns than fixed income assets. Frontier Research’s Founder and Chief Executive Amal Sanderatne, product heads Travis Gomez and Trisha Peries, and Product Lead Thilina Panduwawala took part in a roundtable discussion to explain why equity is hot – they don’t recommend individual stocks but industry sectors. Here, they also discuss underlying economic trends shaping markets in 2018 and beyond. THE ABACUS | MAY 2018 33

GOOD REASON TO BE BULLISH ON LISTED EQUITIES 34 THE ABACUS | MAY 2018

How would you describe 2017, and because it does not represent what what’s the outlook for 2018? businesses do. We believe that compa- nies don’t rely on GDP forecasts when Trisha Peries: There were several they plan their strategy. We rather focus positive trends in 2017 in terms of fiscal on consumer demand because that’s and monetary policy, and exchange rate what businesses want to know; it’s a management. The Central Bank gover- better indicator than GDP growth. nor assures there will be no sugar-highs We tell our clients that GDP growth and that credit growth is controlled. The rates can be volatile and fairly Central Bank is maintaining flexibility, inaccurate in terms of capturing giving the market space to determine the market dynamics. The economy exchange rate. The positive effect of this will have a better run in 2018 is that foreign exchange reserves have and beyond, driven mainly by grown to over $7 billion during the year consumer demand, increasing from about $5.5 billion at the beginning government spending and a pick- of 2017. Fiscal performance is improving, up in exports with GSP Plus trade with promising revenue and expenditure concessions to the EU taking effect. numbers. The main driver will be household consumption, which was low in 2017. Interest rates are expected to ease. In Sri Lanka, we experience up-down cycles So, you don’t have a forecast for in terms of interest rates. Since 2006, economic growth? the country has been through two up- down cycles, and we believe we’re in the Peries: We do, but we rarely share it downward leg on a third such cycle. So with our clients because, in our opinion, Trisha Peries interest rates will ease during the first it is not a very useful indicator. Our cli- half of the year, but there will be pres- ents are more concerned about business sure for rates to rise as domestic debt growth and where it will come from: the repayment pressure builds up in the consumer. There can be problems when second half. Around Rs600 billion of the GDP is estimated, and when base years government’s domestic debt is expected are revised, growth rates change signifi- The economy to mature during the year, most of this cantly. For instance, high growth rates will have a better in the second half. We expect interest recorded for 2013 and 2014 fell sharply rates to continue to move upwards in to around 3-4% when the base year was run in 2018 and 2019. We expect the exchange rate will revised to 2010. beyond, driven continue to be more market determined. mainly by consumer We don’t expect any shocks, but could What’s your view on inflation? demand,‘‘ increasing see 3-6% annualized depreciation of the rupee against the US dollar within the Peries: In 2017, inflation peaked to government spending next two years. record highs on the new index, staying and a pick-up in at over 7% levels over a few months. Consumer demand has been sluggish As is well known now, this was driven exports with GSP Plus over the last two years due to monetary very much by poor supply side condi- trade concessions to policy tightening since 2015, tax increas- tions due to droughts and floods, which the EU taking effect. es and reducing disposable incomes. caused F&B inflation to rise sharply. The main driver However, we believe consumer demand will improve in 2018. Business sentiment This trend doesn’t yet seem to show will be household has been low, and this is reflected in signs of easing, with droughts expected consumption, which corporate earnings, but we’ll see a pick- to persist in the beginning of this year as was low in 2017 up this year. well. Further adding to possible upside pressure on inflation in 2018 are energy What about economic growth? pricing reforms due in March and Sep- What’s your outlook for 2018? tember. These elevated levels of inflation are particularly concerning given that Peries: At Frontier Research, we don’t the Central Bank is expected to move really treat Gross Domestic Product into an inflation targeting monetary (GDP) as a useful economic indicator, policy framework in 2018 as recom- THE ABACUS | MAY 2018 35

mended by the IMF. However, despite lot of people believe in this buy-and-hold the acceleration in headline inflation, strategy, but the Sri Lankan dynamic is core inflation – which excludes volatile very different. We believe in timing mar- items like food, energy and transport – ket cycles and making aggressive calls has not followed this rising trend, and is on asset allocation when appropriate. therefore somewhat of a positive in this Timing markets requires a high degree worrying inflation outlook. of skill, like choosing the right advisors. Given the current economic conditions Interest rates will ease before rising and interest rates trajectory, we believe again. What does this mean for mon- the greater opportunity lies in listed ey and equity markets? equities.

Amal Sanderatne: Our view is that We’re not talking about buying and Our view is that interest rates will ease during the first selling, or holding for the long term, but interest rates will half of 2018 before increasing, slowly at timing the market cycle. In any case, first, and picking up in 2019. However, for a market like Sri Lanka, one to two ease during the it will not be a shock and volatility will years can be considered the investment first half of 2018 be less. There will be a positive story holding period, which we often advice before increasing, on volatility. At the same time, demand because of short market cycles. conditions are improving with spending For instance, our view for 2016/17 was ‘‘slowly at first, and related to the budget in 2019 due to bullish on fixed income and not equity. picking up in 2019. elections. For this reason, we’re more Back then, we estimated inflation to However, it will bullish on equities right now than we’ve average 4-5% over five years, which been for the last one and a half years. meant that real returns on fixed income not be a shock and We also feel that the market will take investment would be high. At that time, volatility will be time to adjust to the falling interest rate the equities outlook for 2016/17 was dull less. There will be cycle. Not all investors can see what we compared to fixed income, especially do. There will be more inflows into the because the IMF demanded a narrower a positive story equity market from domestic inves- budget deficit. There was an expectation on volatility tors during the first half of 2018. The that there would be a greater focus on Colombo Stock Exchange is poised for a austerity and taxation, and this was strong performance. The equity market expected to negatively impact corporate here is undervalued compared to most profits. We believed this was factored emerging markets, which is why foreign into the equity market in 2016 and investors are already attracted by cheap would continue into 2017. If our clients valuations. Also, improving consumer took our advice then, they’d now be demand will translate into better earn- sitting on substantial capital gains. ings for listed companies. Interest rates Some of them have now allocated rising after the second half of 2018 won’t more into equity based on our be a shock to the equity market, either. current view. There are still So, our advice right now to investors is those holding on to long to increase equity allocations. bonds. As interest rates fall this year, they should be So, investors should start increasing looking to cash out. equity allocations. Many hold the view that equity should be a long- What are the hot stocks term investment. Does this hold up to go for? in a market like ours? Travis Gomez: We don’t Sanderatne: Our view on equity is a look at individual listed short-term position. If the stock market stocks but focus on sectors we performs as we expect and by June can recommend allocations to. 2018 investors have made their money, One sector with upside poten- we will have to make a call on what to tial is banking. Given our view of do next. The Sri Lankan economy is interest rates weakening during the first very cyclical, so fundamentally, asset half of 2018, a key indicator of banks’ allocation needs to be dynamic. I know a performance, net interest margins, will Amal Sanderatne 36 THE ABACUS | MAY 2018

be under pressure. However, despite conform to international standards. So the squeeze in margins, we don’t expect there is good potential there. Some of to see a significant decline. Banks can the listed companies within this sector quickly adjust their deposit rates down have somehow managed to maintain while keeping their lending rates steady, high occupancy levels, and rental yields so net interest margins are unlikely to have been steadily improving; so that’s decline sharply. Banks also maintain another sector to look at. Finally, given conservative positions on non-per- the amount of activity that is going on in forming loans and their loan books the construction sector, listed manufac- are fairly diversified so risks turing companies supplying it can plug are spread. Banks will be fairly in to this construction boom. stable in 2018 and returns will continue to be consistent. Larger We have debt servicing obligations banks have been making average and FDI has not flown in as expected return on equity of about 15%, over the last couple of years. Will this which is quite high compared trend continue? to most other sectors. In terms of valuations, banks are trading at Thilina Panduwawala: Sri Lanka needs relatively cheap prices. So banks are policy consistency. If policy keeps a good investment to have. changing from government to govern- ment and within the same cabinet, FDI It’s the same for non-bank finance com- will obviously remain at low levels, panies; their loan books are growing at hovering around $1-1.5 billion a year. FDI a similar rate to banks. However, there’s has declined over the last two years, but Travis Gomez one advantage finance companies have is inching up now. During the first eight over banks. When interest rates ease, months of 2017, FDI was around $700 people tend to shift their deposits from million and the Hambantota Port deal banks to finance companies. During the could bring in an additional $300 mil- China’s ‘One Belt, third quarter of 2017, banking sector lion. The bottom line is, for FDI to take One Road’ initiative deposit growth slowed, while finance off, Sri Lanka needs policy consistency. and the fact that it’s companies saw a 10% increase. While Not only are investors getting mixed this shift is a positive for finance compa- signals but confidence in the system increasingly looking for nies, there is a worry that their tendency isn’t improving as much as is needed. Sri qualitative investment to be overexposed to vehicle leasing and Lanka has had issues with bureaucratic ‘‘ opportunities hire purchase compared to banks could red tape, bribery and corruption, which lead to some pressures on performance. must be dealt with by improving process- offshore should be We’ve already seen their loan impair- es and transparency that allow imple- opportunities for ment provisions increasing over the last menting agencies assisting investors to Sri Lanka. China is few quarters. So, with regard to finance work seamlessly across the different companies, the larger firms are good ministries and government agencies. also rebalancing its to look at because their asset bases are The government announced plans in the economy for more growing; it’s the smaller companies that 2018 budget to set up a single window consumption-led will face some pressure. to attract FDI, which will be linked with over 30 other government institutions growth The property development and real and a one-stop-shop at the Registrar of estate sector is another interesting Companies. These are all very encour- sector although there are varying opin- aging. Improving the ease of doing ions about the condominium sector as business is a good short-term measure to to whether or not a bubble is form- improve FDI. However, consistent policy ing. However, if you look at the listed is what will sustain robust long-term companies in this sector, most of them FDI growth, because investors will have focus on the commercial property space, confidence about the future. That’s what which has a lot going for it including is needed to increase annual FDI from policy support for investments in BPO around $1.5 billion now to the $5 billion and KPO businesses to set up here. that the government aspires to. Demand for office space is growing, particularly high-quality spaces that We have a new Inland Revenue Act THE ABACUS | MAY 2018 37

