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T h e N e p a lMarch 2011Volume13 No3<strong>Chartered</strong>AccountantJournal <strong>of</strong> the <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong>SERVICEPROFESSIONThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 1
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CONTENTSEditorial 5President's Message 6Fair Value Accounting from <strong>Nepal</strong>ese Perspective 8Implementing Quality Control Standards:Frequently Asked Questions 10Mandatory Auditor RotationPotential impact on financial reporting quality 12Cash or Accrual Accounting-An Alternative for the Government <strong>of</strong> <strong>Nepal</strong> 14WCOA-The Olympics <strong>of</strong> <strong>Accountants</strong> 19Organizational Culture 25IFRS and First Time Adoption 29ICAI International Conference 31Altman Z Score: A Model towardsCredit Risk Management 34Forreign Exchange Reserve Management 36Understanding Banking Frauds& Fraud Risk Management 41T h e N e p a l<strong>Chartered</strong>Accountant(Quarterly Journal <strong>of</strong> The <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong>)E d i t o r i a l B o a r dCA. Sunir Kumar DhungelCA. Sudarshan Raj PandeyCA. Bishnu Prashad BhandariCA. Prakash BasyalCA. Santosh Kumar JhaCA. Prakriti TuladharCA. Bikram KhadkaCA. Santosh GhimireRA. Kedar Nath PaudelMr. Binod NeupaneBinaya PaudelChairmanMemberEditorMemberMemberMemberMemberMemberMemberSecretaryThe <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong>,Babar Mahal, P O Box 5289, Kathmandu, <strong>Nepal</strong>Tel. No. 4269130, 4258569 Fax No. 4258568E-mail: ican@ntc.net.npWebsite: www.ican.org npEditorial SupportBranch OfficesBiratnagar: Tel: 021 537195Fax: 021 522077 | E-mail : icanbrt@wlink.com.npButwal: Tel: 071 543629 | E-mail: icanbtl@ntc.net.npBirgunj: Tel: 051 522660 | E-mail: icanbrj@ntc.net.npDesign, Layout & Printed by:Format Printing Press Kathmandu, <strong>Nepal</strong>Subscription RatesAnnual Subscription Rs. 400(including courier charges)Rs. 300(if received by self)Opinions expressed by the contributors in this journal are their ownand do not necessarily represent the views <strong>of</strong> the <strong>Institute</strong>. MemberBodies <strong>of</strong> Safa may quote or reprint any part <strong>of</strong> this Journal with dueacknowledgement. For others, solicitation is expected.Combating Insurance Fraud 45NewsSAFA SUMMIT-2010 5114 th Anniversary <strong>of</strong> the <strong>Institute</strong> 52SAFA BPA Award and SAFA CorporateGovernance Disclosure Award 52Students Corner 53Seminar on “IFRS Issues and Challenges” 53CA Membership Examination 54Student Enrollment Status 54Career Counseling 54Members’ Corner 54About CPE Trainning 54International Affiliation 55Listing <strong>of</strong> members 55International ParticipationSAFA iTAG Committee Meeting 55Regional Standard Setters Conference (RSS) 5518 th World Congress <strong>of</strong> <strong>Accountants</strong> 56President led the delegation to Delhi 5672 nd SAFA Assembly Meeting at Chennai,India 57OrthersIn-house Training Program for Staffs 57Blood Donation Program 57
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E d i t o r i a lCSR and UN Global CompactBusiness is an integral part <strong>of</strong> society. No any business community can disassociate from social issues and societalconcerns. Only those businesses that are socially responsible can survive in long run. The social responsibility <strong>of</strong>the business concern is formally known as Corporate Social Responsibility (CSR). Corporate Social Responsibility(CRS) has many meanings and understandings in different context and environment. Hence, we cannot say exactlywhat companies are supposed to deliver as CSR activities. In <strong>Nepal</strong>, the corporate and business house have beenacting as the funding agency or directly involved in the following social activities;- Construction <strong>of</strong> roads, bridges, Chautaras- Drinking water, canals- Orphan and elderly homes- Construction <strong>of</strong> schools- Advocacy program for social awareness- Scholarship for children- Sports activities and events- Community and VDC buildings, etc.Nowadays, the culture <strong>of</strong> doing CSR activities amongst the corporate house in <strong>Nepal</strong> is emerging as the importance<strong>of</strong> the CSR activities is much more than any <strong>of</strong> the marketing activities. The CSR activities enhance the image <strong>of</strong>the company in the society and gets recognition that will help to have sustainable growth, yet the society at largegets benefits through some social activities undertaken by them. Whereas the Marketing activities are meant forproduct sale and market penetration, the success <strong>of</strong> which is analyzed in the form <strong>of</strong> the cost benefit analysis.Importance <strong>of</strong> the CSR activities can be seen in many forms. There is a direct benefit to the society and indirectly,the business will be able to improve reputation and have sustainable growth. Further, they will be able to improverelationship and manage external risk factors. The big corporate house and multinational companies in <strong>Nepal</strong>have special task force and committee to look after the CSR activities, whereas, the small and medium sizeorganization have been doing on occasional way through internal approval and decisions.On the other hand, the United Nations Global Compact was launched in July 2000 as a voluntary initiative throughwhich business could work with UN agencies, civil society and labor organizations to promote and support humanrights, environmental and labor rights principle. The Global Compact asks companies to embrace, support andenact, within their sphere <strong>of</strong> influence, a set <strong>of</strong> core value in the areas <strong>of</strong> human rights, labor standards, theenvironment and anti-corruption etc. There are 10 set <strong>of</strong> principles set out by the Global Compact as below;Principle 1: Business should support and respect the protection <strong>of</strong> internationally proclaimed human rights;Principle 2: Make sure that they are not complicit in human right abuses.Principle 3: Businesses should uphold the freedom <strong>of</strong> association and the effective recognition <strong>of</strong> the right tocollective bargaining;Principle 4: The elimination <strong>of</strong> all forms <strong>of</strong> forced and compulsory labor;Principle 5: The effective abolition <strong>of</strong> child labor; andPrinciple 6: The elimination <strong>of</strong> discrimination in respect <strong>of</strong> employment and occupation.Principle 7: Business should support a precautionary approach to environmental challenges;Principle 8: Undertake initiatives to promote greater environment responsibility; andPrinciple 9: Encourage the development and diffusion <strong>of</strong> environmentally friendly technologies.Principle 10: Businesses should work against all forms <strong>of</strong> corruption, including extortion and bribery.The Global Compact does not have mandatory or regulatory powers, but instead it emphasis on publicaccountability, transparency and the enlightened self-interest <strong>of</strong> companies.Let us advocate from our level to promote the CSR activities and adhere to the principles <strong>of</strong> the UN GlobalCompact for sustainability and recognized business house.
P r e s i d e n t ' s M e s s a g eDear Members,ICAN has initiated coordination and cooperation with the regulating bodiesto strengthen the role <strong>of</strong> it in effective manner and I am happy to inform themembers that having sole objective <strong>of</strong> harmonizing the relations with theregulating bodies, we have confirmed various interaction programs to createawareness on the limited liabilities <strong>of</strong> public accountants and auditors.As a starting, recently, the interaction program has been conducted withco-operative department and issues raised during the program has beenforwarded to the regulator for improvement where necessary. In near future,we have planned to have interaction program with <strong>Nepal</strong> Rastra Bank, BeemaSamiti, and Securities Exchange Board etc.I am hopeful that it will harmonize the relations with regulating institutionsin one side and in another it will also enhance the role <strong>of</strong> the institution toprotect, safeguard and regulate its members.Specially, in the time like this when we have many instances <strong>of</strong> issues beingraised regarding the public responsibility and liability <strong>of</strong> our members aspublic accountants and auditors, such activities will only help us and theregulators to understand the limitations to our role and limitations in thedirections issued by the regulators.Focusing in these matters, the major activities and initiations till date andfuture programs <strong>of</strong> the institutions are as follows.About activities <strong>of</strong> the Institutions• Successfully organize the annual day program with the chairmanship <strong>of</strong>Hon. Prime Minister Mr. Madhav Kumar <strong>Nepal</strong>.• The construction <strong>of</strong> the ICAN building has initiated.• Since the employees are the back bone <strong>of</strong> the organization, the requiredtrainings have been provided to the staff for enhancement <strong>of</strong> the capacity.Education and Examination Side• The preparation <strong>of</strong> the study material <strong>of</strong> various levels has been in highspeed with high priority to ensure quality <strong>of</strong> chartered accountancyeducation.• The study material <strong>of</strong> various levels has been in regular process <strong>of</strong>evaluation and up gradation as per the need <strong>of</strong> the time.• The career counseling program has been conducted in Kathmandu and thevarious places <strong>of</strong> the country to educate the importance <strong>of</strong> the charteredaccountancy to the related persons through career counseling.• Regular inspection <strong>of</strong> the examination is in place for the improvement <strong>of</strong>the examination system as per need <strong>of</strong> time.
