GAA Accounting

The Journal of the Global Accounting Alliance

03/12/2015
by GAA Accounting
Comments Off on Autumn Statement and Spending Review 2015: ICAS reaction

Autumn Statement and Spending Review 2015: ICAS reaction

ICAS accountancy experts provide their analysis on key aspects of Chancellor George Osborne’s Autumn Statement and Spending Review 2015.

Direction of travel with taxation

Comments by Charlotte Barbour, Director of Taxation

The measures announced would on first appearances seem to be a mixed bag: it’s difficult to discern a clear direction of travel and ICAS continues to call for a tax road map which outlines the overall tax strategy over the course of this parliament.

HMRC savings and reorganisation

Comments by Charlotte Barbour, Director of Taxation

We understand the desire to streamline and create a more efficient tax service; our concerns centre on service levels whilst the change is undertaken, and concerns also remain regarding those who are digitally excluded. ICAS does not support mandatory ‘online everything’  in the tax system.

Tax and devolution

Comments by Anne-Marie Roberts, Head of Taxation, Scottish and Indirect Taxes

The Autumn Statement includes a range of devolution proposals including the powers to set corporation tax rates in the Northern Ireland Assembly and income tax powers for the Welsh Assembly.

The devolution of powers should be dependent on the agreement of the underlying fiscal framework. Without the fiscal framework, devolving tax powers is like trying to hang out the washing with no washing line.

It is vital that any devolution settlements are clear and transparent to both experts and the public so that politicians can be made accountable for their decisions.

Pensions

Comments by Christine Scott, Assistant Director, Charities and Pensions

The Chancellor reasserted the Government’s commitment to the pensions triple lock which is to be kept ‘affordable’ through five yearly reviews of the state pension age, to take account of projected increases in life expectancy.

The basic state pension is to increase by £3.35 per week to £119.30 per week, the largest increase for 15 years, while the rate for the new single-tier state pension is to be set at £155.65 per week.

The Government has come under fire for not communicating sufficiently clearly about who will be entitled to the new single tier state pension, when it is introduced from April 2016, and is taking steps to address this issue, starting with the provision of some key facts on its website.

Following the Summer Budget, HM Treasury rushed out a consultation paper ‘Strengthening the incentive to save’, asking for views on the current model of pensions taxation. This included consideration of the removal of tax relief from pension contributions and exempting retirement income from taxation instead: an approach not supported by ICAS and most pensions industry commentators.

There was silence in today’s Autumn Statement about the consultation results with the announcement of any changes to the current model of pensions taxation expected in the 2016 Budget.

It is also worth noting that increases in auto-enrolled pension contributions are to be aligned with the tax year. While this is a welcome simplification for employers, for some employees this could mean that lower contributions may now be made into their pension pots for a number of months. However, the implementation of the National Living Wage from April 2016 will provide an immediate and ongoing boost to the pension pots of those currently on the minimum wage and being auto-enrolled into a pension scheme.

VAT and the public sector

Comments by Anne-Marie Roberts, Head of Taxation, Scottish and Indirect Taxes

The Chancellor announced a policy to integrate and devolve health and social care, and indicated that Government will not direct how this aim is delivered.  Changes to the delivery of public services across the UK will mean that organisations with different VAT status work together – and may result in services being transferred from the NHS or local government to charities and third sector bodies.  Public sector organisations are split into three types for VAT in the UK:

  • Local authorities and similar organisations (including the BBC) – these organisations can recover all VAT incurred on activities related to the non-business functions of the organisation.
  • Government departments and the NHS, and associated organisations – these organisations can recover input VAT in certain circumstances but they cannot recover VAT on non-business activities.
  • Other public sector organisations – these are organisations that do not have any specific provisions that allow them to recover VAT on their activities which are for the public good. These organisations use the standard income method to split their activities between business and non-business, and operate an appropriate partial exemption method to determine what input tax can be recovered. Charities fall into this category.

ICAS has noted that the differences in VAT recovery act as a disincentive to implement new and innovative service delivery models across the public sector. The Treasury should address the VAT issues that these changes will create upfront so that public funds are spent on delivering public services.

Sporting testimonials

By Susan Cattell, Head of Taxation (England and Wales)

Following the consultation earlier this year the tax treatment of income from sporting testimonials will be changed.  From 6 April, 2017, all income from sporting testimonials and benefit matches for employed sportspeople will be liable to income tax. However, an exemption of up to £50,000 will be introduced for income from sporting testimonials that are not contractual or customary.