and a Foreign Exchange Act. What Exchange Act are implemented, whether can investors expect with these two or not they generate growth, or if they coming into play? dent the government’s fiscal position or Gomez: The core message that I think lead to a flight of foreign exchange. the government has been trying to push From a macroeconomic perspective, the Sri Lanka needs with these acts is to create an environ- new laws are good, but they’re also too policy consistency. ment of transparency and stability in late, so we won’t see significant near- terms of the policy environment. The term gains from these. Our short-term If policy keeps new Inland Revenue Act is an attempt to forecast won’t change because of them. changing from introduce transparency into taxation and The impact of these will be long term, government to processes. Definitions and guidelines on and again, a lot depends on implemen- ‘‘ government and corporate tax and taxable profits are very tation. clear, which will facilitate investment and within the same business decision-making. There is also What about the reforms? cabinet, FDI will a shift from granting tax concessions to obviously remain attracting investment. Panduwawala: The opportunities on the reforms side will depend overall on at low levels, The new act proposes benefits in the how the government manages its political hovering around form of capital allowances. There is capital. There are other opportunities, $1-1.5 billion a year. also an attempt to end the practice of too. On the FDI side, we have the Chinese giving tax concessions by guessing which investment in Port City, which will also FDI has declined sectors in the economy are doing well. attract other investments, and FTAs with over the last The government is trying to move away a number of countries in the pipeline. two years, but is from that and from the discretion that is given to the finance minister, replaced Gomez: China’s ‘One Belt, One Road’ inching up now now by this very clear system. A positive initiative and the fact that it’s increasingly thing about the 2018 budget is that the looking for qualitative investment oppor- government did not deviate from this tunities offshore should be opportunities course. They did not try to change the for Sri Lanka. China is also rebalancing corporate tax structures of the Inland its economy for more consumption-led Revenue Act. The tax concessions were growth. In this regard, a free trade agree- limited to a very few things like renew- ment with China will open opportunities able energy and dairy. It’s evident that for Sri Lanka, provided businesses are the government is intent on achieving competitive to export there. Another big consistency in the taxation policy, which opportunity is from Chinese tourists. is something that foreign investors want Arrivals from Western Europe have been rather than particular benefits to set up growing slowly each year. We’re seeing industry here. faster growth from East Asia and China in particular. It’s the same with the new Foreign Exchange Act. There’s a shift in attitude: Panduwawala: On the risk side, from a mindset of control to manage- there are global risks that could ment, from constraints to facilitating materialize. There is the global within the systemic framework. This monetary policy carried out by opens many opportunities for Sri Lankan the US Fed and shrinking balance businesses to venture overseas. The sheets as other central banks fall new act has increased limits on how in line with it. much can be invested and where. For example, listed corporates can invest Over time, this will impact on how up to $2 million to access international markets behave. However, for the markets to buy stocks and investment moment, we don’t expect any global bonds, and this helps diversify risks. The shocks. Global oil prices are increasing. act also broadens the inward investment This will have two outcomes for Sri Lan- categories for foreign investors. This is an ka. First, remittances from the Middle investor-friendly move. Despite the posi- East will stabilize or improve. Second, tives, it all comes down to how affectively the import cost will rise, so there won’t the Inland Revenue Act and the Foreign be much of a shock. Thilina Panduwawala

THE ABACUS | MAY 2018 39

BLUE OCEAN GROUP RISES TO GREATER HEIGHTS WITH RECORD-BREAKING ACHIEVEMENTS, AND IS GEARED FOR STRATEGIC PARTNERSHIPS

he construction industry has been a trendsetter in over six industries including Ocean Group, the market leader in the Sri major contributor to Sri Lanka’s rapid real estate, construction, engineering, trading, Lankan condominium market, acquired Link T economic development over the past education and corporate consultancy. Our Engineering a few years ago. Today the com- few years. The country has rushed to make dynamism is seen in the global networks and pany designs and constructs all the skyscrap- up for its more than two and a half decades projects we have spawned and the expansion ers that the Blue Ocean Group undertakes. of intermittent building activity across most we fuel in Europe, Asia Pacific, the Middle Aligned with the Group’s hierarchy with their segments, from high-end residential housing East and Asia, especially the UAE, UK, USA, high quality portfolios, Link Engineering and commercial and office space to a variety Canada and Australia. continues in the path towards sustainable of key infrastructure segments. The Group companies engage in varied profitability and creates new business oppor- The world has now shown a new interest construction and real estate activities; among tunities for the Group and their customers in Sri Lanka thanks to its ongoing socioeco- them are construction and engineering, man- around the world. nomic stability and rapid economic growth. ufacturing ready mix concrete, carpentering Another key factor that helps Blue Ocean Global investors see afresh the opportunities furniture, fabricating aluminum door and rise majestically above its industry compet- that they can have by investing in Sri Lanka, windows, importing building materials and itors is fulfilling a property seekers’ require- which lies very close to one of the most other heavy equipment, providing archi- ments by providing them with a dream home; sought after international sea trade routes. tectural and engineering consultation, and they also maintain their properties with the People who left the island in search of greener managing facilities to name a few. help of a sophisticated construction manage- pastures abroad now see the same in Sri In this context, the Blue Ocean Group, com- ment company named Blue Ocean Facility Lanka and return to have their dream homes manded by its visionary chairman Thumilan Management by offering all facilities such built here. Foreigners, both in the corporate is poised to create a major construction as building maintenance service and wealth and private sectors, are vying to make the best revolution. Its fully owned subsidiary, Link management. Hence one could say that Blue out of what Sri Lanka has to offer now. Engineering (Pvt) Limited, boasts an illustri- Ocean is a total package that provides all real Colombo city is recognized as the most ous and remarkable history spanning over 36 estate services from condominium devel- suitable to be South Asia’s commercial hub. years. The company is the forerunner of the opment to maintenance thereby obtaining It is internationally-renowned as the region’s Sri Lankan construction industry with many worldwide recognition as Sri Lanka’s largest cleanest and most livable city. With GDP per notable projects that it completed during and the most convenient condo developer. capita of the country destined to reach the its illustrious career path such as Heritance Blue Ocean Group also possesses the expe- level of US$ 4,000–5,000 within the next three Kandalama. rience, technical expertise, manpower and years, demand for real estate and properties Construction companies should be financial strength to carry out any type of in the country will boom, propelled by the innovative to meet the high demands of small, large or massive construction project US$40 billion mega redevelopment project their clients and customers and to provide that the government and private sector envis- that Colombo and its suburbs are witnessing affordable building solutions for them. Link age in their journey towards the development now under the ambitious Western Region Engineering has understood this need very of the country. Megapolis Project–Sri Lanka’s grand strategy well. With every project they complete, they The Group’s consistent year-on-year to propel the country to achieve its target to show their capability to meet the demand to improvement in financial results is a signal be ‘a developed nation’ by 2030 and gear the satisfy everyone concerned. Link Engineering of the financial sustainability of our business Indian Ocean island economy towards ensur- provides the industry with all its require- model. To ensure the sustainability of the ing an unprecedented GDP per capita of US$ ments supported by the Blue Ocean Group social and environmental aspects associated 65,910 by 2050. of Companies. They maintain the highest with our business, we continue to embrace Similar to the emerging economies in China, standards of the construction industry by best practices for social and environmental Brazil and India, Sri Lanka has a wealthy mid- delivering affordable quality products follow- management. From a social perspective, our dle class segment that can afford lavish life- ing modern architectural themes. The Group infrastructure projects across the country styles. The government is determined to take undertakes any monumental tasks in the field have a significant bearing on the communi- the development to all parts of the country by and completes them on time thereby proving ties in the area and improved the standard initiating massive projects in rural Sri Lanka their highly-acclaimed integrity and business of living of our stakeholders. Our work to to make the country the next Singapore. ethics with their deeds more than with their empower these communities is due to Blue The Blue Ocean Group of Companies has words. Ocean Group being an exemplary corporate today grown into a formidable leader and Understanding its core strength, the Blue citizen of Sri Lanka. 40 THE ABACUS | MAY 2018 THE ABACUS | MAY 2018 41