Members Service and Pr<strong>of</strong>essional Development• With the objective <strong>of</strong> capacity enhancement <strong>of</strong> the members, the CPE trainingshave been conducting in the various places <strong>of</strong> the country with amendment <strong>of</strong>the subject matter.• The important Subject matter has been amended in the <strong>Nepal</strong> <strong>Chartered</strong><strong>Accountants</strong> Rules 2061.• One man one pr<strong>of</strong>ession has been already effective to <strong>Chartered</strong> <strong>Accountants</strong>from 2067/09/20 and where as to registered auditor it will be effective from2070/04/01.• The provision <strong>of</strong> conducting the peer review <strong>of</strong> the audit firm by auditor is in laststage on the basis <strong>of</strong> the statement in peer review issued by the institute.• With the technical help from the <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> India(ICAI), the ISA course shall be run in April this year for the first time to themembers including the <strong>Chartered</strong> Accountant who have passed from this institutealso and IFRS Certification course are underway to run in the month <strong>of</strong> June.International Relations• We will Strengthen and harmonize the relations with international institutionsrelating to accounts and auditing like CAPA, SAFA and IFAC.• Special efforts have been initiated to have relations with the <strong>Institute</strong> <strong>of</strong><strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> India (ICAI) to more harmonize who have contributedin development and expansion <strong>of</strong> the institute since inception. Resulting thatthe ISA course and IFRS certification course shall be run in the April and Junerespectively. Hope to enhance the relationship between ICAN and ICAI willdevelop in new height.Future Programs• Capacity enhancement related programs have been aimed to run outside theKathmandu valley for the members.• The training opportunity will be provided to the employees as per the need.• Joint programs will be lunched in giving priority for coordination with theregulating authorities.• Initiation will be made to provide the opinion and suggestions to governmentor various government entities in the area <strong>of</strong> accounting or auditing, finance,revenue etc.In the end, I would like to thank the council members, ex- presidents, variouscommittee’s members and employees who have continuously supported to achievethe above activities in success and expected the same level <strong>of</strong> support in the future.Thank you,CA. Sunir Kumar DhungelPresident
AUDITINGFair Value Accounting from<strong>Nepal</strong>ese PerspectiveCA. Binod B. RajBhandary*<strong>Accountants</strong> trained in historicalcost concept are no different in<strong>Nepal</strong> from those trained in theother parts <strong>of</strong> the world. <strong>Nepal</strong> isamong the developing nations inthe world. What is more importantfor the accountants in <strong>Nepal</strong>, isthat fair value accounting thathas relatively larger relevance inthis country as in other developingcountries. The reasons for largerrelevance with respect to fair valueconcept as compared to historicalcost concept may be attributedto various reasons. These reasonsare increasingly posing challengesto the accountants as to howto accommodate these issuesin the general purpose financialstatements within the meaning<strong>of</strong> fair value surpassing beyondhistorical cost. The reasons soattributed are (i) privatizationand restructuring <strong>of</strong> public sectorenterprises, (ii) investment insecurities held by employeesretirement funds and life insurancecompanies, (iii) inadequate market,(iii) tax laws with respect toacquisition and disposal <strong>of</strong> assetsand related party transactions, and(iv) investment in human resources, (v) inadequatecoverage in accounting education curriculum.Public sector takes the dominant position in thecorporate sector business in <strong>Nepal</strong>. Government <strong>of</strong><strong>Nepal</strong> is having either full ownership or substantialshareholding in these public sector enterprises (PSEs).These PSEs hold large quantities <strong>of</strong> property, plantand equipments as well as inventories. They are allreporting their financial statements on historical costbasis. With the advent <strong>of</strong> liberalization, governmenthas been increasingly disposing <strong>of</strong> these assets andtheir business to private sector – either outright saleor long term lease, in the name <strong>of</strong> privatization andrestructuring. The question is: what government getsas purchase consideration in their handover processreflects fair value both in respect <strong>of</strong> the assets disposed<strong>of</strong> and handing over <strong>of</strong> the running business. Theaccounting pr<strong>of</strong>ession should give response to therequirement <strong>of</strong> the government with respect to preciseprocedures on their replacement value or net realizablevalue as the case may be so that there is goodjustification to the taxpayers’ money that governmenthas mobilized while setting up these PSEs.Institutional retirement funds and the life insurancecompanies have been making investments in variousdebt and equity securities <strong>of</strong> companies as well asgovernment. The securities held by them are eitherlisted or unlisted. The conventional way <strong>of</strong> accountingand reporting value <strong>of</strong> these securities in their financial* Mr. Rajbhandary is a past president <strong>of</strong> ICAN.8The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
AUDITINGstatements has been at lesser <strong>of</strong> cost or net realizablevalue. The question arises is: whether their reporting inthe financial statements responds to the requirement<strong>of</strong> fair value <strong>of</strong> these securities. Similarly, investmentby these funds on commercial properties which areso far reported on historical cost less depreciation donot also answer to the need <strong>of</strong> the fair value <strong>of</strong> theseproperties. Although the fair value <strong>of</strong> these investmentsshould equal to present value <strong>of</strong> estimated future cashflows from these securities, the question remains theprecise procedures involved and how they find place inthe financial statements within the context <strong>of</strong> financialreporting standards.Developing nation suffers from the syndrome <strong>of</strong> lack<strong>of</strong> market where transactions <strong>of</strong> various goods andservices freely take place at arms length transactions.<strong>Nepal</strong> is no exception to that. This will make it difficultin collecting information relating to market pricesbased on the actual trading activity and as a result fairvalue estimation poses even bigger challenges. <strong>Nepal</strong>’sstock exchange and recently established commodityexchange should be encouraged to develop depth andwider coverage.<strong>Nepal</strong>ese tax laws whether VAT or Income-tax havemade some reference to market value in arriving at thetransaction in kind or in assessing the rental income.The concept is based on fair value. The law, however,does not elaborate on, the basis and nor procedurein estimating the market value based on arm’s lengthtransaction. The revenue authorities increasinglyturn to the assistance from the accounting pr<strong>of</strong>essionseeking guidance on how to arrive at the fair value asan aid to the government in mobilizing its revenue.Enterprises have been increasingly spending theirresources for development <strong>of</strong> manpower employedby them. These spending made for human resourcesdefinitely also accrue future benefits to them Thisspending is generally finding place as expense in theincome statement only but not in the balance sheet asinvestment. The impact <strong>of</strong> disproportionate spendingin human resource by two enterprises conducting thesimilar business is not visible in their conventionallyprepared financial statements in arriving at their netassets. This gives rise to the difficulty in comparability<strong>of</strong> their financial statements to ascertain the worth <strong>of</strong>these enterprises.The training and education for pursuing pr<strong>of</strong>essionalaccountancy course primarily focuses on core subjectslike accounting, auditing and tax laws. The curriculumrequires accountants to become historically costconscious or in derogatory sense ‘after thinker’. Thecurriculum for pr<strong>of</strong>essional accounting does not requirethem to develop the equally important knowledgeand skill on corporate finance and business ormanagerial economics so as to have ‘forward looking’approach. This calls for a need in looking a fresh at thecurriculum.The accounting pr<strong>of</strong>ession should increasingly debateand come out with the methodology on how to addressissue on fair value in the financial reporting. While it isimportant that the general purpose financial statementprepared on historical cost concept should continue butat the same time the stakeholders also have the equalright to expect the financial reporting based on fairvalue. This way these stakeholders have the fair ideaon the estimated amount <strong>of</strong> present value <strong>of</strong> estimatedfuture cash flows from the enterprise they have stakein and the balance sheet based on fair value so as toascertain their near actual worth. Since the fair valueconcept may have some subjective biases and couldbe unique from one enterprise to another enterprise,one <strong>of</strong> the alternatives may be to prepare the specialpurpose financial statements based on fair value. Thistype <strong>of</strong> special purpose financial statements couldfind the place as supplementary to financial reportingbased on general purpose financial statement. Equallyimportant area is the ability to review <strong>of</strong> the fairvalue. When two persons prepare the same financialstatements based on fair value, there should beminimum deviation between the results obtainedby two. They conform to minimum set <strong>of</strong> standardsfor arriving at the fair value. This will answer to thequestion: How fair is the fair value? The pr<strong>of</strong>essionshould respond quickly on this very important subject<strong>of</strong> fair value so as to maintain its long cherishedreputation <strong>of</strong> ‘true and fair’ reporting before beingdragged into ‘true but unfair’.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 9
AUDITINGin a few cases, the NSAs do not ordinarily specifythe specific audit procedures to be performed. Thismeans the specific audit procedures to be undertakento achieve the objectives and to comply with therequirements may be different in an audit <strong>of</strong> a smallentity compared to that <strong>of</strong> a large and complex one.Further, the NSAs explain that the appropriate auditapproach for designing and performing further auditprocedures depends on the auditor’s risk assessment.Recognizing the above facts and prevalence <strong>of</strong> SMPs andSMEs in our context, the Guidance Note to ImplementNSQC has provided for simplified policies andprocedures to be adopted by SMPs or Sole Practitioner.An attempt has been made in this article to provideanswers to some <strong>of</strong> the frequently asked questionsrelated to implementation <strong>of</strong> Guidance Notes in itsessence.Q1: As a sole practitioner, do I really need todocument my system <strong>of</strong> Quality Control?A1: Yes you do. This need not be onerous though. Inmany cases, it will involve describing what you alreadydo rather than inventing new policies and proceduresbut bearing in mind the minimum requirement as perNSQC1.Q2: We are a small firm with three partners. Shouldone <strong>of</strong> us be appointed as a specific quality control(QC) partner?A2: Yes, it may be a good idea for one partner to beassigned the operational responsibility for the system <strong>of</strong>QC. However, the ultimate responsibility for the system<strong>of</strong> QC always lies with the firm’s managing partner.Q3: We are a small firm. Do we have to performEngagement Quality Control Reviews (EQCR)?A3: Possibly. What you have to do is to establish apolicy for the type <strong>of</strong> engagement that would requiresuch a review, based on considerations <strong>of</strong> risk, size,complexity and potential public interest. It is worthemphasising that all audits <strong>of</strong> “listed” entities andpublic interest must have an EQCR, whatever theirsize. Should you accept a new engagement that meetsthe criteria you have determined, then you will needto consider engaging an external EQCR reviewer withappropriate expertise and experience. The requirementsrelating to the criteria for the eligibility <strong>of</strong> EQCRreviewers are given in NSQC1.Q4: I am a sole practitioner and have identified theneed for an EQCR reviewer on one <strong>of</strong> my audits.I’m planning to apply for Peer Review this year forthe first time. Is there anything I should be doing toensure this works efficiently?A4: You will need to consider how the process should bemanaged and this will include the need for appropriatecommunication at the relevant stages <strong>of</strong> the process,including at the planning stage. It’s better to establishcontact with Peer Review Board and get their views onthe same.Q5: We are a small firm and realize that we needto substantially rewrite our audit procedures,particularly for the two specialist audits that we do.What is the best course <strong>of</strong> action for us?A5: First <strong>of</strong> all that firm should consider whether itis in a position to continue as auditor, particularlyfor the specialist audits. This will include assessment<strong>of</strong> whether the firm has staff with the necessaryknowledge and experience. In terms <strong>of</strong> developing thesystems and procedures that will be needed to carryout these audits, the firm might consider purchasing aproprietary system or calling for external help and usethis as appropriate.Peer Review Board <strong>of</strong> the <strong>Institute</strong> has called forparticipation in the Quality Assurance Process andhence it is but natural that all the practicing firmsand individuals should understand the requirement <strong>of</strong>NSQC1. Active participation <strong>of</strong> the members <strong>of</strong> ICAN inPeer Review process will ensure quality <strong>of</strong> services beingrendered by its members and restore deterioratingpublic confidence to its greater height. Each membershould contribute towards this mission by implementingNSQC1 Policies and Procedures as illustrated in theGuidance Notes on Implementation <strong>of</strong> NSQC1 and putforth their concerns in doing so by asking questions tothe ICAN and/or AuSB .2 Annexure l: Illustrative Annual Firm independence Confirmation, Annexure II: Illustrative Independence Policies; Annexure III: IllustrativeClient/Engagement Acceptance and Continuance Form; Annexure IV: Illustrative Engagement Planning Memorandum; Annexure V: IllustrativeEngagement Summary Memorandum, and Annexure VI: Illustrative Firm Quality Control inspection ChecklistThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 11