In its response to the consultation, ICAS supported the introduction of an exempt amount, as a sensible option to help protect lower paid sportspeople and those whose careers have been ended by injury.  It should also help to provide some certainty on the tax treatment of testimonial income below the £50,000 limit as long as it does not arise from a sportsperson’s contract and meets any other conditions which will be set out in the forthcoming legislation.

The new treatment and exemption will apply where the sporting testimonial is granted or awarded on or after 25 November, 2015 and only to events that take place after 5 April, 2017.

This article first appeared in CA Today.

03/12/2015
by GAA Accounting
Comments Off on ICAS launches The Power of One

ICAS launches The Power of One

By Michael McGlinchey.

CEO Anton Colella announces The Power of One – a major initiative to support members in ethical leadership.

ICAS CEO Anton Colella has called for a new era of personal responsibility across the business world, as he launched The Power of One business ethics initiative.

“The Power of One” provides new resources and support for members on ethics and is now available on icas.com.

Anton said: “Regulators, rules and codes of conduct can only achieve so much. For business to restore its reputation in the eyes of the public, we need leaders at every level, to stand up and be counted. Today we call on every one of our 21,000 Chartered Accountants around the world to embrace “The Power of One”.  That means taking personal responsibility and doing the right thing, especially when they encounter dubious or unethical behaviour.”

Anton said ‘The Power of One” places a new emphasis on personal responsibility. He said, “Corporate failure often begins with personal failure. Our aim is to place personal ethical behaviour as the number one priority for individuals”.

He added: “It is often a very lonely place for an individual to stand up against unethical behaviour.  ‘The Power of One’ aims to show business men and women who meet unethical behaviour that they are not alone –  thousands of Chartered Accountants around the world stand behind them and indeed expect their colleagues to stand up and be counted. The power in this is enshrining the power of individuals to make a difference.”

Announcing more details of The Power of One at the New ICAS Conference in Glasgow today (Friday), Anton was due to tell the audience: “We have 21,000 members in highly influential positions in businesses and accountancy firms around the world.  Through their ethical behaviour, CAs are a force for good in the organisations in which they work and the societies in which they live.  They can also influence those around them, and help shape the culture and values of their organisations.”

Anton said there has never been a more important time to shift the focus back on to business ethics.

He said: “The Power of One” would see a fresh focus on the ICAS Code of Ethics with a proposal to add Moral Courage to the five fundamental principles of: Integrity; Objectivity; Professional Competence and Due Care; Confidentiality and Professional Behaviour.

The ICAS CEO told the audience of CAs and other business leaders that the ICAS strategy of “Building a Professional Community” has ethics as its foundation and that ICAS would “take a strong leadership role in the advancement and application of ethics”, by:

  • Setting out ethical leadership as the defining characteristic of the profession;
  • Facilitating mentoring relationships for members to help them deal with any ethical matters arising and opportunities to provide ethical leadership to others;
  • Developing new case studies to help members explore the different dimensions of a range of ethical dilemmas; and
  • Publishing a series of contributions on ethical leadership, including the following themes:
    • Public interest;
    • Reputation;
    • Leadership in ethical behaviour;
    • Personal responsibility;
    • Moral courage;
    • Corporate governance and accountability.

This work, he said, would be accompanied by a range of supporting material, including an ethical decision making framework to assist members in dealing with dilemmas.

Anton said:, “The ICAS motto ‘Quaere verum (seek the truth)’ has served us well since our formation in 1854: let it continue to be the hallmark of a Chartered Accountant and the benefits that we bring to society.  Our vision is to be a global leader in the application of professional ethics. The launch of  “The Power of One” illustrates the importance attached to that strategic objective.”

This article first appeared in CA Today.

03/12/2015
by GAA Accounting
Comments Off on Learning from the world’s biggest fraud

Learning from the world’s biggest fraud

By Ian Robinson FCA.

One of the world’s most experienced forensic accountants, Ian Robinson, on his biggest, longest case.

From 1979 TO 1983, a Hong Kong company called Carrian dazzled investors and created an empire  that spread over Asia, America, Australia and New Zealand. Carrian was in property, transportation, restaurants, retail – anything that took the fancy of its founder, George Tan. Tan paid top dollar for his acquisitions, hired advisors with great reputations and, for a long time, appeared to be very successful. In fact, Carrian was an enormous fraud, at the time the world’s biggest.

In 1983, I had been in Hong Kong for three years as a partner with Arthur Young, as it then was, having been seconded from the Sydney office. I was asked to liquidate Carrian Investments Ltd, one of the three publicly quoted companies in the Group. It took 12years to finish the process; the full story is told in my book The Joker’s Downfall.