WHY GOOD INTENTIONS ALONE ARE NOT ENOUGH FOR SRI LANKA’S FUTURE FOOD SECURITY

THE ILL-FATED ROAD TOWARDS A TOXIN-FREE NATION

Organic agriculture could just be the Chronic kidney disease sparked a glyphosate ban in particular was seen as absolute embodiment of political correct- national conversation on better environ- a tipping point of the government’s will- ness. To say anything against it would be ment-friendly farming practices. The gov- ingness to compromise scientific rigour considered sacrilege. Even its most vocal ernment leveraged this idea as a moral in favour of emotional fervour. “I do not critics who doubt organic agriculture’s justification to revamp the agricultural care whether glyphosate is in or out, my ability to produce high yields without policy and implement more stringent concern has always been the way it was chemical enhancements to feed an controls on agrochemicals. banned,” says Prof. Marambe, who is ever-growing population find it unable “If you have a suspicion, you should also an expert in weed science. to hold a bold defense amid the inflated first ban it,” says Asoka Abeygunawar- This is not the first time weedicides virtues of natural farming. dana, chairman of the Strategic Enter- have come under scrutiny. Paraquat, the “We always say organic farming is prise Management Agency (SEMA), the most widely used agro-chemical before good. No argument about that,” says government institution under the direct glyphosate, was extremely toxic towards Prof. Buddhi Marambe of the Faculty of presidential purview that spearheads humans and contributed towards a spurt Agriculture at the University of Peradeni- the policy. “Then do the trials and prove of farmer suicides. The government ya, a prominent critic of the country’s that it’s not harmful.” The government’s set up a committee to investigate the newfound toxin-free agricultural policy. approach towards toxins in agriculture issue and recommended to phase out “But remember, we also need to feed a underlies the idea of ‘precautionary prin- the use of paraquat over the next three nation.” cipal’, which says that we should avoid years. Prof. Marambe, who was a part Last year, President Maithripala any action that will create severe harm of the committee that banned paraquat, Sirisena launched one of the most pivotal to the public until safety is established believes a similar scheme should have agricultural policies in recent history, through clear evidence. been ideally adopted, providing farmers the toxin-free nation programme. The While the approach is seemingly and the industry time to adjust and seek initiative had one audacious objective: To progressive and something to rejoice alternatives without jeopardizing the cleanse the nation from chemicals used in, some accuse that the policy is toying entire agriculture sector. in agriculture. The previous year, the with the future sustainability of the Whether the glyphosate ban was based country became one of the first to ban nation’s food security. Members of the on scientific grounds is a debatable the popular weedicide glyphosate for its Sri Lanka Organization of Agriculture question. Many scientific studies con- supposed association with the spread of professionals (SLOAP) have been critical ducted to find a plausible explanation for the chronic kidney disease in the North of the toxin-free nation plan, citing it as chronic kidney disease indicated a causal Central province, the heartland of the a policy based on unscientific grounds link with human exposure to agrochem- country’s rice economy. led by political motivations. The sudden icals among many other factors ranging 42 THE ABACUS | MAY 2018

from malnutrition to high prevalence declared glyphosate a chemical that they say they are incapable of doing it, of calcium and chloride in the water, probably causes cancer in people, has the president gives us the mandate to see and alcohol and tobacco consumption. omitted a significant research study that whether this can be done or not.” But multiple studies and agencies have showed the chemical has no links with Abeygunawardana is critical of the offered contradictory conclusions miring cancer. The withheld study was statis- agriculture scientific community who the debate in controversy. So much so tically well powered with a sample of warns that the toxin-free nation plan that the debate has become a cherry 89,000 agricultural workers and families would lead to a national food crisis in the picking fanfare to suit arguments that in the United States since the early 1990s. future. “How can they say that nature favour either party. More importantly, it was also one of the faming cannot compete with chemicals Last year, in April, the cracks of this handful of studies that examined real-life without doing pilot studies,” he says. initial hypothesis started to emerge. The human exposure to glyphosate, whereas “They have to prove this is a failure. Until presidential task force on kidney disease, much of the scientific research ICRA ana- then, they are not experts.” together with the World Health Organisa- lysed involved laboratory rodents. The collusion of science and politics tion, held a three-day joint consultation Abeygunawardana‘s argument for the never ends well. Lysenkoism, a political to review scientific literature on the dis- glyphosate ban is an illustration of the movement that rejected genetics and ease and recommend preventive action. catchphrase ‘better safe than sorry’, science-based agriculture during the This was a landmark event in the effort which at first instance seems to have Stalinist era in Russia, provides an apt for finding the origins of the disease. The merit. After all, it’s tempting not to vie cautionary tale. Tofim Lysenco, a one- consortium brought together 54 experts for a public policy based on a principle time horticulture hobbyist, was the ide- from around the globe from clinicians to that champions public safety as its first ologue of the initiative who spearheaded epidemiologists, toxicologists, agricul- priority. But the rhetorical appeal of it is the movement based on his pseudo-sci- tural scientists, nephrology experts misleading and dangerous. For instance, entific ideas. Chief among them was his and hydrologists. The alleged effect of pesticides are often used as a cause to ex- deviation from Mendelian genetics at a agrochemicals as a probable cause of ercise the precautionary principle; a ban time when the rest of the world adopt- on a toxic ed precise and careful manipulation of Many are equating the toxin-free nation campaign as an chemicals the genome to produce higher-yielding can lead disease- and pest-resistant varieties. eerie illustration of Lysenkoism. The harsh rhetoric has to substi- Lysenko’s criticism of heredity and his frustrated and alienated the local scientific community from tutes and peasant background fit the Marxist ide- participating in the policymaking process alternative ology, which led the communist rulers to practices make him the director of the institute of that create genetics at the nation’s highest scientific the disease was at the top of the agenda a much more harmful impact on the research institution. Lysenko’s pseudo- to discuss. However, in the recommen- environment and society’s well-being. scientific doctrines pushed the nation dation, the notion that agrochemicals Even in the advent of the glyphosate ban, towards famine and marked an era of re- played a major role in the spread of there is nothing to say that the number pression of scientists who dared oppose kidney disease was dispelled. of kidney patients in the future will his beliefs. It has been long argued that agrochem- diminish or the overall health of the na- Many are equating the toxin-free na- ical residue in the form of heavy metal tion would improve. The precautionary tion campaign as an eerie illustration of chemicals like cadmium and arsenic have model creates precedence for offering Lysenkoism. The harsh rhetoric has frus- contaminated waterways, resulting in en- simplistic solutions in the face of com- trated and alienated the local scientific tering human biological systems. But the plex issues to maintain an elusive status community from participating in the pol- committee determined that the strength quo. This creates a state of paralysis for icymaking process. Scientists who voice of evidence of such a case was inconclu- scientific advancement in contentious concern against the toxin-free nation sive – meaning that the available studies areas of the environment like agriculture plan are immediately branded as agents were not conclusive to establish a causa- and energy. of agrochemical companies. Any scientif- tive link. The committee even regarded Today, SEMA plays a crucial role in ic study that shows opposing findings not these areas as not a research priority for dictating the agricultural policy in the in line with the government policy is con- further investigation. For glyphosate, country. The agency was initially estab- cluded to be a product of collusion with the committee acknowledged it as a lished to provide consultative services agrochemical companies. While it’s vital toxic substance for human kidneys, but to improve efficiency in government to acknowledge allegations against agro- determined the strength of evidence institutions and key sectors of the econo- chem giants like Monsanto for meddling once again as inconclusive to establish a my. “When the president requested the with scientific studies, the continuous causative link with the disease. agricultural ministry to formulate a plan ostrasization of the scientific community Just recently, a major investigation to get rid of chemicals in the agriculture will halt any advancement of agriculture revealed that the WHO’s international sector, the ministry said they cannot do putting the country’s food security in cancer research agency (ICRA), which that,” says Abeygunawardana. “When serious jeopardy. THE ABACUS | MAY 2018 43

Rowena Barrett: Culture shapes innovation and entrepreneurship

HOW CAN SRI LANKA UNLOCK THE IMMENSE OPPORTUNITIES FOR PEOPLE TO BE ENTREPRENEURIAL?

rofessor Rowena Barrett is Head of the School of Man- agement at the Queensland University of Technology’s PBusiness School. By research- ing people management, especially in smaller enterprises, in collaboration with government and industry, she looks to in- crease our comprehension of what needs to be done to improve performance. Rowena uses her research expertise to do things differently and find innovative solutions to people-oriented issues. Her contributions to research have been quite considerable, and she has broadly published her outcomes through a range of media. Her aim at QUT is to build an entrepreneurial ecosystem so students have the capability and confidence to choose how they can apply their knowledge and skills in the real world. She took time off from her busy schedule to visit Sri Lanka and address the CEO’s forum on “Innovation and Entrepreneur- ship” at CASL.