AUDITINGMandatory Auditor RotationPotential impact on financial reporting qualityCA. L. D. Mahat*BackgroundSection 111 <strong>of</strong> the Companies Act 2063requires mandatory rotation <strong>of</strong> auditor oraudit firm in every three years for all publiclimited companies. Also, Section 60 <strong>of</strong> theBanks and Financial Institutions Act requirescompulsory rotation <strong>of</strong> auditor or audit firmfor all banks and financial institutions. Thewisdom <strong>of</strong> the legislating mandatory rotation<strong>of</strong> auditor may be questioned, even thoughit is well intentioned. Mandatory rotation <strong>of</strong>auditor as the effective tool to strengthenauditor independence and improve auditquality may have arguments in favor oragainst.Arguments in favor <strong>of</strong>mandatory rotationThe mandatory rotation <strong>of</strong> auditors has longbeen recommended as a means to improveaudit effectiveness as it confers severalbenefits. The specific benefits that wouldaccrue from mandatory rotation <strong>of</strong> auditorfall into following areas:Effective peer review: Mandatory rotation<strong>of</strong> auditors contributes for the creation<strong>of</strong> an effective peer review system thatdiscourages aggressive accounting practiceswhile encouraging critical reviews upon eachauditor turnover. Work done by an auditor isin turn reviewed by successor auditor under mandatoryauditor rotation regime.Prevention <strong>of</strong> conflicts <strong>of</strong> interest: Mandatory rotation<strong>of</strong> auditors contributes for the prevention <strong>of</strong> conflicts <strong>of</strong>interest that can easily arise from long-standing clientrelationships. When an auditor is allowed for the audit<strong>of</strong> an institution for a long period, audit quality maybe impaired due to the possibility <strong>of</strong> auditor gettinginvolved into matters relating to conflict <strong>of</strong> interest.The conditions affect issues <strong>of</strong> audit quality may includecloseness to client management, lack <strong>of</strong> attention todetail due to staleness and redundancy, and eagerness toplease the client.The nature <strong>of</strong> auditing requires that auditors interactextensively with their clients. Long-term relationshipsmay result in a troublesome degree <strong>of</strong> closeness betweenmanagement and the auditor. In Enron scam, Andersenauditors and consultants were given permanent <strong>of</strong>ficespace at Enron headquarters here and dressed businesscasuallike their Enron colleagues. They shared in <strong>of</strong>ficebirthdays, frequented lunchtime parties in a nearby parkand weekend fund-raisers for charities.Continuation <strong>of</strong> auditor for a fairly longer period maylead to a situation where auditor may become staleand view the audit as a simple repetition <strong>of</strong> earlierengagements. This staleness fosters a tendency toanticipate results rather than keeping alert to subtle butimportant changes in circumstances. Auditors returningto an engagement rely on prior-year working papers to* Mr. Mahat is a Fellow <strong>Chartered</strong> Accountant Member <strong>of</strong> <strong>Nepal</strong>.12 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
AUDITINGhelp plan the audit, set the budget, and provide valuableinformation needed for the current-year audit. Manyprior-year schedules are used to develop current-yearinformation. But a problem is created when auditors,especially less-experienced staff, excessively rely onthese working papers. This problem is likely to beexacerbated when the current-year auditor is reviewinghis own working papers from the prior year.The existence <strong>of</strong> a long-term relationship with the clientand possibility <strong>of</strong> future business may result in a situationin which the auditor may take a decision so as to pleasethe client so as to retain the client. This may be one <strong>of</strong>the arguments in favor <strong>of</strong> auditor rotation.Promotion <strong>of</strong> more competitive market: Promotion <strong>of</strong>a more competitive market for audit firms, which wouldlead to higher quality audits.Arguments against mandatoryrotationThere are plenty <strong>of</strong> arguments against mandatoryrotation <strong>of</strong> auditor. These are described below:Increased cost: Mandatory rotation <strong>of</strong> auditors leadsto a substantial increase in the total cost <strong>of</strong> auditingcomprising <strong>of</strong> cost to the auditor and cost to the client.The principal start-up costs initially borne by the auditorinvolve familiarization with the client’s business, financialsystem, accounting procedures, review <strong>of</strong> historicalaccounts, review <strong>of</strong> the tax situation and creation <strong>of</strong> apermanent archive. Rotation <strong>of</strong> auditor at shorter intervalresults in incurrence <strong>of</strong> such costs by the auditor morefrequently which ultimately will be passed on the client.From the client’s perspective, a change <strong>of</strong> auditor anda new first audit also entail major explicit costs. Theclient must devote resources to making the first auditpossible, in addition to those required by a repeat auditsuch as resources required for laborious process forselection <strong>of</strong> auditor, human and material resources forthe familiarization process and so on.Impairment in audit quality: An incoming auditor wouldtake a considerable time to understand the business <strong>of</strong>the client, and during that period, the quality <strong>of</strong> auditmay be impaired. Rotation <strong>of</strong> auditor may, in fact, reducethe effectiveness <strong>of</strong> audit as the new auditor will needtime to become familiarised with and understand thebusiness <strong>of</strong> the company. Diminution in audit qualitywould also result from disrupting the ongoing relationshipthat typically provides an auditor with comprehensiveknowledge <strong>of</strong> its clients’ businesses and operations.Under a mandatory auditor rotation regime, the auditorsknow in advance that their tenure will end at a giventime. When the auditing engagement period is finiteand known to the auditor, the planned audit quality willdiminish over time, and the amount <strong>of</strong> audit effort overthe ending period will be the lowest.International scenarioThe ultimate question about mandatory audit firmrotation is whether such a policy enhances audit quality,and if so, at what cost. The major financial reportingfailures at Enron and WorldCom, as well as apparentfailures at many other leading multinational companiesQwest, Tyco, Adelphia, and others, led to the financialreporting reforms contained in the Sarbanes-Oxley Act<strong>of</strong> 2002. Reform introduced by the Sarbanes-Oxley Actdirectly related to auditors include the establishment<strong>of</strong> the Public Company Accounting Oversight Board,increased audit committee responsibilities, andmandatory rotation <strong>of</strong> lead and reviewing audit partnersafter five consecutive years on an engagement.It is important to note that even Sarbanes-Oxley Actrequires compulsory rotation <strong>of</strong> audit partners, not theaudit firm and that too at the interval <strong>of</strong> five years. Veryfew countries such as Italy, Brazil and South Korea havestipulated mandatory rotation <strong>of</strong> the audit firms, mostothers have stipulated only rotation <strong>of</strong> audit partners.It makes more sense to have mandatory audit partnerrotation rather than having firm rotation which confersbenefits <strong>of</strong> rotation by also addressing drawbacks <strong>of</strong>rotation.ConclusionThere are plenty <strong>of</strong> arguments in favor <strong>of</strong> as well asagainst mandatory rotation <strong>of</strong> auditor specially therotation <strong>of</strong> audit firm. While mandatory rotation <strong>of</strong>auditor or audit firm confers benefits like effective peerreview, prevention <strong>of</strong> conflict <strong>of</strong> interest and promotion<strong>of</strong> competitive market it is also not free from set-backslike increment in cost and impairment in audit quality.Perhaps the best way out could be to have mandatoryaudit partner rotation at an interval <strong>of</strong> five years ratherthan having firm rotation.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 13
ACCOUNTINGCash or Accrual Accounting– An Alternative for the Government <strong>of</strong> <strong>Nepal</strong>Dr. pawan adhikariramesh k. sharma 1Accrual accounting in the publicsectorOngoing financial reforms in many countries are <strong>of</strong>tenclaimed to be a consequence <strong>of</strong> the widespread NewPublic Management (NPM) movements. The underlyingidea behind NPM is to run the public sector in a moreor less similar way as the private sector and to makeit more efficient, effective, and service oriented. Thefinancial aspects <strong>of</strong> NPM also referred to as New PublicFinancial Management (NPFM) imply the adoption <strong>of</strong>accrual accounting in public sector organizations withthe primary objective <strong>of</strong> getting them to run better(Guthrie et al., 1999). Accrual accounting has beenenvisaged as a means <strong>of</strong> commercializing governmentactivities, as well as <strong>of</strong> enchaining the accountability<strong>of</strong> government to its stakeholders. In recent years, theimportance <strong>of</strong> accrual accounting is further emphasizedin order to demonstrate the costs and performance<strong>of</strong> commercially-oriented government practices thathave gained popularity at global level - contracting,outsourcing, and PPP.International organizations, mainly the World Bank, theInternational Monetary Fund (IMF), the Organizationfor Economic Cooperation and Development (OECD),and pr<strong>of</strong>essional organizations such as the InternationalFederations <strong>of</strong> <strong>Accountants</strong> (IFAC) and the Federation <strong>of</strong>European <strong>Accountants</strong> (FEE) are the major propagators<strong>of</strong> accrual accounting in the public sector. Although theIFAC has pronounced both the cash basis and accrualbasis international public sector accounting standards(IPSASs), it has commented extensively on theimportance <strong>of</strong> accrual accounting in the public sector.Similarly, the widespread international frameworks forthe statistical approaches to accounting, including theUN’s 2008 System <strong>of</strong> National Accounts, the EuropeanSystem <strong>of</strong> Accounts 95, and the IMF’s GFS Manual2004, are now on the accrual basis. Internationalorganizations have envisaged the adoption <strong>of</strong> accrualaccounting in the public sector as both progress andself-evident.Overview <strong>of</strong> the adoption <strong>of</strong>accrual accountingAustralia and New Zealand are regarded as the highintensityaccrual accounting adopters. These twocountries embarked on the process <strong>of</strong> implementingaccrual accounting in their public entities in the 1980s.The UK formally implemented accrual accounting,which is titled as resource accounting, at centralgovernment level in the fiscal year 2003/2004 (Connollyand Hyndman, 2006). A survey conducted by OECD(2008) demonstrates that more than half <strong>of</strong> its membercountries have been using some forms <strong>of</strong> accruals atdifferent government levels ranging from agencies todepartments to central governments. Similarly, thereport <strong>of</strong> the FEE (2008) has exhibited a continuingtrend in Europe to shift away from cash accountingtowards accrual accounting.In Asia, Philippines, Azerbaijan, China, Mongolia, andUzbekistan, among others, have adopted a modifiedversion <strong>of</strong> accrual accounting in their public sectors(Athukorala and Reid, 2003). In the context <strong>of</strong> SouthAsia, the South Asian Federation <strong>of</strong> <strong>Accountants</strong> (SAFA)(2006) has recommended its member countries to1 Dr.Pawan Adhikari from Bodø Graduate School <strong>of</strong> Business, University <strong>of</strong> Nordland,Norway and Mr. R.K. Sharma from Public Service Commission, Government <strong>of</strong> <strong>Nepal</strong>.14 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