Our profession can learn from the Carrian case and still needs to, given that the cases that followed Carrian – WorldCom, Enron, Qintex and Bond Corporation, etc – quickly outstripped it as the world’s biggest fraud.

Lesson 1 – It’s not just about the numbers

Most of us will never encounter cases as big and complex as Carrian but we still need to be vigilant. How can you spot something that’s not right? The first lesson is that it’s not just about the numbers – it’s about the people.

In the July 2015 issue of Acuity, Morgan Witzel wrote: “Any company that chains itself to metrics and refuses to engage with the soft side of business is riding for a fall.” I would say the same about accountants. Engage your soft side. My first action in a case is to do a “walk around”. If possible, I’ll go around the premises and look at everything. I’m looking for patterns and exceptions to patterns, something from my experience and intuition that says, “that doesn’t look right”.

Anything unusual or out of place, I make a note, and probably photograph it, then deal with it appropriately. If something doesn’t feel right in the way people respond to you, note the signals you’re getting and see where it leads you in your investigations. Those instinctive feelings should influence how you look at the numbers – and where you look. By the time you have attained a position of responsibility, your instincts should already be well developed. You’ve been dealing with people for 20-plus years, so you actually have a lot of experience behind you. Use that – trust yourself. If it doesn’t feel right, it probably isn’t right.

Lesson 2 – Fraud rarely starts deliberately

Why do companies like Carrian get into these situations? George Tan, who I got to know very well, is an exceptional, if misguided, person – charismatic, personable and a great salesman. Was Carrian created to defraud? Did George deliberately set out to defraud? I don’t believe so. I believe that, poorly advised, he took a first step that was fraudulent in order to fix an unexpected situation and it had to be followed through. As Carrian’s position became increasingly critical, it became easier to make bigger and increasingly fraudulent decisions rather than own up, bringing the company and many others down.

As an Enron executive said: “It started out as pure, clear, legitimate deals. And each deal gets messier and messier. We started out just taking one hit of cocaine and the next thing you know, we’re importing the stuff from Columbia.” Or, as another is quoted: “You did it once, it smelled bad; you did it again, it didn’t smell as bad.” What seems to happen is that an individual’s ethical standards gradually decline – and he or she will then go to extraordinary lengths to cover up their fraud, and delude themselves that they will make it right in the end, and so get away with it.

Lesson 3 – Consider carefully before blowing the whistle

Suppose you, as an accountant or auditor, spot an apparent fraud. Should you blow the whistle? The easy answer is to say, “of course – that’s our job”. And it’s the correct answer but, like so many things, it’s easier to say than to do. I suggest the following checklist prior to calling in the authorities.

  • Ensure that you are protected. In the Carrian case, we had police protection and were advised to vary travelling procedures and routes. Rather like nuns are supposed to, we were always to go around in pairs. It probably won’t get that serious; the personal risk is more to your career – but you do have a duty to your family. The whistleblower needs to be protected otherwise only people of enormous courage will be prepared to do it.
  • Be absolutely sure you’re correct because almost everyone will tell you that you’re wrong. If you are wrong and you blow the whistle then the implications are extremely serious for you, the company and your employer.
  • Find someone you trust implicitly with whom you can discuss what you have found. Be careful if your organisation seems to have become involved, even by just “not noticing”.
  • Analyse what the results will be if you don’t blow the whistle. People lost money, jobs and careers because companies like Carrian carried on trading when people did nothing when they either knew – or should have known – that something was wrong.

Lesson 4 – Strength of character is crucial

With a case like Carrian, you’ll need strength of character. You may have to stand up to some pretty fearsome people – captains of industry, judges, lawyers, etc. Here experience is important. But choose your actions wisely.

Sometimes you may have to stand up to your own advisers. It takes a lot of courage to tell a top barrister you’ve hired at great expense that you’re going to disregard his advice. But you are the one finally responsible. You see the bigger picture – and a lawyer’s opinion is no more than a lawyer’s opinion.

Without ethics, we have no profession

Are ethical standards important to our profession? Absolutely. Our clients hire us, just like their other professional advisers, because we can do what they can’t. Shareholders and others trust us to safeguard their interests because of our knowledge, our skills and our behaviour. It is crucial therefore that we operate to the highest possible ethical standards. If we don’t, then ultimately we don’t have a profession.

This article first appeared in the November 2015 edition of Acuity.

