The Association of Chartered Certified Accountants and the Institute of Management Accountants held a panel discussion at St. John’s University in New York on Wednesday evening to discuss how accountants and C-suite executives need to manage business risks.
“The new normal is volatility,” said ACCA chief executive Helen Brand. “Volatility hits everybody. There’s no hiding place. There’s no crisis that doesn’t ripple, that doesn’t have an effect on other economies around the world. I think that interconnectedness, which has become greater and greater, is actually one of the causes of the volatility that we all have to be conscious of in managing a business.”
[IMGCAP(1)]It’s easy for businesses to be overwhelmed when considering all the global risks that might happen, she pointed out.
IMA chair-elect Marc Palker, a principal at the consulting firm MPP Associates, a consulting firm that provides CFO services, noted that he deals with many corporate boards and discusses with them about how much risk they’re willing to tolerate. “If you’re not willing to tolerate some risk, then your monitoring systems are going to be rather extensive and they’re going to be very expensive, which is going to affect your bottom line,” he noted. “You have to be able to set the right risk tolerance but also set the monitoring systems at the right level. You don’t want to have all your controls when invoices are processed. But you want to definitely have some control above that that’s going to catch an error or catch a problem, like somebody taking more money than they’re entitled to.”
Speaking of risky strategies, Mark Vale, vice president and corporate controller at UPS, described how the shipping and logistics giant has been experimenting with using drones to make deliveries, years ahead of the recent widely publicized pilot tests by Amazon. “It’s always funny,” he said. “I get asked a lot about Amazon and the drones and how they are going to disrupt. We don’t tell anybody this, but we were testing drones six or seven years before Amazon even talked about it. It’s just not in our DNA to go out and tell everybody about it. In fact, we think it’s probably not the right thing to do because it could be a competitive advantage for us.”
Amazon is awaiting permission from the Federal Aviation Administration to begin further testing of drones. Walmart also announced plans this week to begin testing drones to deliver goods to customers.
Accountant as Ethical Guardian
During an interview with Accounting Today ahead of the panel discussion, Brand talked about how the ACCA was helping accountants deal with risk management. “It’s become a huge area of interest for business,” she said. “Very often it’s the CFO, the finance professional, who is being asked to take this on. Since the financial crisis, the ACCA quite heavily amended its professional syllabus to reflect risk and governance issues. We know that the most popular continuing professional development program among members is around risk and governance. We’re also trying to focus today on how you deal with risk, but at the same time build the business, take the opportunities, take risks as well as mitigate them. You can take calculated risks in order to drive revenue, or otherwise the business stops. You can become so fixated with the risk profile that you’re actually not dealing with the strategic development a business needs. We think the finance professional plays a huge role there in making sure that holistic view is taken of risk.”
[IMGCAP(2)]Risk management is too often just an exercise largely driven by compliance requirements rather than something that can help deliver on business strategy, she noted. “I think risk is seen as a chore,” said Brand. “If it’s something you only look at quarterly and it’s ticking a box and going through a process, it won’t be effective. What we’ve seen is the biggest risks are around behaviors and culture, and that’s a very long-term thing that an organization needs to deal with. It’s not a quick fix. If you’re not dealing with the culture of an organization, you’re probably not dealing with risk. We still see huge reputational scandals happening. If you look at the Volkswagen case and see what has already been said about that, it’s pretty clear that it’s a cultural issue rather than not having certain processes there.”
She pointed to another recent example in her home country, the United Kingdom, where the supermarket giant Tesco had an accounting scandal. “The culture there was absolutely driving for the bottom line, at the cost of everything else,” she said. “The CFO can be absolutely the person who leads on that, because of course they’re interested in the financial sustainability of the business, how the resources are going to be used most effectively. But if they are using their professional skepticism and judgment, which is an inherent part of being a professional accountant, then they should be taking that holistic view that creates the right culture. That differentiates them. I still think that ethical dimension is a differentiator in the workplace, particularly in the business environment. I can’t name the other qualifications or accreditations other than those of a professional accountant that so clearly drive doing the right thing and doing it in the right way.”
Brand sees the CFO as being the “ethical guardian” of a business. “Businesses know they need that role to be performed,” she said. “We need them to know it’s the CFO who can do that very effectively.”
The ACCA has been expanding its educational offerings to foster those qualities in accountants. “At the very core, ACCA’s qualifications are built on three pillars: examinations, experience and ethics,” said Brand. “When we start off with a student, we talk about those three things. It’s absolutely clear that ethics has an equal weight with the other two things that they need to address. Within the experience examinations, ethics testing is there to demonstrate their competency, and the ethical module we have online actually asks people to apply their judgment in various scenarios. Nobody can become a member of ACCA without having gone through that at the very start. Every member of ours is required every year to declare their compliance with the ethical code. We put a lot of effort and emphasis into our regulatory and disciplinary scheme so the public can have confidence in the standards that our members apply, including the ethical standards. We don’t wait until something goes wrong. If somebody doesn’t comply with CPD [continuing professional development], they will be struck off our membership.