ACCOUNTINGpursue a phased-program for conversion <strong>of</strong> prevailingcash accounting into accrual accounting for thegovernment. In fact, India has already initiated theprocess <strong>of</strong> adopting accrual accounting. Centralgovernment and 21 Indian state governments haveagreed to implement accrual accounting and somehave even volunteered to pilot the accrual accountingproject in their states (GASAB, 2010).Apart from countries, a number <strong>of</strong> internationalorganizations have in recent years altered theiraccounting system from cash to accrual. For instance,the European Commission has been preparing itsgeneral purpose financial statements using the accrualprinciples since 2005. The UN, OECD, IFAC, NATO, andInterpol have either implemented or are in the process<strong>of</strong> implementing the accrual basis IPSASs. However,there is envisaged a lack <strong>of</strong> framework for adoptingand implementing accrual accounting in a unified wayat the global level. This has resulted in the emergence<strong>of</strong> various forms <strong>of</strong> accrual accounting, ranging frompure to various modified versions <strong>of</strong> accrual accounting.Accrual accounting has therefore become a fluidtechnique that can be shaped by the implementers inseveral ways (Arnaboldi and Lapsley, 2009).Arguments for accrual accounting in the public sectorAccrual accounting is anchored on the principle thatrevenues and costs should be charged to the periodin which they are earned and incurred. The generalpurposefinancial statements under accrual accountingconsists <strong>of</strong> the statement <strong>of</strong> financial position, thestatement <strong>of</strong> financial performance, the cash flowstatement, and the statement <strong>of</strong> changes in netequity/assets, amongst others. The proponents <strong>of</strong>accrual accounting argue that accrual-based financialstatements provide better and comprehensiveinformation for decision making and more accuratecosts analysis.A report published by the ADB has demonstrated thebenefits <strong>of</strong> accrual accounting both at the aggregatelevel (whole-<strong>of</strong>-government) and organizational level(Athukorala and Reid, 2003). It is claimed that at theaggregate level, the accrual-based information isuseful to enhance the effectiveness <strong>of</strong> governmentdecisions on aggregate demands, to reinforce theaccountability <strong>of</strong> executive government, and todemonstrate sustainability <strong>of</strong> fiscal policies. Similarly, atthe organizational level, the accrual-based informationis seen useful to generate information for managingresources more effectively and efficiently, to identifypayment arrears, to support liquidity management,and to reduce opportunities for fraud and corruption,among others.The FEE (2008) has emphasized the importance <strong>of</strong>accrual accounting in facilitating better planning,financial management, and decision making at thegovernment level. It is claimed that the accrual basedfinancial statements drive greater organizationalperformance through improved resource allocation.According to the IFAC (2011), financial statementsprepared on the accrual basis contributes to improveddecision-making and accountability, as they allow users,among others;• to access the accountability for all resourcesthe entity controls and the deployment <strong>of</strong> thoseresources,• to access the financial position, financialperformance, and cash flows <strong>of</strong> the entity; and• to undertake decisions about providing resourcesto, or doing business with, the entity.Arguments against accrualaccounting in the public sectorA large number <strong>of</strong> academicians and practitionersare yet to be convinced with the propagated benefits<strong>of</strong> accrual accounting. They argue that the benefitsclaimed for accrual accounting have been overstatedand the costs understated. The rhetoric aboutaccrual accounting has been fabricated, as this isthe only means the supporters <strong>of</strong> accrual accounting,particularly international organizations and pr<strong>of</strong>essionalaccountants, get their reform proposals accepted.Some academicians argue that accrual accounting isinferior and unsuitable in the public sector, as the latteris not meant to generate pr<strong>of</strong>it and ensure solvency.A challenging issue in accrual accounting has been therecognition and valuation <strong>of</strong> assets, mainly heritageassets, infrastructure assets, and community assets.There are also concerns about the non-neutrality <strong>of</strong>accrual accounting, particularly in dealing with noncashitems such as depreciation and impairment.Lessons drawn from the experience <strong>of</strong> countries thathave introduced accrual accounting reforms show thatthere is a lack <strong>of</strong> understanding and use <strong>of</strong> accrualinformation by potential users, as well as unintendedconsequences due to implementation difficulties. Forexample, although accrual accounting was introducedThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 15
ACCOUNTINGin the UK at the beginning <strong>of</strong> the new century, themajority <strong>of</strong> government agencies in the country arestill struggling to prepare the accrual based financialstatements (Connolly and Hyndman, 2006). In Australia,a debate is still going on whether the introduction<strong>of</strong> accrual accounting and budgeting has reallyresulted in improved efficiency and accountability forgovernments. Similarly, the use <strong>of</strong> accrual informationhas been questioned in many countries, includingItaly, Russia, and Belgium (at the municipal level), asbudgetary accounting still continues to dominate thepublic sector domain (Timoshenko and Adhikari, 2009).In all these cases, politicians, who are recognized asthe major stakeholders for government accounting,are seemed to be much concerned with the budgetimplementation rather than pr<strong>of</strong>itability and financialposition <strong>of</strong> the government.It has been acknowledged that a change towardsaccrual accounting should be a part <strong>of</strong> broader publicsector reforms, as the former involves a culturalchange in the government. Moreover, a transitiontowards accrual accounting is seen as a costly and timeconsuming process involving substantial resources.International organizations such as IPSASB and otherpublished research have therefore introduced a series<strong>of</strong> preconditions that are to be considered prior tointroducing accrual accounting (Hepworth, 2003). Itis argued that accrual accounting reforms initiatedwithout recognizing the significance <strong>of</strong> these conditionsare tended to worsen rather than improve financialcontrol and management.Accrual accounting in thegovernment <strong>of</strong> <strong>Nepal</strong>Accrual accounting is not a new phenomenon in thegovernment <strong>of</strong> <strong>Nepal</strong>. In fact, the need and relevancy<strong>of</strong> accrual accounting in <strong>Nepal</strong> has been a subject <strong>of</strong>discussion since the late 1980s. The accounting andauditing improvements project, set up at the FCGO in1987, had proposed new accounting codes and manualunderpinning a modified version <strong>of</strong> accrual accounting.A diagnostic survey on <strong>Nepal</strong>ese government accountingand auditing performance, conducted with technicalassistance from the ADB in the late 1990s, had alsoprovided recommendations regarding the use <strong>of</strong>accounting standards and accrual accounting. At thebeginning <strong>of</strong> the new century, the World Bank’s CFAAreport urged the government to develop a road-mapfor the medium to long term introduction <strong>of</strong> accrualaccounting based on a carefully phased plan and arealistic time table.However, there have been some controversies regardingthe need for accrual accounting at central governmentlevel since 2005. Although the report <strong>of</strong> the high-levelexpenditure committee formed to seek out alternativesfor streamlining public expenditure management hadfavored a move towards the accrual basis <strong>of</strong> accounting,the other two reports issued in the same year, i.e.2005, were against the idea <strong>of</strong> an immediate transitiontowards accrual accounting. Both the joint financialaccountability assessment report <strong>of</strong> the government,DFID, and the World Bank, and the ADB’s public financemanagement assessment report emphasized thegovernment to focus on improving the cash systemby adhering to IPSASs and GAAP practices in the shortrun rather than adopting the accrual basis accounting.The World Bank’s assessment <strong>of</strong> <strong>Nepal</strong>ese public sectoraccounting and auditing standards and practices,conducted in close collaboration with government<strong>of</strong>ficials and pr<strong>of</strong>essional accountants in 2006, hadalso favored improvements in the prevailing cash basisaccounting system by complying with the cash basisIPSAS. The main argument <strong>of</strong> the World Bank was thatthe implementation <strong>of</strong> the cash basis IPSAS wouldhelp the government address many <strong>of</strong> the deficienciesenvisaged in the existing cash basis accounting andprovide a means <strong>of</strong> elevating the country’s capacity topractice accruals in the future. The PEFA report issuedby the FCGO in 2008 also recommended the use <strong>of</strong> thecash basis IPSAS to raise the score on a number <strong>of</strong> PFMindicators.Although the implementation <strong>of</strong> <strong>Nepal</strong> Public SectorAccounting Standard corresponding to the cash basisIPSAS has now been elevated on top <strong>of</strong> the governmentaccounting reform agenda, the debate on accrualaccounting is not yet finished. The IMF is seemedto be still emphasizing the need for the immediateimplementation <strong>of</strong> accrual accounting in <strong>Nepal</strong>. TheIMF’s report on observance <strong>of</strong> standards and code issuedin 2007 had suggested the government to initiate a steptowards the accrual basis <strong>of</strong> accounting. More recently,the budget management and public expenditurereevaluation committee <strong>of</strong> 2009 has presented asimilar recommendation enforcing the government todevelop a detailed plan for the introduction <strong>of</strong> accrual16 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
ACCOUNTINGaccounting. Although the committee has acknowledgedthe ambiguities in implementing a full-fledged accrualaccounting at present, the former has encouragedthe government to identify the types <strong>of</strong> accrualsappropriate for <strong>Nepal</strong>. The committee has clarifiedthat the existing cash basis accounting is inadequateto present a comprehensive financial situation <strong>of</strong>the government reincarnating the debate on accrualaccounting.Conclusion: What is the bestalternative for <strong>Nepal</strong>?There is an ongoing trend to transform the accountingsystem from cash to accruals in the public sector inWestern countries. There is no doubt that accrualaccounting engenders better and comprehensiveinformation, as compared to cash accounting,for financial decision-making and accountability.However, it is also evident that accrual accountingis a problematic reform and becoming less and lesssuccessful in many jurisdictions, including WesternEurope (Lapsley et al., 2009). Even the countries suchas Australia and the UK, the so-called front runnersin the adoption <strong>of</strong> accrual accounting, are still in theprocess <strong>of</strong> maturing and institutionalizing accrualaccounting reforms. As a result there is increasinghesitation among countries whether or not they shouldadopt accrual accounting. Many countries includingGermany, the Netherlands, Malaysia, Norway, andNamibia, among others, have prioritized improvementsin their existing cash basis accounting rather thanembarking on move towards the accrual basis <strong>of</strong>accounting. Similarly, a large number <strong>of</strong> developingnations have been considering the adoption <strong>of</strong> the cashbasis IPSAS in the near future as part <strong>of</strong> improvementsin their existing cash accounting (IFAC, 2010).Given the poor infrastructure along with inadequateresources and expertise, <strong>Nepal</strong> is indeed not in aposition to reap the benefits <strong>of</strong> accrual accounting.Instead <strong>of</strong> debating on accrual accounting, anincremental approach, as stated by Athukorala andReid (2003), therefore seems to be a better alternativefor the government <strong>of</strong> <strong>Nepal</strong>. This alternative impliesimproving the existing cash basis accounting andfinancial reporting at the outset and gradually adoptinga modified version <strong>of</strong> accrual accounting using theaccrual basis IPSASs. International experience showsthat it takes a time period <strong>of</strong> around 8-10 yearsto fully implement accrual accounting even in theICAN OBJECTIVES• To play the role <strong>of</strong> regulatory body in order to encourage the members to carry on accountingpr<strong>of</strong>ession being within the limit <strong>of</strong> the code <strong>of</strong> conduct laid down so as tomake accounting pr<strong>of</strong>ession transparent.• To develop, protect and promote the accounting pr<strong>of</strong>ession by making the members andthe practicing accountants understand the responsibility towards the importance <strong>of</strong> theaccounting pr<strong>of</strong>ession and the accountancy.• To provide quality pr<strong>of</strong>essional education to accounting pr<strong>of</strong>essionals in consonance withinternational norms and practice so as to make the accounting pr<strong>of</strong>ession respectableand reliable.• To support the government with constructive suggestions towards the formulation andthe revision <strong>of</strong> legislation in regards to commerce, trade, accounting, revenue etc.• To support the economic development process by increasing the confidence among investorsand general public towards the capital market by pronouncing the standards <strong>of</strong>discloses in financial reporting practices.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 17