03/12/2015
by GAA Accounting
Comments Off on Yuan way

Yuan way

By Adam Creighton.

China’s yuan, also known as the renminbi, is on track to become a common currency of international trade.

A hundred years ago the United States had grown rapidly to become the biggest economy in the world. Rapid population growth, decades of peace, low taxation and a constitution that supported property rights made the US a fertile laboratory for entrepreneurs and business.

While its economic might had come to overshadow the long-established European powers, the latter remained pre-eminent in financial markets. The US$ – overwhelmingly the currency of international trade and investment since the Second World War – was a relative minnow in a global monetary system that was still underpinned by gold.

China today, for all its economic dynamism and ambition, is in a similar position. Its national currency, the renminbi, the currency of almost 1.4 billion people and an economy set to become the world’s largest within a decade, was involved in only 2.2% of transactions in 2013. It was the ninth most traded currency, slightly ahead of the New Zealand dollar in tenth spot.

In the same year, the US dollar was one side of almost 90% of foreign exchange transactions, according to the Bank for International Settlements latest triennial survey. The euro, the second most traded currency, was part of a third of transactions. The Australian dollar was the fifth most traded (being part of 8.6% of FX transactions, up from 7.6% in 2010).

Renminbi, meaning “people’s currency”, is the term typically used by the Chinese government. Yuans are the unit of account. The difference between sterling and pounds in the United Kingdom is roughly analogous. Whatever it is called, China is eager for its currency to play a far more important role in global trade and investment. Less than 20% of China’s trade is settled in yuan. To achieve that end it also wants the yuan to join the elite group of currencies – the US dollar, euro, yen and pound – that make up the IMF’s Special Drawing Rights (a protointernational currency that only governments and the IMF deal in).

But the US has proved reluctant to give up what has been called its “exorbitant privilege”, a phrase popularised by French president D’Estaing in the 1970s to describe the benefits that flow to a nation from having a widely accepted currency. This includes the ability for the US government to borrow more cheaply given strong global demand from business and governments for US$ assets.

The US Congress has repeatedly failed to ratify changes agreed by the G20 in 2010 (including by US President Obama) to alter the IMF’s rules to give China more of a say. Currently, China has 3.8% of the voting shares – less than either France or the UK has – compared to the US’s 16.7%. The US government has consistently argued Chinese authorities have been keeping the yuan currency low to boost China’s exports.

China’s determination to internationalise the yuan has reverberated throughout the global financial system this year. An unexpected announcement by the People’s Bank of China (PBOC) in August, which tweaked how the yuan was valued, accompanied and exacerbated one of the biggest global equity selloffs in years, from which markets still hadn’t recovered from months later.

The PBOC updated the exchange rate regime along more liberal lines. Its nine-year-old “crawling peg” system, which saw the yuan’s value fixed arbitrarily each day by the PBOC against a basket of international currencies (mainly the US dollar), became what could be called a “walking peg”. That is, the PBOC would henceforth set the daily rate with reference to how the currency traded the previous day.

Phony war

On the day of announcement, authorities also oversaw a small depreciation of the yuan, which roused fears China was resorting to competitive devaluation to bolster its flagging economy. It’s not news among economists that China’s economy is struggling to generate the 7% growth rate its government has promised. So fears emerged authorities were engaging in “currency wars” – the popular expression given to overt or covert depreciation of a national currency to boost employment and exports at home.

Chinese authorities were at pains to dismiss this, arguing they were liberalising rather than devaluing, a reform path they have been steadily pursuing for years. “If every country tries to devalue its currency, no one will benefit,” the PBOC protested accurately (currency depreciation is a zero sum game).

Certainly, the PBOC’s timing didn’t help engender confidence; the decision came only weeks after the PBOC’s clumsy attempt to prop up what should have been an obvious stock market bubble (having increased 150% from October to April, the Shanghai market has slumped around 40%).

But Chinese authorities have a point. Since 2014 the yuan’s value has been able to deviate plus or minus 2% around its daily fixed value. And for six months it had been butting up against the top of this band. So the yuan was far from being artificially overvalued, as the US has claimed.

Chinese authorities had been spending billions trying to prop up the yuan. Central banks can only offset pressure for their domestic currency to depreciate by acting in the market to buy it with their holdings of other currencies.

China’s famously large foreign exchange reserves – US$4 trillion strong last year – have since fallen almost US$500b (US$100b in August alone). By contrast, the Reserve Bank of Australia in September had A$75.3b in reserves. Pressure for China’s currency to weaken shouldn’t be surprising given its deteriorating trade balance and removal of laws preventing the Chinese from shifting their assets overseas.