44 THE ABACUS | MAY 2018

Could you give our readers an understand why things might happen outline of what you said at the CEO’s in certain ways, why people behave in Forum on Innovation and Entrepre- certain ways within organisations, and neurship? how one might need to vary the man- I wanted to talk about what entrepre- agerial and leadership levers in order neurship and innovation are, and then to get action from individuals. So those think about some possible characteristics Hofstede categories are quite controver- of a country like Sri Lanka that might sial, without a doubt, but they are put hinder or facilitate entrepreneurial there as this broad overview to try and behaviour. Innovation is not just about explain why things happen. It attempts science and technology, but about cre- to explain a range of different elements ativity. In particular, a country’s culture of how people behave in society, but cer- does make a difference. In a country like tainly many researchers connect that to Sri Lanka, there are immense opportu- how they behave in a business context. nities for people to be entrepreneurial. There is a great unmet need for products You talked about a digital disruption transformation due to the mobile phone and gig economy. Many organisations are extremely large and making a huge difference to the world. Look at a company like Uber; what is the key element in that business? It is the platform that connects supply A startup weekend usually and demand. It is also a platform that kicks off on a Friday afternoon, enables those lazy assets (cars) that were with a lot of the team working, being used for other things to be a part of the market economy. Is Uber anything to networking, getting people do with taxis? No, it’s not. It is about the to do a little ice-breaking and data they are gathering. Using this data, they will create new business opportu- some pitching. People will nities; it’s not just about giving people come and pitch an idea, and jobs. What they are doing is interesting. try and get others to work There are questions about how there is an increasing concentration of power with them. in certain companies and locations, but Uber is a model that can be replicated in other places. For example, I see PickMe is like that here.

Countries like Japan, Korea and China have a large input of automation taking place in the productive process, and services, and there are also parts of whereas countries like Australia are the country that are well developed and outsourcing production to countries can share what they have with the rest of like China. the world. Well, it could be innovation in a different way. I suppose you have to look at the cost of doing things. It is rather Your mention of Hofstede’s cultural like saying ‘the robots are going to take dimensions for Sri Lanka proved rather our jobs.’ Well, they are not going to take controversial. many people’s jobs where the cost is Hofstede looked at five elements low, as the cost of bringing in robots and of culture and how countries differ, putting them to work is quite high. The and mapped the culture of countries problem in Australia is that it is a high- all around the world through a survey cost location, and when they can’t afford process – many surveys of individuals. to operate any longer, they outsource The purpose of doing that was to try to production to other low-cost locations. THE ABACUS | MAY 2018 45

On the other hand, European coun- the firm and have access to real-time a lot of our university students apply for tries like Germany and Sweden also data that enabled them to take decisions this programme funding, which supports have very high innovation in automa- easily. Most of them had the customer at activities for young people. The pro- tion, and their labour costs are as high the centre of everything they did. How gramme supports science and research, as in Australia and they are far less would this affect the customer? How as well as entrepreneurs; there is also a entrepreneurial or individualistic. will we be able to service the customer business development fund to support Perhaps it is simply around that mind- better? How can we offer something entrepreneurs. set that companies are open and willing different to the customer? to accept change and develop. There I wear a sensor that is connected to As chartered accountants are mov- have been studies of innovation that sug- my insulin pump. It is incredibly sophisti- ing away from being number crunch- gest that firms that are not listed on the cated. It is the most sophisticated version ers to more strategic thinkers, what stock exchange, that have long-term and of the pump and sensor technology that should they take into consideration? patient investment, may be family-ori- exists at the moment. But the company is Chartered accountants will be among ented but are more likely to play for the hopeless. When I talk to them, I get frus- the most trusted advisers in a business. long-term because they have the stability trated. They have all my data, but they They have the capacity to be able to that enables them to do that. So perhaps don’t communicate with me. For many work with business owners and em- there is a different attitude to long-term. organisations to be successful, it is about ployers to think about the long-term, There can also be an element of culture. the little things. to comprehend the numbers and to For us, it is a history element. understand how things might play out There have been many things that You spoke about startup weekends over time. But as that trusted adviser, hold us, as Australians, in place that boosting innovation. it’s a very special role to work with haven’t forced a need for change. In a A startup weekend usually kicks off a company and help them shift their country like Sri Lanka, there is a need on a Friday afternoon, with a lot of the focus from just being successful today to for change. The country has changed team working, networking, getting peo- being successful in the long-term. In that through years of civil war. People need ple to do a little ice-breaking and some advisory function, chartered accountants to do things differently. Whereas in pitching. People will come and pitch an will need to be like others in that they Australia, it has been a very comfortable idea, and try and get others to work with understand what is going on in the world life. But as the world changes around us, them. So, they try to create teams and around them, what other companies are it gets harder to maintain that stability. work on the idea over the weekend, do doing, what can be learnt, being exposed There are many entrepreneurs in Austra- some market testing, primary market to new thinking and what’s happening in lia, and there have been for a long time. research, identify the value in this idea a market, and being able to connect with But among younger people, like our stu- or problem that is being solved, what the others who can help their goals. dents in the university, I have never seen market should look like, etc. At the end An organisation like CA Sri Lanka can this interest in activity, and I’ve been of the weekend, they pitch it to a panel work particularly with universities and operating in the sector for a long time. of entrepreneurs, business owners or training providers. We find that those

venture capitalists. It’s a way of rapid young minds are the ones that have so You mentioned having innovation much possibility and potential to create without innovative technology. How team formation, working together, new things. At this university, we have does that work? coming up with an idea. No one, at the end of 54 hours, is going to have a fully this book we have created called the We did a study about nine months functioning, fully fledged business, but ‘Blue Book: Tips for Start-up Founders ago looking at high-growth firms in they have got enough. So we see people at QUT’ that talks about different ways Queensland and how they used technol- who come up through startup weekends students can work together to pursue an ogy and how technology impacted their doing some additional work on their entrepreneurial idea. It is organisations high growth. A high-growth firm is one idea. They may end up in an accelerator like CA Sri Lanka that can unlock oppor- that grows at 20% per annum for at least programme or working out of a co-work- tunities for others, and people who have three years. Not many of them exist, ing space before they head off into the a wealth of experience and knowledge but there are some. All such firms used world. that they can share with others. It is that technology in various ways. The most mixing of the new with the established technology used by one high-growth firm In order to get that mindset, what that can make a huge difference. We was point-of-sale software that told them can the government do? are very grateful to work with char- what their inventory was and how much We work quite closely in Queensland tered accountants around the Blue Shift product had moved through their store. with our state government, and they programme, with high school students. Other firms used technology simply to are very keen through the Advance These kids are going to blow people away collaborate and connect with their cus- Queensland programme to support in- with their ideas. There is some network- tomers. These were sophisticated tech- novation and entrepreneurship; they do ing and some mentoring from chartered nology, but they only used it to connect it in a range of different ways. There is a accountants; beyond that, they create with their customers, collaborate across programme focused on young people, so and carry forward the initial idea. 46 THE ABACUS | MAY 2018

Understanding THE ACCOUNTANT’S ROLE in corporate governance

In today’s world, accountants are the gatekeepers of governance and financial reporting. Rather than being number crunchers, the role of an accountant has developed into becoming critical in making business decisions on the Excerpts from the interview are as follows: management of organisations. By more effectively communicating corporate What is corporate governance? governance structures from the top down, Professor Barry J. Cooper: There are various defi- organisations can facilitate more accurate nitions, but it’s really about a system of control over organisations and mobilization. I am tempted to use and ethical information. the definition on Wikipedia, which says ‘corporate Recognised as the torchbearers of the governance is the mechanisms, processes and relations accounting and auditing profession in by which corporations are controlled and directed.’ Sri Lanka, the Institute of Chartered Professor Gishan Dissanaike: It’s also the kind of Accountants of Sri Lanka (CA Sri Lanka) field where you don’t get fierce debates on what the recently launched the revised Code of definition is. Almost everyone knows that it can mean Best Practice on Corporate Governance. different things to different people. Present at the event were Professor There are various models of corporate governance Barry J. Cooper – Associate Dean in different countries. The German model has two (Regional Engagement) and Professor boards, and the British one is Anglo. What is the Sri of Accounting at Deakin Business Lankan model? School, Deakin University, Melbourne, Cooper: The Sri Lankan one is different from both the and Professor Gishan Dissanaike – a British and American models. When I look at the code financial economist, Director of Studies for of best practice, it’s not really that different from the code of best practice of Australia. There is a lot of com- Management Studies at Trinity College, monalities because of the common law system. Cambridge, and a Fellow of Hughes Hall – who further elaborated on the importance Would you agree that the purpose of corporate of companies adopting corporate governance is to increase shareholder value? governance best practices. Cooper:That is one reason, but there are others. It’s also a form of social contract to operate, so good ethical behaviour and corporate governance should be a part of that contract. There are so many examples where the social contract wasn’t met and there has THE ABACUS | MAY 2018 47

been bad corporate governance where shareholders had lost a lot of money, in particular in the US and Australia, or where money was invested back in the company, but because of bad corporate governance, the companies went bankrupt and all employees lost their pensions. So it’s much broader than that. Dissanaike: Some people would believe in the primacy of shareholders. A significant portion of those involved in corporate governance might subscribe to that no- tion. There is also a stakeholder perspective when you think of the other constituents as well. My own view is somewhere in-between; I believe that stock markets should ideally adopt a long-term perspective, and the moment you take a long-term perspective, there is no longer any divergence between the different approach- es. If you are looking at a long-term perspective, there’s no problem because you have to think of the employ- ees and the environment. Cooper: But, in fact, maybe CEOs in particular because they are so fixed on the share price. Because of the remuneration policy, they are fixed on short-term gain and don’t consider the long-term view. Dissanaike: And markets are probably not very long term. That’s a problem.