ACCOUNTINGWCOA–The Olympics <strong>of</strong> <strong>Accountants</strong>CA. Paramananda Adhikari*Background/AbstractRecently, I have participatedin the 18 th World Congress <strong>of</strong><strong>Accountants</strong> (WCOA), fondlycalled “<strong>Accountants</strong> Olympics orWorld Cup” which took place inKuala Lumpur, Malaysia from 8-11November 2010. It has been, <strong>of</strong>course, an awesome experiencefor me. It was world’s singlelargest gathering <strong>of</strong> accountantsrecorded so far with over 6,000delegates from 134 countriesacross the globe, a recordbreakingnumber. In this congress,significant presence was fromAfrica. Over 800 accountants werefrom Nigeria and many more fromother African countries. It was the2 nd highest number in the congressafter Asia. This provided a greatcolour to the occasion.The organizers <strong>of</strong> the congresswere the International Federation<strong>of</strong> <strong>Accountants</strong> and the Malaysian<strong>Institute</strong> <strong>of</strong> <strong>Accountants</strong>. Itwas held in the Kuala LumpurConvention Centre (KLCC), whichwas a wonderful venue next tothe Petronas Twin Tower, the pride<strong>of</strong> Malaysia that perfectly suiteda conference <strong>of</strong> the size <strong>of</strong> over6,000 delegates.The congress originated in 1904, has been held regularlysince 1977 in every five years and since 2002 in everyfour years. The congress has been organized underthe aegis <strong>of</strong> IFAC, the global organization for theaccountancy pr<strong>of</strong>ession representing over 2.5 millionaccountants across 163 member organizations spreadover 124 countries. It is the foremost international eventfor the accountancy pr<strong>of</strong>ession. This overwhelmingparticipation <strong>of</strong> the accountants is highly acclaimedacross the globe.The opening ceremony <strong>of</strong> the congress was amazing fromthe perspective <strong>of</strong> sitting in a room with over 6,000accountants. Robert Bunting, the outgoing president<strong>of</strong> IFAC opened the congress on 8 th evening. The PrimeMinister <strong>of</strong> Malaysia, Honorable Mohammad NajibBin Tun Haji Abdul Razak was supposed to representat the occasion, was unavoidably absent having justbeen discharged from hospital a day before the event.However, Minister Nor Mohamed Yakcop delivered PrimeMinister’s speech on the occasion.The Theme:The theme <strong>of</strong> congress was “<strong>Accountants</strong>: SustainingValue Creation”. The congress was held in Malaysia forthe first time, brought together 183 eminent speakersfrom over 40 countries. I felt, the theme perfectlymatched and was quite appropriate with the role <strong>of</strong>the accountants’ benefit to the performance <strong>of</strong> anorganization. Value creation obviously becomes vitalto the business agenda, more and more accountantsare active in strategic, leadership roles, and being heldmore accountable for the business performance <strong>of</strong> theirorganizations.* The author is Technical Director <strong>of</strong> ICAN and ex-Executive Secretary <strong>of</strong> SAFAThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 19
ACCOUNTINGFurther, in my view, the theme <strong>of</strong> the congress clearlytransmits the message that our history <strong>of</strong> take, makeand waste is not sustainable in the long run. Theearth has neither limitless resources nor it can haveenough capacity to store the waste. Natural assets dohave a cost. Therefore, the business impact on theenvironment and society needs to be reported on andthe accountants should have the role <strong>of</strong> measuringthese impacts."One significant message from thesesessions is that sustainable valuecreation is built on trust, relevance,technical standard and leadership intoday’s vibrant economy."The Speakers at the CongressThe speakers at the congress were the renowned,world-class experts in their knowledge and experience.Among the distinguished speakers were Dr. WangJun, China’s Vice Minister <strong>of</strong> Finance, Pr<strong>of</strong>. StavrosThomadakis, Chairman <strong>of</strong> the International PublicInterest Oversight Board, Sir David Tweedie, Chairman<strong>of</strong> IASB, Mr. Michel Prada, Chairman <strong>of</strong> the InternationalValuation Standards Council, Dr. Zeti Akhtar Aziz,Governor, Bank Negara Malaysia, Dr. Paul Pacter, BoardMember IASB, Pr<strong>of</strong>. In Ki Joo, President-CAPA, Mr.Goran Tidstrom, President, IFAC, Mr. Robert L. Bunting,outgoing President, IFAC, Pr<strong>of</strong>. Dr. Arnold Schilder,Chairman, IAASB and many more others.Plenary SessionsThe plenary sessions were supposed to attend by all theparticipants in the congress. Four Plenary sessions wereheld during the congress. The speakers for each wereworld class in their experience <strong>of</strong> the subjects whichwere:PlenarySession1.2.Topics<strong>Accountants</strong> : Sustaining Value Creation in theBorderless EconomyIslamic Finance : Strengthen the Global FinancialMarket3.4.Accounting for Sustainability : The ConnectedReporting Framework<strong>Accountants</strong> in the Next Decade : EmbracingChange and Seizing OpportunitiesThe plenary sessions were most stimulating. It wasparticularly interesting to know about Islamic Finance,something we all need to understand which is basedon Shariah Principles. The main feature <strong>of</strong> the IslamicFinance system is prohibition <strong>of</strong> the payment andreceived <strong>of</strong> interest (riba). Interest (riba) refers to anincrease or excess, which accrues to the owner in anexchange or sale <strong>of</strong> a commodity or by virtue <strong>of</strong> a loanarrangement without providing any equivalent value tothe other party. Money is not considered a commodityin Islam. The prohibition <strong>of</strong> interest arises from thefact that money is only perceived as a medium <strong>of</strong>exchange and unit <strong>of</strong> measurement.All the sessions concluded the need for globalaccounting standards and a reporting framework toinclude social and environmental measurements. Onesignificant message that I have learned from thesesessions is that sustainable value creation is built ontrust, relevance, technical standard and leadership intoday’s vibrant economy.Concurrent Sessions:There were 35 concurrent sessions heldsimultaneously. A delegate could attend maximum5 concurrent sessions out <strong>of</strong> 35, during the wholecongress program. Delegates who came from acrossthe globe attending the congress were to very eagerfor choice <strong>of</strong> topic when it comes to decide on whichconcurrent session they should to attend. With 35sessions to choose from, running on five tracks, a widerange <strong>of</strong> topics and issues has covered by prominentspeakers at the largest world congress to date. At theconcurrent sessions the key issues discussed, interalia were accounting ethics, corporate governance,standards, development <strong>of</strong> the accounting pr<strong>of</strong>ession,corruption and money laundering, XBRL, climatechange, IFAC member body compliance, SMEs andSMPs, forensic accounting etc. Issues <strong>of</strong> convergence<strong>of</strong> national standards with IFRS were also deliberated.The details <strong>of</strong> topics <strong>of</strong> the concurrent sessions aregiven in the following table.20 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
ACCOUNTINGS.N. Concurrent Session-1: Topics1.2.International Financial Reporting Standards (IFRS)for Small and Medium Enterprises (SMEs)Developing the Pr<strong>of</strong>ession Globally -The IFAC’sDriving Force3.Human Governance -The Nucleus <strong>of</strong> CorporateGovernance4.International Financial Reporting Standards (IFRS)Convergence-The Way Forward5.Corporate Reporting to Business Reporting – The WayForward6.Strengthening the Accounting Pr<strong>of</strong>ession in EmergingEconomies7.Accounting Technicians – The Building Block <strong>of</strong> theFinancial Reporting Chain8. Monitoring Group ReviewS.N. Concurrent Session-3: Topics1.Capacity Building for Small and Medium Practices(SMPs) IFAC’s Initiatives2.Public Sector Accounting Overcoming the Issues andChallenges3.Risk Management and Internal Control-DoesCompliance Cost Outweigh the Benefits4. The Essence <strong>of</strong> Audit Quality - A Panel Discussion5.Quality Business Reporting for Decision Making – TheBest Practices6.eXtensible Business Reporting Language (XBRL) – AnUpdate7. Climate Change Reporting - Saving the EarthS.N. Concurrent Session-5: Topics1.Role <strong>of</strong> Small Medium Practices (SMP) in ProvidingBusiness Support Services2.International Ethics Standards Board (IESBA) –Adopting the New Code <strong>of</strong> Ethics3.The Effect <strong>of</strong> Shariah Principles on AccountingMethods for Islamic Banks4.Function <strong>of</strong> National Standard Setters in anInternational Environment – Is Relevance Lost ?5.Forensic Accounting Addressing the Challenges in aDigital Environment6. Research Supporting IFAC’s Standard Setting BodiesS.N. Concurrent Session-2: Topics1.SME Financing in the Global Market – Is There Roomfor Improvement?2.International Auditing and Assurance StandardsBoard (IAASB) Agenda3.Enterprise Governance Framework-Can We Afford toRock the Boat?4.Oversight Boards-The Global Experience andLearning5. Convergence The Regulators’ Perspective6.Fighting Corruption & Money Laundering-TheOngoing Battle for <strong>Accountants</strong>7. Shaping the Next Generations <strong>of</strong> <strong>Accountants</strong>S.N. Concurrent Session-4: Topics1. Review and Compilation Services 20112.International Education Standards – Upholding theRelevance for the Future3.A Globally Integrated Enterprise – Business withoutBorders4.IFAC Member Body Compliance Program – How is itworking ?5.Fair Value Accounting - Valuation Specialists inCorporate Reporting Chain6.Corporate Responsibility – Meeting the StakeholdersExpectations7.The Resilience <strong>of</strong> Islamic Finance in a GlobalFinancial MeltdownAmong the concurrent sessions, I attended thesession <strong>of</strong> IFRS Convergence. The prominent speakershighlighted about how to facilitate the adoption <strong>of</strong>international financial reporting standards (IFRS)in local context, how local standard setters areinfluencing the International Accounting Standard Board(IASB) and how they serve as an approving body for thelocal issuance <strong>of</strong> the IFRS.The other interesting session that I attended wasSMEs financing in global market. It was highlightedin the plenary session as well as concurrent sessionthat the SME’s are the backbone <strong>of</strong> all economies andrecovery from the global financial crisis. Thereforeaccounting bodies should be supporting small andmedium practices that support the SME sector. Aflourish SME sector is a vital part <strong>of</strong> job creation, socialcohesion, innovation and economic growth. In many, ifnot most, countries around the world, SMEs representThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 21
ACCOUNTINGthe vast majority <strong>of</strong> entities as well as the majority<strong>of</strong> private sector employment and GDP. According tothe OECD, SMEs accounts for over 95% <strong>of</strong> enterprisesand approximately 60–70% <strong>of</strong> employment in OECDcountries.The next session outlined IFAC initiatives for theSMP sector, which included more prominence <strong>of</strong> SMPmembers on boards, committees, and a change infocus to “small is beautiful” rather than the “big one”.Therefore, IFAC recognizes the importance <strong>of</strong> SMEs andprovides valuable support to SME Sector through theirmember bodies so that they can provide better servicesto their SME clients-services that meet the SMEs’ needsand are <strong>of</strong> high quality; this in turn helps SMEs to growand develop.The final session I attended was related to Role <strong>of</strong> SMPsin Providing Business Support Services. The speakersdescribed it from their own country perspective andseem useful to be shared.Challenges to AccountingPr<strong>of</strong>ession and <strong>Accountants</strong>The event was important due to the attendance <strong>of</strong>prominent players in the business world across theglobe. The congress served as an excellent platform forexchange <strong>of</strong> ideas on issues and challenges faced bythe global accounting fraternity and the wider businesscommunity. The congress was held at the time, whenthe world expects the accountants to act more in thepublic interest to sustain the values they have created.Pr<strong>of</strong>essional <strong>Accountants</strong> exist because <strong>of</strong> societallicense given to them by the society. They are thereforerequired to act in the best interest <strong>of</strong> the public andnot just serve the interest <strong>of</strong> a particular/sectionalgroup. Pr<strong>of</strong>essional accountants operate in all facets<strong>of</strong> the global economy creating value and upholdingbusiness integrity in both the private and publicsectors. In a world demanding short-term solutions, thepr<strong>of</strong>essional accountants are challenged to sustain longtermgrowth in the current vibrant economy.The global bond <strong>of</strong> the pr<strong>of</strong>ession will be moredeveloped in the days ahead because <strong>of</strong> borderlesseconomy. The shift <strong>of</strong> power to the emerging economieswill also influence the role <strong>of</strong> accountants in thecoming years. Ethical standards, social responsibilityand sustainable reporting, <strong>of</strong> course, will influenceinto the future corporate reporting. As a single set <strong>of</strong>global financial reporting standards, known as IAS/IFRSbecame more popular globally and financial reportinghas changed radically over the past ten years. Theimpact <strong>of</strong> non-financial information on the corporatereporting shows that sustainable business is a longtermbusiness and thereby reporting and measuring thesustainable actions will be vital both for the businesssociety and for pr<strong>of</strong>essional accountants.SAFA Forum-2010For this year, the representative <strong>of</strong> ICAN, Mr. KomalChitracar has been elected to the high <strong>of</strong>fice, aspresident <strong>of</strong> South Asian Federation <strong>of</strong> <strong>Accountants</strong>(SAFA). In his initiation, the 14 th SAFA Board Meetingheld on 8 August 2010 at Dhaka, Bangladesh inter alia,decided to organize the SAFA Forum on 8 November2010, before the opening ceremony <strong>of</strong> WCOA. I was alsopart <strong>of</strong> the Forum since I was coordinating the programas the Executive Secretary <strong>of</strong> SAFA. The Forum playedhost to myriads <strong>of</strong> enthusiastic and curious pr<strong>of</strong>essionalsfrom SAFA member bodies, African countries, Malaysia,Europe and so on.A panel discussion on the theme “Implementation IFRSand IPSAS in Developing Countries” was organized. Mr.Komal Chitracar chaired the session. Other eminentspeakers were Mr. Kevin Stevenson, Chairman,Australian Accounting Standards Board, Pr<strong>of</strong>. Dr.Andreas Bergmann, Chairman, IPSAS Board, IFAC, Mr.Ken Pushpanathan, Board Member, Malaysian Accounting22 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