“We estimate it’s between 5% and 10% overvalued following the sharp depreciation of many emerging and developed market currencies,” said Harrison Hu in early September, an economist at UBS in Hong Kong. Andrew Luboski, an interest rate swap and foreign exchange trader at Citi, also says the yuan is still overvalued arguing Chinese economic data are probably much worse than the official statistics indicate. “The US dollar should remain pre-eminent given the lack of transparency surrounding the Chinese government,” Luboski says. “One only needs to look at the ham-fisted way in which they managed a relatively small devaluation of their currency whose knock-on effect was effectively to derail the chance of a September Federal Reserve hike,” he adds.

Liberalisation

The reality is Chinese authorities are inching toward their longstanding promise to liberalise their financial system. Along with permitting the exchange rate to respond better to market forces, authorities have started unpicking the impediments to outbound investment. The threshold required for approval by the state National Development and Reform Commission was lifted from $US300m to $US1bn in May last year. Authorities are also planning to lift a $US50,000 annual foreign exchange transaction cap on individual Chinese.

If China had really wanted to fire a shot in a 21st century currency war, it could have used a lot more firepower. In early 1994, for instance, the PBOC devalued its currency by 55% from 5.35 to 8.28 yuan to the US$. The longer term trend is still one of appreciation – since 2007 China’s currency has appreciated by 21% against the US$, and 55% on a trade weighted basis, according to UBS’s Hu.

The world should welcome a yuan that better reflects China’s economic fundamentals, where arbitrary changes in value by government are less likely. And to the extent a weaker currency helps cushion China’s economic slowdown, all the better. Any whiff of competitive devaluation would in any case scotch China’s desire to see the renminbi become part of the IMF’s Special Drawing Rights. For that to occur, the renminbi will need to be a currency used freely and confidently by non-residents of China as well as Chinese nationals at home.

There’s still some way to go. The yuan is still not easily tradeable like Australian or New Zealand dollars. There is a heavily restricted “onshore” trading market (based in Shanghai), and a freer “offshore” market centred in Hong Kong (although it is able to be traded in a growing number of overseas cities, including Sydney from late 2014). This is a common practice for developing or smaller countries that might struggle to generate confidence in their fiat currencies and desire a stable exchange rate.

Both Australia’s and New Zealand’s dollars were pegged to the pound and then US dollar before the 1980s. Last year Reserve Bank of Australia Deputy Governor Phil Lowe said the internationalisation of the renminbi “has the potential to create a seismic shift in the international monetary and financial landscape”. Indeed, this liberalisation process will especially benefit Australia and New Zealand, who, along with Chile, are two of only three countries to have negotiated a free-trade agreement with China. Being able to trade in yuan with China will cut down on transaction costs and reduce the risk Chinese businesses might currently face by having to use the US$.

“It’s a sign of increasing flexibility in Chinese trade which is positive for trade in our region, particularly for commodity exporters like Australia and New Zealand,” Luboski says. While China’s financial liberalisation will most likely continue, it is less likely the yuan will come to rival the US$. Unlike the US in 1915, China is a mix of a free economic market and political dictatorship. Investors may prove reluctant to shift toward the currency of a country where the rule of law is less established.

And as China’s economic growth slows the legitimacy of the current regime might suffer, increasing rather than reducing instability.

This article first appeared in the November 2015 edition of Acuity.

03/12/2015
by GAA Accounting
Comments Off on New traditionalists

New traditionalists

By Ben Power.

The A$1.3b Noongar settlement could help kick-start a new Indigenous economy in Australia.

Earlier this year the West Australian Government struck a landmark A$1.3b settlement agreement that recognised the Noongar people as the traditional owners of much of the state’s south west, including Perth. While yet to be fully ratified, the settlement, which removes the need for a protracted legal claim, lays the foundation for the emergence of a Noongar economy and cultural renaissance, and should provide inspiration for other settlements throughout Australia.

But the story of Australia’s largest Indigenous settlement involved looking across the Tasman Sea to New Zealand. “We took a lot of inspiration from successful Māori settlements”, says Glen Kelly, the chief executive of the Noongar people’s representative body, the South West Aboriginal Land and Sea Council (SWALSC). It also involved the crucial role of a chartered accountant, Malcolm Firth, SWALSC’s chief financial officer, in helping navigate the complex world of finance and investments, which was particularly critical in the negotiations. “Without Malcolm’s insights we probably would not have achieved the outcome we were able to,” Kelly says.