I read somewhere that the reduction of corporate governance to maximise shareholder value has led to dramatic failures like the financial crisis. Could you explain that? may think that this is not good enough. It’s also to do Cooper: I wouldn’t say reduction, but possibly a lack of with the disruption of business. If you look at the taxi shareholder value. industry, we didn’t see Uber coming, and the impact of Dissanaike: I wouldn’t call it reduction either. I AirBnb on the accommodation market has been enor- would say, however, that unless we work on corporate mous. Organisations have to be very strategic about the governance, there will always be corporate scandals, way they operate, they have to be able to see the next because any system you create is a human-devised big thing coming. system. So it’s not foolproof. Whether you have a Dissanaike: Corporate governance is more than just mandatory or voluntary approach, there’s going to be compliance. If you have purely a compliance mindset, corporate scandals. It’s about reducing the probability. you start forgetting that businesses are out there to be Cooper: In a lot of those cases, the scandals are not vehicles of entrepreneurship, and we expect them to necessarily corporate collapses. In Australia, for exam- add value. So it’s not just compliance, there are threats ple, the Commonwealth Bank of Australia has behaved lurking around the corner. Sometimes, it’s about the very badly from a corporate governance point of view, company doing its core business properly. allowing money laundering to happen. In Australia, Cooper: Multinational companies operating in Austra- a lot of people who have taken advice from financial lia never paid a cent in taxes, and now that has become planners lost their money or were defrauded. The level an issue. We pay lots of taxes, but there are some big of confidence in corporate governance in Australian corporates, well-known household names, who don’t banks is at a pretty bad level. The Royal Commission pay anything. is a very powerful legal authority that can take a lot of Dissanaike: When that becomes known these days evidence. through social media, customers start complaining and companies have to watch out. In what ways does corporate governance help organisations to function more effectively? Would you agree that social media helps keeps Cooper: My view is that good ethics means good busi- checks and balances? ness. Bad ethics have been bad for business in Austra- Cooper: The problem is that most corporate boards lia, especially with social media. You have to be careful comprise old guys like me who aren’t very savvy with because it can have a big impact on how companies social media. Which is why having younger people on are perceived. Companies now have to react instantly. the board, with those skills and a gender balance are Younger people nowadays are internet-savvy, and they important. 48 THE ABACUS | MAY 2018

financial performance in the long run, and when that happens, many of these trade-offs go away.

CA Sri Lanka portrays accountants as playing a bigger role, and not just number crunching anymore. How true is this? Cooper: Absolutely. A lot of number crunching is no longer done by accountants. It’s all automated and the role of the accountant is much more about understand- ing the strategy, having the soft skills, teamwork and understanding the nature of the business. They order the business, so they have a big role to play. Dissanaike: At the same time, within any firm, not all directors will be familiar with the figures. So accoun- tants need to inform and explain them so informed de- cisions can be made. Directors sometimes bring skills, but they need to be made aware of the issues. Cooper: Most companies have subcommittees to the board, such as the audit committee that is made up of people with a good understanding of the field. It’s important that the board deals with these committees.

When we do research on good governance, we come across the words ‘socially responsible investment’. How does that tie into corporate Dissanaike: Social media can be a forceful court, but it governance? could also cause problems. These days you have a lot of Cooper: If that is your strategy or philosophy, the rules fake news, so companies need to engage in correcting of corporate governance do not change. Companies are misinformation. Social media is not all good. much more aware of social investment. Some com- What rewards does corporate governance reap for panies in Australia have investment funds that won’t companies? invest in certain companies. There are also massive innovation funds in Australia that come under different Cooper: Good ethics is good corporate governance. So, regulations. if you have good corporate governance, you will man- age the risks and be strategic about how you operate. Dissanaike: In the UK, many organisations and some You won’t lose value through fraud and bad decisions. universities have a ‘Church of England’ screening, where the Church of England was concerned about You mentioned financial performance. Do you think investing in certain places and so they devised certain there’s a strong link between the two? criteria. Companies hope that if it’s good for the Cooper: Yes, there is a link. I think you can move a step Church of England, it’s good for them. forward and go to integrated reporting. You are not talking only about financial performance, but business Talk to us about this code of ethics. What are its model, KPIs and strategies. There are concerns over distinguishable features? that because directors are worried about their legal Cooper: It’s a code that has been refined. One of the liabilities. It’s what’s holding things back in Australia. major refinements is the emphasis on non-executive A number of companies in Australia have adopted the directors. In the past, there was an issue about owners full framework of integrated reporting. So, it’s about being separate from shareholders. Managers some- the behaviour of multinationals in different countries times look after their own interest because of short- being more open and transparent. Some countries term goals and appoint directors. The idea of non-ex- have corrupt regimes, and in those countries, the com- ecutive directors are people who are not involved in panies are happy to be corrupt. For example, in China, the company whatsoever. They come from outside, if I needed to purchase some equipment, it would be and in a way, their role should be monitored by the natural to go to my brother’s company, but in Austra- CEO or the board to make sure the best interest of the lia, that’s corruption. You have to be sensitive to the company is served. different cultures and so on. Sometimes, big companies Dissanaike: Many of the codes that have been devel- take advantage of that. oped stress on the independence of non-executive Dissanaike: They are connected, but it’s more members. This is important, but it’s not the only cri- complex. Some corporate governance measures may teria. Lessons from the recent financial crises are that reduce the financial performance. But we look at knowledge of the industry and passion matter as well.

50 THE ABACUS | MAY 2018

CA SRI LANKA PRESIDENT Jagath Perera's Vision

CA SRI LANKA'S PRESIDENT SAYS UPDATING ARCHAIC LAWS, UPGRADING SKILLS AND UPHOLDING STANDARDS WILL PREPARE THE PROFESSION FOR THE NEXT STAGE OF DEVELOPMENT IN SRI LANKA

CA Sri Lanka's incumbent President Jagath Perera, Partner at KPMG Sri Lanka, outlines the vision that will make the country's accounting profession stand out in a fast-changing competitive world. Upholding standards and improving the quality of work are at the core of the institute's goals. Education and professional development are as critically important, while inculcating leadership skills and a culture of entrepreneurship is high on Perera's agenda.

Globally, the accounting profession is breaking away from the traditional, stereotypical financial reporting role. In fact, markets demand this shift, and technology is driving it. Perera believes a developing Sri Lanka will open many opportunities for the profession, which is why CA Sri Lanka is making it a priority to prepare its members and students for it. THE ABACUS | MAY 2018 51 52 THE ABACUS | MAY 2018

Excerpts from the interview are as follows: CA SRI LANKA MEMBERS

VISION AND STUDENTS MUST BECOME MORE We have set several goals for the institute to achieve, and these fall into three broad areas: First, is upholding ENTREPRENEURIAL. SRI standards and improving the quality of accounting and LANKA HAS TOO MANY auditing work; the second area is achieving excellence in education and professional development. Enhancing EMPLOYEES AND ONLY leadership and entrepreneurship skills is the third. A FEW EMPLOYERS. THE Underlying these three broad objectives are several outcomes we will have to achieve, which means a lot of INSTITUTE MUST EMPOWER hardwork. But I'm fortunate to be a part of a passion- MEMBERS AND TRAIN ITS ate team and dedicated membership, so achieving our goals will be a pleasant, exciting and rewarding STUDENTS TO BECOME experience. Let me briefly outline our goals and objectives start- ENTREPRENEURS, SO ing with upholding standards. We're looking at several THEY ARE THE ONES WHO initiatives in this area. COULD CREATE JOBS. PROFESSIONAL IT'S NOT A SKILL THAT COLLABORATION CAN BE TAUGHT IN THE First, I like to see professional accounting bodies CLASSROOM, BUT THERE working for a common cause. In Sri Lanka, there are three professional accounting bodies. CA Sri Lanka ARE WAYS IT CAN BE is the oldest and the leading accounting body in the INCULCATED, AND THIS IS country. Then, we have CMA, with its core discipline management accounting arm, and AAT for accounting AN AREA WE ARE KEEN TO technicians. The objective of all three institutions is to EXPLORE OVER THE NEXT uphold the standards of accountancy. This is our com- mon ground, although we approach the discipline from FEW YEARS. WE MUST different ends. It's critical that the three accounting bodies work together and have one voice on profes- MOTIVATE OUR STUDENTS sional matters. This is an initiative CA Sri Lanka will AND PREPARE THEM FOR drive and support, and I am confident we will succeed. SENIOR MANAGEMENT PREVAILING LAWS ROLES IN THE INDUSTRY.

CA Sri Lanka's own Act of Incorporation is almost 60 years old. We have to consider the nature of adjust- ments and changes required to keep up with the rest of the world and better serve the emerging needs of a developing Sri Lanka. An appropriate update of the Act will be an important objective for us. Accounting practices fall under a partnerships act which was enacted more than 125 years ago in 1890. We must update this law to include the different types of partnerships that have since emerged in other parts of the world like limited liability partnerships, or LLPs, and multidisciplinary partnerships. It is important for us to prompt legislators to update the partnership law.