ACCOUNTINGStandards Board, Mr. Nishan Fernando, Past President,<strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> Sri Lanka andMr. Federico Diomeda, CEO, European Federation <strong>of</strong><strong>Accountants</strong> and Auditors. Mr. Kevin Stevenson wasthe moderator <strong>of</strong> the panel discussion while Mr. A. N.Raman, Vice President, SAFA highlighted the objective<strong>of</strong> holding the SAFA Forum and expected outcome.At the outset, Mr. Kevin briefed about the topic andrequested each speaker <strong>of</strong> the panel to speak fromtheir country perspective on the topic specific. Pr<strong>of</strong>.Andreas highlighted about the possible strategies forimplementing international public sector accountingstandards in a developing economy, while Mr.Pushpanathan highlighted about the lessons thatMalaysia has learned from the implementation <strong>of</strong> IFRS.Likewise, Mr. Nishan and Mr. Federico highlighted abouthow Sri Lanka is moving towards implementing IFRSand the lessons to be learnt from Europe’s transition toIFRS. In the Panel discussions, the following questionswere raised and the speakers addressed the issuesamicably.• What are the critical prerequisites before adoptinginternational standards (e.g. qualified people,training, translation, recourse to technicalexpertise, political and preparer support)?• What could a regional body like SAFA do to assist itsmembers’ transition to international standards? Andwho else could help?• What is the role <strong>of</strong> the national standard-setterwhen international standards are to be adopted?• What is the role <strong>of</strong> other regulators, especiallyin relation to giving authority to internationalstandards and enforcement?• What are the penalties to be incurred if transitionis delayed?• Which sector should be transformed first–theprivate or public sector? Which sector is mostimportant in developing countries?• International standards are heading towards beingprinciple-based and yet most developing countriesfeel a great need for implementation guidance.How can this issue be resolved without writingdomestic rules?• How should developing countries addressdifferential reporting?At the end <strong>of</strong> the panel discussion, participantsunanimously viewed that this kind <strong>of</strong> programfacilitates to understand the sharing <strong>of</strong> ideas andexperiences with the international experts on the topicspecific.Special address by Dr. MahathirMohammadOn 10 November 2010, after the concurrent sessions,I had an opportunity to see Dr. Mahathir, the formerPrime Minister <strong>of</strong> Malaysia, in person. Dr. Mahathir isknown for his unconventional insights, ideas and viewson the present issue <strong>of</strong> global financial and economiescrises facing world today.The session was about an hour starting from 4.00 PMonwards at the Plenary Hall, KLCC. The session wasexclusively organized for WCOA 2010 delegates and theregistration was on complimentary with available seats.I was in a rush to Plenary Hall after the concurrentsession was over to see Dr. Mahathir. To my surprise,I found him a person good humor. The WCOA 2010delegates were very eager to listen to Dr. Mahathir.They were pushing and pulling each other to reservethe seat at the Hall.Finally, at the scheduled time Dr. Mahathir gave his extempopresentation on “Transitioning to a SustainableGlobal Financial System”. He managed to linkeverything with the topic. He was so humorous that hemade the accountants more and more laugh at the Hall.After his presentation, there was a Question andAnswer session, which was so funny but intellectual.Exactly I cannot recollect right now, all the questionsraised by the delegates from Nigeria, Thailand, Ghanaand many others. However, I remember how thedelegates from Japan and Pakistan were tremblingwhen asking questions to Dr. Mahathir.The delegate from Japan asked the questions like-youPrime Minister, not Prime minister now, are you stilllooking east?Then he replied so sweetly. He said, “when we look at acountry, we want to learn something from them. Japanand Korea are doing so well. Now, Japan is not doingso well and many Japanese people asked me, do youThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 23
ACCOUNTINGstill look at us? Still looking east? His answer was YES.Because we want to know the mistakes that, you made,so that we do not do the same mistakes’.Then the delegate from Pakistan, raised a questionabout the monetary value <strong>of</strong> Pakistani currency unitRs.86 is equal to 1 USD and Pakistani Rs. 26 is equal to 1Malaysian Ringgit. Is this a symbol <strong>of</strong> strong economy <strong>of</strong>Malaysia to have good leaders like you?Dr. Mahathir’s answer was ‘when you choose a leader,you have to let them time to perform. They have tostudy so they need time. You cannot go around andshoot them.’ While speaking, the hall was with full <strong>of</strong>laughter, which was, in fact, real. May be after givingthe reasonable time, if they are still not performingthen you might have a valid reason to shoot them. Thenhe added ‘the only reason I survived as Prime Ministerin Malaysia, is because Malaysian people are not thatmuch violent.”<strong>Nepal</strong>ese Delegates at WCOA 2010 with <strong>Nepal</strong>ese Ambassador to MalayasiaDr. Rishi Adhikaripr<strong>of</strong>ession? Are we really benefitted from the“<strong>Accountants</strong> Olympics”? Are we, going to contributesomething to the <strong>Nepal</strong>ese accounting pr<strong>of</strong>ession?Whether we would be able to create and sustain valuefrom the lessons learned by attending the 18th WorldCongress is questionable.Here, I thought it would be worthwhile to share theseideas and experience to others so that they couldknow something about Mahathir. I have written theseparagraphs being based on what I learned from hisspeech.Looking forward:<strong>Nepal</strong> had a significant presence, eleven in number, atthe Congress as per the size <strong>of</strong> its current membership.Eleven <strong>Nepal</strong>ese were part <strong>of</strong> over 6,000 delegates from134 countries. In fact, Nigeria had the second largestnumber <strong>of</strong> participants over 800 after the host countryMalaysia which registered over 2,000 participants. Notonly did ICAN participate through its President, VicePresident, and Council Members, I was also the part <strong>of</strong>the team, working as the Executive Secretary <strong>of</strong> SAFA.In appreciation <strong>of</strong> the participation <strong>of</strong> the <strong>Nepal</strong>eseaccountants, the <strong>Nepal</strong>ese Ambassador to Malaysia Dr.Rishi Adhikari attended the opening ceremony <strong>of</strong> WorldCongress <strong>of</strong> <strong>Accountants</strong> 2010. The ambassador fullypraised the <strong>Nepal</strong>ese accountants for being the pride<strong>of</strong> the country by making their strong presence at thecongress.Adieu to the WCOA 2010The beauty <strong>of</strong> the Kuala Lumpur city and the level<strong>of</strong> economic and technological development <strong>of</strong> theMalaysia were palpably incredible. Suffice to saythat the organization <strong>of</strong> the congress was marvelous.Moreover, the participants from all over the countriessavored it all. The programme ended on Thursday 11November 2010 with fond memories <strong>of</strong> Kuala Lumpurthat will remain in our memory indelible for a longtime. The President <strong>of</strong> IFAC, Mr. Goran Tidstrom,presented the closing address to the congress.To my mind, I had never been in such an interestingevent before, that the preparation, publicity andregistration for WCOA 2014, to be held in Rome, Italyfrom 10-14, November 2014, had already begun.As the delegates left the KLCC, taking picturesand exchanging complimentary cards. The partingphrase for some was “See you in Rome’’. Attendingthe congress was a wonderful experience and ithas renewed energy, enthusiasm and pride to theaccounting pr<strong>of</strong>ession. I hope it is same for all 6,000delegates across the globe.Nevertheless, for <strong>Nepal</strong>ese, the question was ‘’whenwill we be capable to strengthen our accounting24 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
organizationOrganizational CultureCA. Mahesh DhakalOrganizational culture describes thepsychology, attitudes, experiences,beliefs and values (personal andcultural values) <strong>of</strong> an organization.It has been defined as the specificcollection <strong>of</strong> values and norms thatare shared by people and groups in anorganization and that control the waythey interact with each other and withstakeholders outside the organization.Organizational values are known asbeliefs and ideas about what kinds<strong>of</strong> goals members <strong>of</strong> an organizationshould pursue and ideas about theappropriate kinds or standards <strong>of</strong>behavior organizational membersshould use to achieve these goals.From organizational values developorganizational norms, guidelinesor expectations that prescribeappropriate kinds <strong>of</strong> behavior byemployees in particular situations andcontrol the behavior <strong>of</strong> organizationalmembers towards one another.Buchanan and Huczynski saysorganizational culture is not the sameas corporate culture. It is wider anddeeper concepts, something that anorganization ‘is’ rather than what it‘has’.Corporate culture is the total sum <strong>of</strong>the values, customs, traditions andmeanings that make a company unique.Corporate culture is <strong>of</strong>ten called “the character <strong>of</strong>an organization” since it embodies the vision <strong>of</strong> thecompany’s founders. The values <strong>of</strong> a corporate cultureinfluence the ethical standards within a corporation, aswell as managerial behavior.Senior management may try to determine a corporateculture. They may wish to impose corporate valuesand standards <strong>of</strong> behavior that specifically reflect theobjectives <strong>of</strong> the organization. In addition, there willalso be an extant internal culture within the workforce.Work-groups within the organization have their ownbehavioral quirks and interactions which, to an extent,affect the whole system. Roger Harrison’s four-culturetypology, and adapted by Charles Handy, suggests thatunlike organizational culture, corporate culture canbe ‘imported’. For example, computer technicianswill have expertise, language and behaviors gainedindependently <strong>of</strong> the organization, but their presencecan influence the culture <strong>of</strong> the organization.Strong culture is said to exist where staff respond tostimulus because <strong>of</strong> their alignment to organizationalvalues. In such environments, strong cultures help firmsoperate like well-oiled machines, cruising along withoutstanding execution and perhaps minor tweaking <strong>of</strong>existing procedures.Conversely, there is weak culture where there is littlealignment with organizational values and controlmust be exercised through extensive procedures andbureaucracy.Where culture is strong - people do things becausethey believe it is the right thing to do- there is a risk* Mr. Dhakal is working in Commerze and Trust Bank Ltd.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 25
organization<strong>of</strong> another phenomenon, Groupthink. Groupthink asdescribed by Irving L. Janis is a quick and easy wayto refer to a mode <strong>of</strong> thinking that people engagewhen they are deeply involved in a cohesive ingroup,when members’ strivings for unanimity override theirmotivation to realistically appraise alternatives <strong>of</strong>action. This is a state where people, even if they havedifferent ideas, do not challenge organizational thinking,and therefore there is a reduced capacity for innovativethoughts. This could occur, for example, where thereis heavy reliance on a central charismatic figure inthe organization, or where there is deep belief in theorganization’s values, or also in groups where a friendlyclimate is at the base <strong>of</strong> their identity (avoidance <strong>of</strong>conflict). In fact group think is very common, it happensall the time, in almost every group. Members that aredefiant are <strong>of</strong>ten turned down or seen as a negativeinfluence by the rest <strong>of</strong> the group, because they bringconflict.We can observe culture <strong>of</strong> an organization and askquestions in the manner listed below-Observe Culture• What do <strong>of</strong>fices looklike• How are peopledressed• Where do they eatlunch• How would you characterizethe peoplein the hall-formal orinformal & laughing orserious• What kinds <strong>of</strong> pictures,signs, jokes are onthe walls? Listen forparticular languageAnd, notice the features <strong>of</strong>culture <strong>of</strong> an organization.Ask questions, like• Tell me the organizationalcreation story• How do new people‘learn the rope’ in theorganization ?• What gets noticed (andrewarded) ?• Are some people on thefast tract and if so, howdid they get there ?• What are some taboosthingspeople shouldnever do ?• If a team accomplishessomething great, whathappens ?• Describe the organizationin three words• If the organization werean animal, what wouldit be ?Innovative organizations need individuals who areprepared to challenge the status quo -be it groupthinkor bureaucracy, and also need procedures to implementnew ideas effectively. According to Schein, culture isthe most difficult organizational attribute to change,outlasting organizational products, services, foundersand leadership and all other physical attributes <strong>of</strong> theorganization.Culture is very hard to change and employees needtime to get used to the new way <strong>of</strong> organizing. Forcompanies with a very strong and specific culture it willbe even harder to change. Cummings & Worley give thefollowing six guidelines for cultural change.1. Formulate a clear strategic vision: In order to makea cultural change effective a clear vision <strong>of</strong> thefirm’s new strategy, shared values and behavioursis needed. This vision provides the intention anddirection for the culture change.2. Display Top-management commitment: It is veryimportant to keep in mind that culture change mustbe managed from the top <strong>of</strong> the organization, aswillingness to change <strong>of</strong> the senior management isan important indicator. The top <strong>of</strong> the organizationshould be very much in favour <strong>of</strong> the change inorder to actually implement the change in the rest<strong>of</strong> the organization.3. Model culture change at the highest level: In orderto show that the management team is in favour <strong>of</strong>the change, the change has to be notable at first atthis level. The behaviour <strong>of</strong> the management needsto symbolize the kinds <strong>of</strong> values and behavioursthat should be realized in the rest <strong>of</strong> the company.It is important that the management shows thestrengths <strong>of</strong> the current culture as well, it must bemade clear that the current organization does notneed radical changes, but just a few adjustments.4. Modify the organization to support organizationalchange: The fourth step is to modify theorganization to support organizational change.5. Select and socialize newcomers and terminatedeviants: A way to implement a culture is toconnect it to organizational membership, peoplecan be selected and terminate in terms <strong>of</strong> their fitwith the new culture.6. Develop ethical and legal sensitivity: Changes inculture can lead to tensions between organizationaland individual interests, which can result inethical and legal problems for practitioners. Thisis particularly relevant for changes in employeeintegrity, control, equitable treatment and jobsecurity.26 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