It was historic changes to the legal fabric of Australia back in the early 1990s that paved the way for the Noongar settlement. The High Court’s “Mabo” decision in 1992 wiped out the notion that Australia was terra nullius – a land of no people – when European settlers arrived. The resulting Native Title Act, which recognised Indigenous Australians’ rights to, and interest in, their land, triggered a number of claims around Australia – six in the south west region of Western Australia, including metropolitan Perth. The area was the traditional home of the Noongar people who, with 30,000 people, form one of the largest Indigenous cultural blocks in Australia.

After a series of Federal Court rulings and consultation with the Noongar community, the SWALSC, which represented the six claimant groups, decided to negotiate a settlement with the State of Western Australia. They struck the A$1.3b agreement in January. The South West Settlement Agreement is the largest settlement of native title in Australian history:

  • The State will recognise the Noongar people as the traditional owners of the South Western region of Australia, which includes the Perth metropolitan area.
  • A “future fund” and land worth around A$1.3 billion will be held in a proposed Noongar Boodja Trust, which will in turn fund six regional Noongar Corporations and a Central Services Corporation.
  • Each corporation will develop a strategic plan according to their own priorities, and then put funding submissions to the trust.

Building capacity

“Some [corporations] might want to mainly pursue economic development,” Firth says. “Others may be more interested in cultural and community services and activities.” The Central Services Corporation will deliver economies of scale in relation to the provision of accounting and other administrative services, land administration and cultural research. There will also be a cultural domain where the Noongar Community meets to make cultural decisions.

Firth says the groundbreaking agreement had a number of drivers, but a key in its formulation has been the SWALSC’s willingness to look around the world to intimately understand settlement best practice. In 2012, it hired Mercer to investigate equivalent international and Australian settlements. Mercer reported on issues including investment governance, financial structure, investment objectives, asset allocations and how each settlement approached ESG (environmental, social and governance). “It enabled us to put this settlement into an international perspective,” Firth says.

The report looked at three settlements in the United States, one in Canada, one in Australia and also three Māori settlements in New Zealand, the Ngāi Tahu, Tainui and the Ngati Awa (see p18 for more on the Māori economy). “We are well aware of the successes of the various Māori groups,” Firth says. “We would like to have more contact with them as I’m sure we can learn from them. And possibly the reverse may be true.”

The settlement involves large sums of money and a complex interaction of various factors that will allow ongoing funding of each corporation’s activities. Kelly says that Firth provided a crucial link between the finance world and SWALSC’s directors and helped the Noongar negotiators to deal with the State government with greater confidence.

Firth developed a model of likely staffing levels and budgets for the proposed new corporations, which gave an annualised cost. He then calculated the required size of an endowment fund to support that expenditure. His result was very similar to the medium case developed by the Noongar economic consultants. “When the State offer was received, it was extremely close to both of these figures. We felt immediately that we were all thinking in similar terms, so we were confident to proceed,” Firth says.

The SWALSC was also greatly assisted by the NSW Aboriginal Land Council, which helped them “learn the ropes” about best practice investment management. “The NSWALC fund has a large fund, which operates under sophisticated investment and distribution policies,” Firth says. “Distributions are controlled through linking them to the long-term real rate of return achieved by the fund. This is how we expect distributions from the Noongar Future Fund to be managed.” But Kelly says the settlement is “not all about material enrichment”. It’s also about creating cultural wellbeing that has a flow-on effect. “If people are culturally disoriented, they just don’t do very well,” he says.

He says Māori settlements can also provide inspiration in that area and cites the te kura kaupapa language immersion schools. “They’ve blown our minds,” he says.

Framework

The Noongar settlement will likely provide a framework for other settlements in Australia. Kelly says other claimant groups from areas such as Queensland are already showing interest in the settlement. Firth says the settlement model is an alternative to lengthy and expensive proceedings through the courts.

He says there was no certainty as to the success of the Native Title cases, and Native Title had been comprehensively extinguished in the South West, so very little land would remain to which Native Title would have applied. The settlement will extinguish rights and future claims, which creates certainty for the Noongar and the State. “The settlement was structured in such a way that no future claims can be made. This was one of the main factors considered when attempting to estimate the quantum of the settlement, in that the quantum had to be substantial enough to eclipse the size of any potential future compensation claims.”