Every year, a couple of hundred accountants lose their membership for noncompliance with CPD, which we feel is very much a public interest issue. If an accountant isn’t maintaining the standards and applying the ethical code, we can’t hold them out to the public in that way.”
The reasons for the termination are generally not made public unless there’s a regulatory or disciplinary issue, but the proceedings are open. “There are public hearings and the judgments are made public,” said Brand. “But someone will just not be permitted to use the designation letters [ACCA] in the case of noncompliance with CPD.”
Management Accounting and Risk
Palker spoke with Accounting Today ahead of the panel discussion about the role played by management accountants in risk management.
[IMGCAP(3)]“I was actually involved when Sarbanes-Oxley was passed and immediately went into practice in the implementation of Sarbanes-Oxley,” he said. “I would help corporations comply, find out about their internal control weaknesses, help to correct them, go through the testing and so forth. We would work with the auditors to make sure they have sufficient coverage and were comfortable to rely on our work. Now it’s evolved even further to nitty-gritty testing and higher-level board responsibility, making sure there’s a risk culture in every corporation, making sure they’ve determined what their risk tolerance is. It all comes from the top down—from the board—as opposed to being driven by the CFO or some other C suite person, whether it be technology or whatever. The board sets the culture and everybody else tends to follow it, manages risk, evaluates risk and sees what needs to be changed in the corporation to avoid risk.”
Risk management and ethical training are part of the educational process for accountants pursuing the IMA’s Certified Management Accountant designation, as they are for the ACCA. “You always have situations with management accountants where they’re putting a dollar value on certain processes,” said Palker. “If the board says we need to monitor a risk and make sure it’s covered, and therefore we need additional processes, while the CEO is worried about earnings per share and the earnings of the corporation, there has to be a balance. You can’t mitigate every risk. That’s like protecting yourself against the world.”
Like Brand, Palker cited the Volkswagen emissions scandal. “When they did what they did, they calculated that they were willing to risk or tolerate that risk,” he said. “Obviously it didn’t work out well.”
He noted that with the CMA designation and training, everything has a cost. “Whether it’s fixing something that you’re risk averse to or calculating risk or changing processes to mitigate risk, everything has a cost,” said Palker.
CMA vs. CGMA
The IMA announced Wednesday that in fiscal year 2015, more than 3,500 new professionals earned the CMA credential, the highest number in any fiscal year, and a 17 percent increase over the previous year.
“We’ve just had our fifth year of record growth,” said Palker. “We have 3,500 new CMAs in our last fiscal year and then 15,000 candidates coming on board for the CMA certification. It’s really a very well respected credential within management accounting and we’re proud of it”
The American Institute of CPAs announced last week at its Fall Meeting of Council that it would be broadening the qualifications for its competing Chartered Global Management Accountant designation that it operates as a joint venture with the Chartered Institute of Management Accountants in the U.K. to include other types of financial professionals besides management accountants (see Report from Council: AICPA Broadens CGMA Path, Elects New Chair). As incoming IMA chair, Palker was asked about his reaction to the AICPA’s move, but he didn’t see a problem with it.
“First of all, everything the AICPA does in the area of management accounting helps us,” he said. “It broadens awareness out there in the corporate world. It puts it out there in the financial world. So as the innovator of management accounting here in the United States, we were the first one to have this designation and to have every single CMA have a path with a rigorous exam with multiple parts. It shows the person who is hiring the CMA or involved with the CMA that they have the level of competency that they can count on because it’s been tested.”
The AICPA is making changes to its Uniform CPA Exam to test for “higher-order” skills (see Report from Council: Building a Better CPA Exam). The IMA is improving its CMA test as well. “What the IMA does constantly with their exam is make sure it’s relevant,” said Palker. “There’s constant review of the exam. There’s constant review of the questions to make sure that we are testing what is needed be known now so that we’re not testing history. We’re testing the latest and the greatest in accounting and finance. It won’t necessarily change every year, but the review process is there and it’s constantly updated.”
The IMA has been focusing on what it calls the “Competency Crisis” of students graduating from accounting programs in college without the skills needed for careers in industry accounting. “Having never worked in public accounting and only on the corporate side, what I’ve found is that when it came to studying for the CMA exam, there was plenty that I already knew from my everyday job. But then in the preparation for the exam, I learned a lot more that I brought to my employer through the various things I learned.”
The IMA and the ACCA have been partnering with universities to try to improve their curriculums to address more issues relevant to accountants who work in the corporate world.
“When you think about how many universities there are in the United States, you can’t have consistent programming across the board,” said Palker.