EMPOWERING MEMBERS

The third area under upholding standards is empow- ering practicing members of the institute. Practicing THE ABACUS | MAY 2018 53

members are a very important community within the ployees and only a few employers. The institute must profession and society because of the critical role they empower its members and train its students to become perform as auditors. Because of auditors, sharehold- entrepreneurs, so they are the ones who could create ers and other stakeholders have a clear view of an jobs. It's not a skill that can be taught in the classroom, organisation's financial health. On the other hand, due but there are ways it can be inculcated, and this is an to the same reason, the management and custodians area we are keen to explore over the next few years. of an organisation tend to develop more transparent We must motivate our students and prepare them for governance structures. From a small business to a large senior management roles in the industry. corporate and even a state enterprise, an auditor is a watchdog guarding against breaches in public trust on STANDOUT PROFESSION which the foundation of any economy is built. This is why the auditor's report is absolutely critical, and this We experience an economic growth of 4-5 percent an- is an area CA Sri Lanka will pay special attention to in nually, and of course one needs to expect certain hic- order to enhance the quality and consistency of audit cups. With the Colombo International Financial Centre, work. there will be lots of opportunities for the profession. As We need to keep up with changing technology and Sri Lanka continues to open up to the outside world, update ourselves with global developments that impact we need to ensure that our professionals are world the profession. In this regard, the institute will play an class, so that we can thrive in the competition. Our pro- awareness-building role. fession needs to stand out. This is why it's so important to keep abreast with global developments, embrace KNOWLEDGE AND SKILLS technology and sharpen professional skills. Risk man- agement is an emerging discipline that can open many The second objective is achieving excellence in educa- doors. This is why it's so critical to realise our objec- tion and professional development. The professional tives around education and professional development, qualification of CA Sri Lanka is benchmarked with the and leadership and entrepreneurship. UK's National Academic Recognition Information Cen- tre. Accordingly, ACA is benchmarked as RQF 7, which TARGET GROWTH is equivalent to a Master's Degree in the UK. That's a great achievement for the institute s achieved under Legislatively or constitutionally, Sri Lanka has done the previous President Lasantha Wickremasinghe. a lot. Without dwelling on those changes, we now Now, we need to take that forward. We have to es- need to focus on the economy and delivering growth tablish mutual recognition agreements with other pro- of about 10 percent if we are to realise the aspirations fessional bodies so our students can enjoy additional of the people of this country. Our per capita income exemptions and global recognition. We need to engage today is around $4,000, and we should set a target to top-ranking universities in the world so our students reach $12,000 and have a comprehensive plan to take can proceed to a Master's Degree or even a PhD after us there. This is what the country needs. gaining CA Sri Lanka's ACA qualification. We need to open all avenues because this is an opportunity for our CHANGE members and students to gain a global qualification with a local brand. We need to get a global passport for our members. The new Inland Revenue Act, Foreign Exchange Act, proposed SEC and audit bills, and other laws should ACCOUNTANTS = ENTREPRENEURS take the country forward, attract investments and deepen capital markets. There are always grey areas Developing soft skills of our students is critical and a and new challenges that may crop up, but these have lot will be done in this regard. We will develop a new to be dealt with in a rational manner. It is our duty as curricular for 2025 that will take into account the accel- professionals to engage with legislators in a construc- erating speed in which technology and global regula- tive manner. tions are changing. Soon, they will be expected to have No law is perfect, but they have to be implemented a deep understanding of industries, laws and regula- and enforced. As far as the profession is concerned, we tions and even software. We may require to bring these must work with laws at hand and do our best to take concepts into CA Sri Lanka's syllabus so our students the country forward. We must embrace change, good are prepared with the right competencies and skills or bad, but our goal and focus should always be to the for the future. This brings me to the third objective: future. If we succeed in our goals, the profession will enhancing leadership and entrepreneurship skills. be in a position to positively contribute towards push- CA Sri Lanka members and students must become ing Sri Lanka towards the next level of development; more entrepreneurial. Sri Lanka has too many em- and this will be a rewarding outcome for all of us. 54 THE ABACUS | MAY 2018

4 KEY STEPS for CFOs to instill integrated thinking and reporting by Laura Leka , Technical Manager, Global Accountancy Profession Support, IFAC and Stathis Gould, Head of Professional Accountants in Business and Integrated Reporting, IFAC

hief Financial Officers (CFOs) are natural leaders reporting provides a unique way and additional incentive in integrated reporting, and embracing this gives for CFOs and their finance teams to focus on the information them the opportunity to shine as “changemak- and decisions that matter to the organisation and its success. ers” in their organisations, where they inspire CFOs increasingly have an organisation-wide perspective Cnew thinking and understanding of value cre- in their roles, as well as responsibilities that extend beyond ation. This is according to a new publication, ‘Creating Value financial management and reporting (e.g. risk management, – CFO Leadership in ’, published by the International business development and corporate strategy). Integrated Reporting Council, in collaboration with IFAC. With direct access to the governing board and executive Indeed, finance professionals are well positioned to take management team, along with credibility through their trust- integrated reporting to the next level. As CFOs and finance ed reputation, skills and professionalism, CFOs are uniquely leaders increasingly evolve into business partners and organ- positioned to play a leading role in the transition to integrat- isational integrators and navigators, integrated thinking and ed reporting. THE ABACUS | MAY 2018 55

Four key actions CFOs and their finance teams can to support implementation, it sends a strong message consider to enable integrated reporting in their organ- to the rest of the organisation. Additional guidance is isations: available: Creating Value with Integrated Thinking: The Role of the Professional Accountant, which includes five 1. Secure commitment to integrated reporting and key areas that the finance function can actively support; thinking from business leaders: Top-down support from connectivity; external value focus; integrated planning; the governing board and executive management can effective governance and oversight; and integrated be crucial to successfully implementing integrated communications. reporting and thinking in an organisation. CFOs can use their influential position to help change mindsets and CFOs who embrace integrated reporting and drive its im- support business leaders in recognizing that, through plementation have an immense opportunity to impact their integrated reporting and thinking, the organisation can organisations, improve understanding of its drivers of value better understand how it creates value over time, and through a multi-capital lens and embed this into processes the significant (internal and external) factors that affect across the business. The result is more informed decision its ability to do so. The board and management need making, better managed risks and opportunities, and im- to be actively engaged at the start and throughout the proved information to understand performance. integrated reporting process in order to provide impor- Becoming the “changemaker” also helps a CFO enhance tant and effective oversight at all stages, from identifying his or her role and reputation, and increase his or her material matters to reporting, to the preparation process profile, influence and status as the key value enabler in the and approving the final report. organisation.

2. Create a structured and multi-disciplinary implementa- tion approach that has wide support: Integrated report- Laura Leka is a Technical Manager in IFAC's ing requires the involvement of various functions and Global Accountancy Profession Support departments across an organisation, including finance, team, which promotes and supports the role strategy, sustainability, investor relations, operations of professional accountants in business. She was previously an audit manager for and human resources. Such a multi-disciplinary team Grant Thornton, specializing in public sector requires strong direction and a champion to help coordi- assurance in the UK. She also spent a year nate efforts, connect the functions and break down silos. on secondment to the International Integrat- It is important that all departments or functions have a ed Reporting Council (IIRC), where she was common understanding of how the organisation creates responsible for managing their public sector value, as well as their respective contributions towards and business network programmes. Laura is a shared organisational objectives. qualified member of the Chartered Institute of Public Finance and Accountancy (CIPFA), and 3. Assess internal capacity for integrated thinking and in- started her career with the Audit Commission. tegrated decision making, and put in place the processes and systems that provide data to show how value is being Stathis Gould heads up the development of created or destroyed: Implementing integrated reporting international services for professional ac- requires an understanding of its fundamental concepts, countants working in business and industry at such as the 6 capitals and the value creation process, IFAC. A key element of his work is developing and how these can be applied and embedded within the thought leadership and guidance in support of organisation's management processes. Incorporating a finance professionals and their roles facilitat- multi-capital perspective into decision making requires ing sustainable organisational performance. Before moving to IFAC, at the Chartered the capture and interpretation of reliable financial and Institute of Management Accountants (CIMA), operational data. CFOs can apply their experience with he was responsible for planning and oversee- well-established processes, systems and controls over ing a programme of policy and research. Prior financial data to the development of wider information to serving the accountancy profession, Gould collection systems for non-financial data. In doing so, worked in various roles in the private and the CFO and finance function can enhance confidence public sectors in the UK. in less-mature non-financial information. This is explored further in the recent article: Confidence in Non-Financial (This article originally appeared on the IFAC Global Knowledge Gateway: www. Information Next Frontier. ifac.org/Gateway. Visit the Gateway to find additional content on a variety of topics related to the accountancy profession. Copyright April 2018 by the 4. Prepare the finance function to facilitate integrated International Federation of Accountants (IFAC). All rights reserved. Used with thinking and reporting: When the finance function permission of IFAC. Contact [email protected] for permission to reproduce, embraces integrated reporting and adapts its activities store, or transmit this document.) 56 THE ABACUS | MAY 2018 TAX RE FORMS: accounting professi onals' turn at the wheel