The agreement now needs to go through a registration process and the Native Title Tribunal, which will hear objections. There has been some opposition, but Firth notes that six out of six Noongar regions voted for the settlement package. He says some opponents maintain the settlement was a sellout, or that it represented an abandonment of cultural principles. “We respected all views and sought to give people opposed to the settlement the opportunity to put their views forward at the authorisation meetings. At the end of the day, the majority view was to proceed with the settlement.”

Firth says more understanding of the settlement has developed and the level of opposition has lessened and it represents a “remarkable act of reconciliation” on the part of both the State government and the Noongar community. “Both the Noongar community and the West Australian Government were of the view that a better path for all was for there to be a negotiated settlement,” he says. “The Settlement could be seen as an act of reconciliation, in that it aims to put an end to litigation and create a strong platform for the Noongar community to focus on economic and cultural development.”

This article first appeared in the November 2015 edition of Acuity.

03/12/2015
by GAA Accounting
Comments Off on Tribal triumphs

Tribal triumphs

By Yvonne Tahana.

Chartered accountants have contributed vital financial expertise to the successful development of New Zealand’s multi-billion-dollar Māori economy.

In New Zealand, the growing pains of Māori businesses have been excruciatingly public at times. Early in its corporate life the Tainui iwi [tribe] of the central North Island lost NZ$40m – memorable to the public as Tainui had invested in the Auckland Warriors (as the trans-Tasman rugby league team was then known).

Perhaps unfairly, memory of such failure has a long shelf life. But that loss is a yawn to tribal members, who are well past it given Tainui’s commercial performance over the past decade. This has seen its initial NZ$170m settlement grow into an asset base worth more than NZ$1b. It’s not the worst business failure the Māori economy has seen, but it was the first and an early benchmark for bad business practice in a new part of the economy that was not well understood by the public.

Hinerangi Raumati FCA had nothing to do with that investment but did spend time at Tainui Group Holdings as a chief financial officer. She was also part of a new team brought in to clean up a NZ$31m loss at Parininihi ki Waitotara (PkW) when an Australian property development went wrong.

In both, the conditions for failure were simple. Decision makers were out of their depth, Raumati says. “People were making investment decisions in sectors that they knew nothing about,” she says. “The Warriors – someone would have been making an emotional decision.

“PkW was the same. It went from doing small property developments (one was NZ$10m) to a NZ$100m development. They tried to manage it from a distance and it was just doomed to fail.”

Raumati works in the mainstream and the Māori business worlds. She was recently appointed to Auckland Council Investments – the NZ$2.3b body owns and manages the city’s ports and airport. She is also the chair of PkW, a massive Māori farming venture in Taranaki which is the largest regional supplier of milk to Fonterra. In her downtime she sits on the boards of fishing giants Te Ohu Kaimoana and Aotearoa Fisheries. With tribal affiliations to Waikato and Ngati Mutunga, she’s had an insider’s view of Māoridom’s economic journey over 20 years.

She’s been there, she says wryly, in good times and when the proverbial has hit the fan. The lesson that Māori tribal businesses have learned, she says, is that they need appropriate financial expertise. “You’ve really got to have capability – most of us don’t, so we’ve got to invest in building the capability of our people.” To that end, many iwi have educational grants at tertiary level for school leavers. But it’s not enough, she says. “They’ve got to invest in those in their 30s and 40s if they want to funnel their own [people] into management and governance roles.”

In the interim, getting in external financial expertise is fine. Failure to have clear political/business boundaries can be catastrophic. In 2012, Ngati Tama, following a small cohort of iwi leaders with little experience in their chosen investments, lost all of its NZ$14.5m settlement. Raumati’s nothing if not laconic. “If you can’t manage the money, that’s a big problem.”

Success story

Until recently the Māori economy, and what it contributes to the larger story of NZ Inc, was largely unaccounted for. In 2010 government Māori development ministry Te Puni Kokiri (TPK) was the first to commission research. By then Tainui and South Island tribe Ngāi Tahu had become powerful machines in their respective regions. Both now operate successful billion-dollar enterprises with property, tourism, seafood, venture capital interests.

There are also less visible Māori trusts and incorporations that existed before the modern settlement process ramped up in the 1990s. They were built over the past century by pooling land shares to create sizeable entities and they rival some of the big settlement iwi in scale with interests in geothermal power plants, property development, technology and communications.

The 2010 TPK research found a total asset base worth NZ$36.9m. By 2013 this had increased to NZ$42.6b. GDP from Māori economy producers totalled NZ$11b, dominated by income from the primary sector. There are challenges. While the asset base is improving in size and value, the productivity of those assets remains below average.