organizationOne <strong>of</strong> the key factors for successful operation isoperating environment and it is largely influenced bythe culture. Taking in another way, one can find theculture <strong>of</strong> an organization by looking at the arrangement<strong>of</strong> furniture, what they brag about, what members wear- similar to what one can use to get a feeling aboutsomeone’s personality.Organizational change efforts <strong>of</strong>ten fail because <strong>of</strong>lack <strong>of</strong> understanding about the strong role the cultureplays in organizations. That’s one <strong>of</strong> the reasons thatmany strategic planners now place as much emphasison identifying strategic values as they do mission andvision. The strongest component <strong>of</strong> culture is the beliefsand attitudes <strong>of</strong> the employees, the people who makeup the culture. This is shown in their behaviours as:“People really care if you do a good job in thisorganisation”.Charley points outs 4 types <strong>of</strong> culture in anorganization-Power CultureRole CultureTask CulturePerson CultureEach culture, stems from different assumptions aboutthe basis <strong>of</strong> power and influence, what motivatespeople, how people think and learn, and how changeshould occur.Power CultureIt is like a web with a ruling spider. Those in the webare dependent on a central power source. Rays <strong>of</strong> powerand influence spread out from a central figure or group.Role CultureOften referred to as a bureaucracy - controlled byprocedures, role descriptions and authority definitions.Co-ordination is at the top. Job position is central -value predictability and consistency - may find it harderto adjust to change.Task CultureIt is very much a small team approach - the networkorganization - small organizations co-operating togetherto deliver a project. The emphasis is on results andgetting things done. Individuals empowered withdiscretion and control over their work. It is consideredto be flexible and adaptable.Person CultureThe individual is the central point. If there is astructure it exists only to serve the individuals withinit. The culture only exists for the people concerned; ithas no super-ordinate objective. It tends to have strongvalues about how they will work. They are verydifficult for the organization to manage.Ceremonies, Rites and Rituals are regular events thatteach people about the culture, and maintain a sense <strong>of</strong>seasonal order. A reference can be made to Stories andMyths as well find organizations developing narrativesto explain and teach. Common examples are storiestold by managers about successes, failures, high visibleactions. Stories usually have a basis in reality; mythscan be fictitious, but so indicative <strong>of</strong> the culture thatpeople tell and retell them anyway.Some organizations develop internal heroic figures,develop acronyms, metaphors, proverbs, and jargonthat have specific meaning inside and signs, companylogos, the way <strong>of</strong>fices look, the type <strong>of</strong> clothing thatis allowed are all symbolic reflectors <strong>of</strong> a culture. Forexample, well dressed-up employees exhibit goodworking culture within the organization.We need to create a culture that is in keeping with thevalues <strong>of</strong> an organization. The vision and values providethe psychological content in which people commit tothe organization. Values are the qualitative goals thatthe company strives to achieve in all its activities. Theyare intended to release energy and motivate people towork together collectively.How does the leader communicate, how people areexpected to behave is very important in buildingorganizational culture. It, in turn, sets the culturalstandard for others to follow.Culture improvement can be achieved with thefollowing exercises.Establish a clear vision and mission for the organizationCheck it out for yourselfKeep the mission up frontEstablish behaviors consistent with culture and setexampleThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 27
organizationMake employee learning an ongoing practiceChange <strong>of</strong> culture in the organizations is veryimportant and inevitable. Cultural innovationis more difficult than cultural maintenance andthe former must be made a continuous processbecause it entails introducing something new andsubstantially different from what prevails in existingcultures. People <strong>of</strong>ten resist changes hence it isthe task <strong>of</strong> the management to convince peoplethat likely gain outweighs the losses. Besidesinstitutionalization, adoration is another process thattends to occur in strongly developed organizationalcultures. The organization itself may come to beregarded as precious in itself, as a source <strong>of</strong> pride,and in some sense unique. Organizational membersbegin to feel a strong bond with it that transcendsmaterial returns given by the organization, andthey begin to identify with in. And ultimately, theorganization turns into a sort <strong>of</strong> clan.28 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
IFRSIFRS and First Time AdoptionCA. Sewa Pathak*Never in the history and development <strong>of</strong>international standards for accounting andauditing have they reached such greaterprominence than today as the wholeworld moves closer towards internationalconvergence. With over 100 countriesrequiring or accepting InternationalFinancial Reporting Standards, there islikelihood that all companies around theglobe will be using the same accountingstandards in the near future.For accounting standards to garnerworldwide acceptance they must beapplied universally. Comparabilityis essential if “in accordance withIFRS” means that the same or similartransactions are accounted for the sameway everywhere, producing financialstatements in accordance with IFRSwill add value. Investors would nolonger need to waste time and effort toreconcile financial information as theycompare similar companies from differentcountries. Capital would flow moreefficiently, at less cost to more companiesin more places.First time adoptionIFRS 1 was created to assist companiesin their transition to IFRS and to providepractical accommodations to make firsttime adoption cost-effective and lessburdensome.IFRS 1, First-time Adoption <strong>of</strong> IFRS is a financial reportingstandard under International Financial Reporting Standards(IFRSs) that stipulates the requirements for an entity thatis preparing IFRS compliant financial statements for thefirst time. It provides guidance during the preparation <strong>of</strong>the company’s first IFRS based financial statements IFRS-1is applied only once.What does IFRS 1 require?Many companies will require making changes in theirexisting accounting policies in order to comply withIFRS such as revenue recognition, inventory accounting,financial instruments, employee benefit plans, impairmenttesting, provisions and stock based compensation.The key principle <strong>of</strong> IFRS is a full retrospectiveapplication <strong>of</strong> all IFRS standards that are effective as<strong>of</strong> the closing balance sheet date or reporting date <strong>of</strong>the first IFRS financial statements. IFRS 1 requires thecompanies to• Identify first IFRS financial statements.• Prepare an opening balance sheet at the date <strong>of</strong>transition to IFRS.• Select accounting policies that comply with IFRS andapply those policies retrospectively to all the periodspresented in the first IFRS financial statements.• Consider whether to apply any <strong>of</strong> the optionalexemptions from retrospective application.• Apply the four mandatory exceptions fromretrospective application.• Make extensive disclosures to explain the transition toIFRS.IFRS 1 is continuously updated to addresses the issues* Ms. Pathak is a CA Member <strong>of</strong> ICAN.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 29
IFRSfaced at first time adoption. To make lessen the burden<strong>of</strong> retrospective application optional exemptions areavailable. These exemptions are available to all the firsttime adopters.As mentioned above, although exemptions provide somerelief to first time adopters particularly in areas whereapplying IFRS retrospectively is a challenge, there arehowever no exceptions from the disclosure requirementsin IFRS. Many companies will face difficulty in derivinginformation and data for retrospective disclosures.When to apply IFRS 1Companies with apply IFRS 1 when they are transitionfrom their current standards to IFRS and prepare theirfirst IFRS financials statements.The Opening IFRS balance sheetThe opening IFRS balance sheet is the starting point <strong>of</strong>all subsequent accounting under IFRS and is preparedat the date <strong>of</strong> transition which is the beginning <strong>of</strong> theearliest period for which full comparative informationis presented in accordance with IFRS. For examplepreparing IFRS financial statements for the two yearsending 31 Asadh 2068 would have a transition date <strong>of</strong>1 Srawan 2066. That would also be the date <strong>of</strong> openingIFRS balance sheet.IFRS 1 requires the opening IFRSBalance Sheet.• Include all <strong>of</strong> the assets and liabilities that IFRSrequire.• Exclude any assets and liabilities that IFRS does notpermit• Classify all assets and liabilities and equity inaccordance with IFRS.• Measure all items in accordance with IFRS.• Be prepared and presented within an entity’s firstIFRS financial statements.These general principles are followed unless one <strong>of</strong> theoptional exemptions or mandatory exemptions doesnot require or permit recognition, classification andmeasurement in line with the above.What is Mandatory Exemptions?The IASB has accessed that retrospective application <strong>of</strong>change in accounting policies in certain situations cannotbe performed with sufficient reliability. Therefore IFRS1 contains four mandatory exceptions to the generalprinciple <strong>of</strong> retrospective application.30 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 20111. De-recognition <strong>of</strong> financial assets and financialliabilities.2. Hedge Accounting3. Accounting Estimates and4. Assets classified as held or sale or discontinuedoperations.What is Optional Exemptions?In number <strong>of</strong> areas, retrospective application <strong>of</strong> IFRSshall require significant resources and may in certainsituations be impractical. In such circumstances, IASBhas decided that the cost <strong>of</strong> applying IFRS retrospectivelymay exceed the benefits in certain instances. IFRSprovides optional exemptions to general principles <strong>of</strong>retrospective application. Since these exemptions areoptional the entities may change their accounting policiesretrospectively if they desire provided they can computethe effects reliably.There are optional exemptions in the following areas• Business combinations• Fair value or revaluation or deemed cost• Employees benefits• Cumulative translation differences• Compound financial instruments.• Assets and liabilities <strong>of</strong> subsidiaries• Designation <strong>of</strong> previously recognized financialinstruments.• Share based payments• Insurance contracts and• Changes in existing decommissioning, restoration andsimilar liabilitiesThe transition to IFRS can be a long and difficult processwith so many accounting and technical challengesto consider. Although IFRS <strong>of</strong>fers many benefits tothe companies specifically in terms <strong>of</strong> consistency,comparability and efficient use <strong>of</strong> resources, it doescome with certain drawbacks. Changing to IFRS is notsimply a change in accounting procedure. It needs to bea transformation by companies. They need to focus ondeveloping an action plan as well as a clearly definedplan for their future as IFRS users. Since the benefits<strong>of</strong> using IFRS will allow them easier and better foreignmanagement, there should be a plan involving usingthese circumstances to their full benefit. Conversions inEurope and Asia indicates that there are some challengesthat consistently underestimated by companies makingthe change to IFRS including consideration <strong>of</strong> datagaps, consolidation <strong>of</strong> differences in present accountingstandards and IFRS and consideration <strong>of</strong> choices <strong>of</strong>accounting policies.