THE SUCCESS OF THE OVERHAULED TAX CODE TO BE IMPLEMENTED BY THE IRD WILL ALSO HINGE ON ACCOUNTING PROFESSIONALS THE ABACUS | MAY 2018 57 TAX RE FORMS: accounting professi onals' turn at the wheel

It’s now the accounting profession’s turn to steer the tax reforms agenda. The government has pushed through difficult reforms to I Sri Lanka’s tax system. The income tax code was overhauled, re- moving ambiguities, complexities and loopholes and granting tax authorities greater powers to penalise evaders. Despite a turbulent drafting stage and uncertainty greeting its passage, the new Inland Revenue Act, No. 24 of 2017 (in effect since April 2018) is lauded for its clarity and simplicity. The Inland Revenue Department is responsible for its implementation, although the department needs restructuring. Success of the overall tax reforms agenda will now largely depend on how accounting profes- sionals deal with the changes. 58 THE ABACUS | MAY 2018

The new tax code promises to create a fairer system. the political will to act on them was lacking until the It will also enable the country to fix the decades-long UNP-SLFP government swept to power in a wave of problem of declining income tax share of government optimism – fertile ground for difficult reforms. revenue. Despite the positive outlook, the new income The new code is a result of the government pushing tax code presents some serious challenges that the ahead with reforms to simplify the tax system, elim- accounting profession will have to face in a construc- inate widespread tax concessions and holidays, plug tive manner. “Everyone can appreciate the fact that loopholes and give Inland Revenue more teeth to nab the new tax law is easier to understand and well tax evaders. The private sector took part in the consul- structured. That’s a good place to start,” says Shamila tative process and formulation stages of the new code. Jayasekara, Partner - Tax and Regulatory at KPMG. The Ceylon Chamber of Commerce, for instance, had a Figuring out the changes to income tax rates and to team of top accounting and taxation experts lobbying what, who and how they apply is certainly daunting, for pro-business changes. but it’s a role accountants are trained for and expect- The government hopes to raise Rs60 billion in ed to do as professionals. “There were frequent and additional tax revenue annually under the new system. significant changes to tax law in Sri Lanka, so we had However, it also realises that the new code is useless to learn to adapt quickly. In that sense, the new tax without strengthening tax administration and widen- law shouldn’t be too daunting in terms of accepting ing the tax base to increase revenue. change,” Jayasekara says. Inland Revenue has been set targets to open 200 It is critical to quickly grasp how the new code new files a month. Only 1.6 million people pay taxes. impacts businesses. Processes will have to be designed Direct taxes in Sri Lanka account for less than 20% of and implemented so that firms manage their affairs -ef revenue, compared to 72% in Malaysia, 54% in India, ficiently to minimise compliance costs both in terms of 45% in South Korea and 32% in Bangladesh. allocating resources to file proper taxes – for example, There are three reasons for Sri Lanka’s low income new transfer pricing rules cover domestic related party tax collection. First, income tax evasion is widespread. transactions – and avoiding unnecessary disputes. Second, the old tax code had too many loopholes, Inland Revenue has more influence and power making it easy to avoid taxes (without committing a under the new code. The department has the final say criminal offence). Third, Sri Lanka’s tax department is on tax avoidance measures, which are legal means of not an autonomous agency. minimising tax liabilities. A company may choose to The 2009 Presidential Commission on Taxation register a subsidiary because it makes business sense, made some unsurprising revelations. It was this com- but if there are tax savings, Inland Revenue may decide mission that suggested overhauling the tax code and that this was the sole purpose of the subsidiary. Also, tightening administration. It found that less than a fifth taxes must be paid in full before an assessment can of registered companies paid income taxes. Only half even be appealed; this was not the case earlier. These a million people had personal tax files and less than are reasons for chief financial officers to be vigilant. 4% of the working population paid PAYE taxes. These numbers by themselves don’t point to tax evasion. Many small companies may have closed down or The new income tax code was widely cannot deal with the complexities of tax returns, and panned when it was first mooted many small businesses and individuals simply don’t after the UNP-SLFP government took earn enough to qualify to pay taxes. office in 2015. Late night political talk The Inland Revenue Department audits only three shows perpetuated misconceptions percent of tax files each year. It does not have the that the income tax law was being capacity to dig deeper into existing taxpayers let alone T overhauled on the whims of the IMF uncover the evaders outside the income tax base. Tax with draconian taxes. Nothing can be further from the evaders are let off with a light sentence, made to pay truth. one to two years’ taxes and a penalty of Rs50,000. An overhaul of the tax code was a long-felt need The department is in early stage deployment of within the country: for the government, because in- RAMIS (Revenue Administration Management Informa- come tax collections were too low, its share of revenue tion System), which is linked to over 20 government declining; and for businesses, which felt the code was agencies and will flag potential tax evaders even if they too ambiguous, complex and penalised those already register assets like land, houses and vehicles in the in the tax net. names of relatives. It’s not clear if RAMIS will leave an In 2009, the government appointed a commission audit trail so that allegations of tax evasion can stick, to recommend reforms to Sri Lanka’s tax system, but but it will monitor officers and processes in Inland Revenue to prevent collusion with dodgy taxpayers on THE ABACUS | MAY 2018 59

the outside. However, when life insurance bosses decided that they Ideally the tax reforms should have targeted Inland would not try to avoid paying taxes, an amicable settle- Revenue first. ment was reached with Inland Revenue. Life insurance companies will now pay 28% on profits like any other Tax officials are known to collude with tax evaders. business. The change in attitude benefited both Inland The 2009 tax commission found that many people in Revenue and the industry and averted what could have the tax office have access to tax files without superviso- been a prolonged dispute. ry approval. There is no record of who handles what, so files get misplaced or data manipulated. Good tax A country’s tax code plays a crucial role in attracting officials are demoralised with few career prospects investment and boosting productivity. This is why the and departments are underfunded – easy prey for tax World Bank’s Ease of Doing Business index looks at evaders. taxation separately. Georgia ranks 40th out of 189 countries in the 2016 World Bank index for ease of paying taxes. Ten years The new tax code has overhauled a ago, it ranked 102nd when it rolled out its tax reforms law that’s been around for several programme. For Georgia, reducing the number of decades, and this alone is enough taxes and rates were secondary objectives. It started by to cause apprehension. There is a col- introducing administrative reforms. The number of tax- lective repository of expertise around es at 22 in 2004 was reduced in stages to six by 2011, a the old code and understanding of T what made Inland Revenue tick. There’s voluminous case law on how judges ruled on various tax matters. None of this may be valid any- more. ACCOUNTING PROFESSIONALS Exacerbating this is the fact that officials at Inland Revenue are themselves in unfamiliar territory. To HAVE A CRITICAL ROLE TO PLAY avoid unnecessary disputes, the IMF has requested a manual with clear explanations and guidelines on each IN FACILITATING A SMOOTH section of the tax code in order to minimise ambigu- TRANSITION, BECAUSE IT WILL ities. Also, transitional provisions were expected to be ADD VALUE TO THEIR BUSINESSES finalised before the new code became effective in April AND EVENTUALLY BENEFIT THE 2018. When this didn’t happen, confidence declined. This shouldn’t have happened. Fixing Sri Lanka’s COUNTRY income tax problem will need all stakeholders working together. The tone of the new act indicates that the govern- ment means business when it says income tax share 20% VAT was reduced to 18%, and a corporate tax was of total revenue will be doubled from 20% to 40%. To brought down from 20% to 15%. Tax revenue doubled this end, the era of sweeping tax concessions to attract in seven years. Today, Sri Lanka ranks 158th, trailing investments has ended, there are stricter rules around 118 places behind Georgia. tax avoidance and Inland Revenue will have more teeth to penalise offenders. Everyone understands the need Administrative reforms will bring stability to the to raise income tax collections, but those already pay- new tax code and cut the cost of compliance. Un- ing taxes feel they may be the first to feel the sting. certainty creates problems, and this is a big reason why people evade taxes. The new income tax code is Dealing with problems will require professional intended to generate certainty and confidence. The tact. Take the example of the life insurance industry. government has promised not to tinker with the law for Just three out of 15 life insurance companies reported the next two years. Businesses will likely pay more tax- taxable profits each year. The rest were making use of a es now, but it may be a small price to pay for stability. loophole to set off expenses related to the business and showing tax losses. Accounting professionals have a critical role to play in facilitating a smooth transition, because it will add When the new tax code was being drafted, Inland value to their businesses and eventually benefit the Revenue changed the rules so that life insurers would country. “We have to start by telling clients that they end up paying as much as 80% of profits as tax. This need to pay taxes. We need to foster an attitude that’s sparked off frenzied lobbying that went nowhere, not averse to paying taxes,” Jayasekara says. This could forcing the industry to appeal to the Supreme Court. well be the profession’s most significant contribution. 60 THE ABACUS | APRIL 2018 WATCHES OF THE MONTH Two watches that exude class via their simplicity and another two ideal for those who love complications, these are the four to watch out for…