Economic research consultancy BERL has noted: “The nature of many of the land-based assets (restricted access, limited potential, and/or difficult management/ownership structures) tends to make this below-average outcome inevitable. However, the broadening of Māori asset interests across a range of sectors (processing and manufacturing, tourism, property, education, health and social service provision, along with SMEs in building and construction, manufacturing, retail, transport and other sectors) lessens this inevitability.”

History not on repeat

Competition often defines the relationship between New Zealand and Australia, but it’s a feature missing from Māori tribal businesses when they talk about the potential for Indigenous corporations to flourish in Australia. For players such as Raumati, there’s a strong sense that whatever can be done from Aotearoa’s side of the ditch to smooth the way for those building Australian Indigenous businesses, should be done. Unspoken bonds exist through the shared experience of colonialism and its attendant baggage: land, language and identity loss.

There is no arrogance when Raumati says that Māori support for Indigenous businesses in Australia is unconditional. “Our support is moral – we can’t be competitive in this space. We’re just so much bigger, so much more developed and it’s our job to help them.”

KPMG’s Joe Hanita FCA used to work for Raumati at Te Wānanga o Aotearoa, a national tertiary institute started by Maori. They share a passion for indigenous development. Hanita says the conditions for success are pretty simple. “You need a clear, long-term aspirational strategy which influences your decision making.

“All our [Māori] organisations have to achieve the aspirations of our people. At the end of the day we’re striving to make sure they ultimately benefit.”

Iwi businesses need to be around for as long as their members are – with high birth rates the outlook has to be forever. That intergenerational approach to increasing wealth and wellbeing has affected the way Māori incorporations have acted. “We have been traditionally inherently conservative. When we receive [settlement] funds back we tend to pool all of our money into funds, which is probably a wise thing to do, and into certain asset types. What we’re doing is we are making sure we don’t erode the asset base because it has to last for future generations.”

But iwi businesses are changing the way they operate. Most recognise that the eggs-in-one-basket approach will not do enough to improve wellbeing for Māori who find themselves at the bottom of plenty of socio-economic indicators. “Ngāi Tahu and Tainui [incorporations] are nothing like they were when they started 20 years ago,” says Hanita. “They have got a quite a sophisticated level of maturity and that’s part of the business lifecycle. As we build capability and confidence, we’re diversifying and evolving.”

Conservative doesn’t have to mean completely risk adverse. It just means thinking about risk and investment a little differently. Hanita says Whai Rawa, Ngāi Tahu’s NZ$44m matched savings scheme, which works off the back of a managed fund, is an example of a willingness to try something a little different that will have lasting impacts on members. He hopes that our “Australian cousins” know that, at every level, culture belongs in business. Rangatiratanga, kaitiakitanga and hauora – Māori concepts of leadership, care and wellbeing – are a core part of the way he works. And he’s proud of it. “We’re indigenous, we’re diverse and we bring culture to work. We have to change the old pale, stale and male view.”

Sharing economy?

Tina Porou is the head of sustainability at Contact Energy. She’s also worked across iwi trusts and incorporations. Māori have as much to learn from other native cultures as they have to give, she says. “You can’t put a Māori framework on an Aboriginal [Indigenous] problem but you can have conversations about how it is we can grow together.”

Porou has consulted in Australia and is looking at a model used there to get more Indigenous people into corporate roles. “I’ve had conversations with kuia [elderly] over there – the conversations I could imagine my old people having 50 or 60 years ago. So they are behind. “But it was humbling and it was a stark reminder to me that we shouldn’t forget the fight. And we shouldn’t be so ‘entitled’.”

Just like Hanita, Porou is a big believer in knowing and being who you are. It’s a point of difference that should never be undervalued, she says. That belief was rammed home to her on a Stanford University boot camp. Part of it saw her visit IDEO, one of the pre-eminent design companies in the world. At the end, the 45-strong group stood up to waiata [sing] to the president, a practice ingrained there.

The IDEO President and CEO Tim Brown blogged: “This group was deeply in touch with why they were in business and how their culture brought meaning to their work. It made me realise that in most other parts of the world we consciously try to separate our cultural experiences from our work lives, sidelining them to a trip to the theatre, or to the museum.

“It made me wonder: how much more meaningful might our work be if it was more closely interwoven with our culture?”

That made her smile, Porou says. “I think my biggest thing, and we all see it because we’re working in a capitalist society, is don’t compromise your indigeneity for capitalism. Take it with you into the boardroom and don’t forget that diversity in the business world is king.”

This article first appeared in the November 2015 edition of Acuity.