TISSOT PRC 200

While the complications are pretty standard on this timepiece – with a date window, seconds sub-dial, 30-minutes counter and 6-hour totalizer – the watch in itself has a clean look, making it easy to read, yet stylish. The chronograph seconds hand is in the shape of Tissot’s ‘T’, which is a personalized touch, and a minimal tachymeter lies bordering the dial. This is the perfect starter watch if you are just stepping into the wonderful world of chronographs. T0554271705700; Rs143,000; W A De Silva

ORIS DIVERS SIXTY-FIVE

Watch manufacturer Oris jumps on clean lines and minimalistic look. The the diving watches bandwagon that only gripe is perhaps its old-school has taken the market by storm in depth rating of a meager 100 metres, the recent past with the Oris Divers making it ideal for recreational use Sixty-Five. With an in-house modified rather than as a professional dive Selitta SW200 and a double AR- watch. 01 733 7707 4064-07 4 20 coated domed sapphire crystal, it 18; (LKR195,000); Wimaladharma dispels chunky dive watches with its Brothers

SEVENFRIDAY M1/01

CASIO G-SHOCK MTG-S1000BD With a watch design inspired by turbines, the Swiss brand Ideal for any jetsetter, the Casio G-Shock SevenFriday M1/01 is ideal for MTG-S1000BD is fitted with multi-band petrolheads accustomed to reading 6 atomic timekeeping and built with speedometers. The six-layered dial Triple G Resist, capable of weathering displays the hours, minutes and shock, vibration and centrifugal force. In seconds via three rotating discs addition, this model features a new Core and is difficult to read until you get Guard Structure and a watch frame with used to it. Although the timepiece inner workings that reduce the chance has adopted the same generic of impact force reaching its module. SevenFriday 47mm x 47.6mm The large resin dial ring also combines stainless steel case, it features a CASIO’s original cutting technology and modified Japanese Miyota caliber a new evaporation technology to make 8215 automatic movement with a it ultra lightweight. MTG-S1000BD-1A; power reserve of about 45 hours. (LKR139,500); Blink Experience Center SF-M1/01; (LKR185,000); Blink Experience Center THE ABACUS | MAY 2018 61

Caves of Mulu The stunning caverns of Mulu in Malaysia’s Sarawak District are an adventure-lover’s dream destination

BY SRAVASTI GHOSH DASTIDAR

eyond the bustling Malaysian mainland, en- connectivity and no banks. In case provisions run out, sconced in the intriguing equatorial rainforests there is hardly anywhere to purchase these. Kiosks Bof Borneo, are some of the most expansive and eateries sell Malay food in some areas. A medical caves in the world. The elaborate cave network clinic aids the sick, and helicopters airlift seriously ill lies within Malaysia’s UNESCO World Heritage Site, patients. Gunung Mulu, Sarawak’s largest national park. The Besides the four show caves (Wind, Clearwater, sandstone mountain of Mulu and its limestone karsts, Langs and Deer Caves), there are the Mulu summit rock pinnacles, cliffs and gorges belong to the Melinau climb, Pinnacles trail, the world’s longest tree-based formation, aged between 17 and 40 million years. canopy walk (480m), Penan burial cave, other caves This remote access area can be reached by daily and an amphitheatre-like bat observatory. The largest flights from Kuala Lumpur via Miri, Kuching and Kota natural chamber−Sarawak Chamber−in the Nasib Ba- Kinabalu. Till recently, the only ways to travel were by gus Cave is big enough to house 40 Boeing 747s, with- riverboat from Miri and then by longboat from Kuala out crowding. The caves teem with insects, snakes, Baram, or hiking through the ancient ‘Head Hunter’s lizards, tree frogs and butterflies. Although difficult to Trail’ from Limbang. spot, the impenetrable forests are home to bearded Sparsely populated and covered by a thick forest, pigs, macaques, gibbons, Borneo tarsiers, deer and Mulu is an explorer's paradise. It has limited mobile Malaysian sun bears. 62 THE ABACUS | MAY 2018

SCALLOPED WALLS AND CLEAR WATERS

A two-to -three night trip is good for the time-starved had to spend the night in the caves. traveller who can lodge in the stilt-propped bunga- The Morning Tour (8:30am) is along the Melinau lows of Mulu Marriott Resort or Benarat Inn along the River in a longboat, with a halt at the Batu Bangan scenic Melinau River. Locals offer cheaper homestay village of the nomadic and eco-friendly Penans. The facilities. gentle Penans are the last remaining hunters and Tours can be booked at the park office. Advance gatherers of Borneo. After World War II, missionaries bookings may be needed for the comparatively drier have tried to settle them. They hunt with ‘kelepud’ months of June to September, the peak season. Hir- (blowpipe) made of wood from Belian trees that can ing a park guide is compulsory. Recently, a backpack- carry darts accurately over 3 metres. The poisonous, er avoided hiring one to cut costs, got lost and was latex-tipped darts are made of sago palm. The long- found in near-death conditions 12 days later. house market sells handicrafts like uniquely designed Torches, raincoats, water bottles, trekking shoes, handbags, charms, wooden ladles and blowpipes. hats and Malaysian Ringgits are mandatory. Tour The market is closed on Sundays. That is the entire itineraries usually include snacks and lunches. Raised shopping that Mulu offers. wooden planks throughout the hiking path, concrete steps and sensor lights in the caves make the long Wind Cave treks easier for tourists of all ages. As trees canopy Over millions of years, water draining along the most of the trail, the sunrays are partly blocked. slopes of Gunung Mulu has cut deep gorges through However, high humidity can sap energy. its limestone rocks and formed intricate networks of To avoid crowding, the show caves are not open caves. The water continually scallops the walls and all day. The Wind and Clearwater caves are toured in changes the dimensions of the caves. the mornings, and the Langs and Deer caves in the The Wind Cave is one of many. As the gentle afternoons. The four caves can be covered in one day breeze blows through the magical chambers of this or over two days. The gates close at specified hours. cave, an imaginative mind finds resemblances to Gatekeepers count footfall and to date no one has camels, birds, hands and Chinese gods among the THE ABACUS | MAY 2018 63

(TOP LEFT) HOW CLEAN AND GREEN IS MY WATER! (TOP RIGHT) SKYLIGHT, WIND CAVE stalagmites, stalactites and helictites. Touching these is strictly prohibited. Nature’s work in progress is of- ten evident, with water dripping from the stalactites on to the stalagmites. The roof and the floor some- times touch each other to form mammoth pillars, as in the King’s Chamber, a cavern with massive stones. The entrances and skylights ensure a steady stream of wind. This cave forms the southernmost entrance to the Clearwater Cave. tropical shade, swamps and gurgling streams guide the traveller to the Langs and Deer caves. Caterpillars Clearwater Cave and millipedes often use the wooden railing as their From the Wind Cave to the Clearwater Cave is walkway. Bats and swiftlets are common to both a 250-step walk or a 5-minute boat ride. It is the caves. longest interconnected cave system in the world by volume and the 8th longest (222km) cave in the Langs Cave world. Uncommon single-leafed pendulum plants Named after its discoverer, Langs Cave is the welcome tourists at the entrance. The icy and crys- smallest of the caverns, with decorative long shawls, tal-clear waters of the mighty Clearwater River travel rim-stone pools, stalactites and stalagmites. Shim- a subterranean route for over 170km, and emerge mering webs spun by the threadworm larvae near from a dense forest-covered cliff-face. The ‘measure- the roofs are fascinating. Snakes also take shelter in less’ caverns and ‘dancing rocks’ of Coleridge’s Kubla the niches of the roofs. Khan come to mind. Swimming is not permitted inside the cave. There Deer Cave is a sandy, refreshing swimming area just outside it, 100m away is the Deer Cave, with the world’s larg- with a perfect picnic spot under giant trees. est cave passage. It derives its name from the sambar The Afternoon Tour (2pm) coincides with the deer that ventures in to lick salt-bearing rocks. The bat exodus at dusk. A 3km wooden walkway with main entrance to the cave is 146m wide. This impres- 64 THE ABACUS | MAY 2018

(TOP) THE GIANT MOUTH OF THE DEER CAVE

(LEFT) PASSAGE OF THE DEER CAVE

(bat droppings), some of which may even drop into the mouth as one looks up in awe at the crescent ceiling. The guano is food for hosts of cockroaches and beetles jostling on the floor, as in the filmThe Mummy. Outside the Deer Cave is the Bat Observatory, sive cave is 4km long and 174m wide. The vaulting where one can view millions of bats exiting the cave dome is 90-122m high. A peculiar rock formation in search of insects between 4pm and 6.30pm daily. near the entrance, resembling the profile of Abraham They spiral out in hordes to avoid being prey to bat Lincoln, and an opening similar to a bear, attract hawks waiting for them on the cliffs. Rains can spoil attention. The once-raging river that had moved huge bat-watching plans, as it’s difficult for bats to echolo- boulders is now a noisy trickle. cate flying insects during this time. They unfailingly venture out on clear days. Over 2-3 million bats of 12 species inhabit the roof. They devour 30 tonnes of mosquitoes nocturnally! If The walk back to the park office in the dark, at the roof looks dense black due to the clinging bats, around 7pm, is stimulating in torchlight amid the then the floor and railings look dark due to guano sounds of gushing mountainous rivers, croaking frogs, chirping crickets and zipping fireflies.

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