generalICAI International Conference4th – 6th January 2011 at Vigyan Bhawan, New DelhiAccountancy Pr<strong>of</strong>ession: Catalyst to Sustained Economic GrowthPanel Discussion on Country Perspectiveon Governance & EthicsKey Note Address: Komal Chitracar, IPP, SAFA; 6 January 2010 4:40PMSalutationsSri Amarjit Chopra, President, ICAI; SriG. Ramaswamy, Vice- President, ICAI;Sri Sunir Dhungel, President, ICAN;Distinguished delegates; Ladies andgentlemenNamaskar. Good afternoonIntroductionI sincerely thank ICAI for invitingme to deliver a key note address inthe conference. It is a honour to mepersonally to be standing before youthis afternoon sharing the moments<strong>of</strong> joy with some <strong>of</strong> my personalthoughts on a subject that is veryclose to my heart. It is recognitionfor SAFA and ICAI’s commitment t<strong>of</strong>oster the cooperation with the fellowpr<strong>of</strong>essionals <strong>of</strong> the region I extendhearty thanks to the organizers for thewarm reception and kind hospitalityextended to me, my wife and the<strong>Nepal</strong> delegation being led by ICANPresident Sunir – the warmth in whichyou have welcomed us has given usgreat comfort and pleasure even in theshivering cold wave that the beautifulcity <strong>of</strong> Delhi is experiencing these fewdays.I would like to felicitate ICAI on behalf<strong>of</strong> SAFA. I bring with me greetings fromthe new SAFA President Mr AN Ramanto whom I am going to hand overthe mantle formally in a few days inChennai.Congratulations for having successfully organized theinternational conference on a very topical issue <strong>of</strong> thecontributions that the pr<strong>of</strong>ession can and should makein ensuring sustainable development. The grandeur<strong>of</strong> the conference with a large participation from thevarious countries – developed and developing – is highlyimpressive.SAFA and ICAIBefore entering into the topic <strong>of</strong> discussion this evening,I would like to take this opportunity to speak a fewwords about SAFA.SAFA is committed to positioning, maintaining anddeveloping the accountancy pr<strong>of</strong>ession in SAARC Regionand ensuring its continued eminence in the world <strong>of</strong>accountancy, in the public interest, and towards broadeconomic development <strong>of</strong> the region.SAFA is dedicated to ensure its continued eminence inthe world <strong>of</strong> accountancy; in the public interest andtowards broad economic development <strong>of</strong> the region.SAFA endeavours to contribute towards the economicdevelopment <strong>of</strong> the region by promoting adherenceto high-quality pr<strong>of</strong>essional standards to internationallevel.SAFA provides a forum to deliberate on the issuesspecifically relevant to the developing economies andraising a united voice in the international forum andpresenting the perspective <strong>of</strong> developing economies isessential for addressing their special needs.ICAI is one <strong>of</strong> the founders <strong>of</strong> SAFA which now havenine member bodies. Sri PN Shah <strong>of</strong> ICAI served asits first President in the year 1984-1985. ICAI hasbeen continuously contributing towards achieving theThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 31
generalcherished goals <strong>of</strong> SAFA. I thank ICAI for extending hands<strong>of</strong> cooperation for the growth <strong>of</strong> the pr<strong>of</strong>ession in theSouth Asian Region.SAFA has been helpful in developing pr<strong>of</strong>ession in theeconomies in the region. <strong>Nepal</strong> is proud to be in SAFAand has benefitted immensely from the support <strong>of</strong> themember bodies, particularly <strong>of</strong> ICAI in establishmentand development <strong>of</strong> ICAN. With the active support,advocacy and encouragement from SAFA, the <strong>Nepal</strong>esepr<strong>of</strong>essionals have been able to be recognized as astatutory body with the establishment <strong>of</strong> ICAN in 1997.In line with the decision <strong>of</strong> SAFA, technical cooperationbetween ICAN and ICAI helped institutionalize anddevelop the pr<strong>of</strong>ession in <strong>Nepal</strong>. As I was personallyinvolved in the process, I recall with fond memory thewarmth and goodwill with which ICAI extended the hands<strong>of</strong> cooperation to us. I thank all the <strong>of</strong>ficials <strong>of</strong> ICAI fromthe time then and now for giving continuance to thecooperation.SAFA has proved that together we can grow into aformidable force to meet the international challenges<strong>of</strong> high standards and excellence in pr<strong>of</strong>essionalcapabilities. Together we can contribute towardsuplifting the lives <strong>of</strong> the large mass <strong>of</strong> unfortunatepeople from hunger, disease and poverty.Achievements <strong>of</strong> SAFA in 2010, among others includedthe following two major events, which helped bring SAFAinto international limelight –• The first SAFA Summit was concluded recentlyin Kathmandu with Declaration to work towardsmobilizing the pr<strong>of</strong>essional resources for sustainabledevelopment and successfully held an internationalconference on Sustainable development in SAARCRegion.• The SAFA Forum was held in Kuala Lumpur on theoccasion <strong>of</strong> the World Congress <strong>of</strong> <strong>Accountants</strong>when several international experts participated in apanel discussion on Implementing IFRS and IPSAS indeveloping economies.The topic: Governance & EthicsThere is a very close link between the conference themeand the topic <strong>of</strong> discussion Good governance and ethics arethe prerequisite for sustained economic growth.Accounting pr<strong>of</strong>ession around the globe has been facingmassive challenges to design and maintain mechanismsto assure effective, ethical and responsible corporategovernance. The global economic crisis has taught usmany lessons and emphasized the importance <strong>of</strong> findinginternational solutions. The need for high ethical standardsand stronger corporate governance has been more acutelyfelt. Restoring public confidence in financial reportinghas become a national issue in each country and also aninternational issue with action required at both the levels.Sustainable development is a universal challenge. It isa complex challenge <strong>of</strong> finding right balance betweencompeting demands <strong>of</strong> economic development, protectingenvironment from degradation for the future <strong>of</strong> humanity,and ensuring social stability. Sustainable developmentinvolves cooperation on a global scale to develop a waythat benefits the widest range <strong>of</strong> sectors across bordersand between generations.Sustainable development is about applying the principles<strong>of</strong> sound management and good governance to managingcommon pool <strong>of</strong> resources. It is about generating longlastingpositive results for the greater benefit <strong>of</strong> humansocieties.Economic growth has costs which cannot be ignored.Growth has also resulted in income inequality – majority <strong>of</strong>the people has not experienced tangible benefits – pushingthem always back to destitution and injustice. This gaverise to political instability and disturbance in peace inmany parts <strong>of</strong> the developing world. We are experiencingit so vividly in the region.Scientific and technological innovation played a great rolein promoting material well being and has given a big twistto economics which was never seen before. Economicsis the foundation <strong>of</strong> a good life and the modern dayeconomists tend to postpone the practice <strong>of</strong> morals untilthe good life has been achieved and enjoyed.The enormous fast development in science and technologyin the modern world that helped the production <strong>of</strong>material goods at an unprecedented scale have led toglobal problems relating to the environment, society andmorals. It is the attachment to material wealth that is thesource <strong>of</strong> the problem.There is a sea difference between a good life and a happy32 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
generallife. When one seeks only pleasure and crave to lead agood life, the person can never be happy.In one <strong>of</strong> his discourses, the Buddha narrated the story <strong>of</strong>Chakkavatti, the Universal Monarch. He first decided torule according to his wishes which resulted in a breakdownin law and order. He then instituted righteous means <strong>of</strong>security, protection, and guard for the people, but tookno measures to create opportunities for them to acquirewealth and to improve their economic conditions. Povertydrove people to stealing. In order to avoid punishment,they tend to commit other evils such as lying. The king,realizing that there could not be harmony when the bellywas empty, decided to provide thieves with opportunitiesto acquire wealth. Those who heard about it resorted tostealing in the hope <strong>of</strong> gaining king’s favour. Finally, theking had to mete out severe punishment for stealing andother crimes.Equal distribution <strong>of</strong> wealth alone does not solve economicand social problems. It has to go hand in hand with moralprogress. Material wealth or comfort is not in itself anevil. Abject poverty and deprivation are not the solutionsto the problems caused by material wealth. It is ratherthe attachment to material wealth that is the source <strong>of</strong>the problem. Hence, the Buddha’s statement: throughcraving for riches, the imprudent person destroys himselfa though destroying others. The Buddha explained inmany occasions that the moral life and the acquisition<strong>of</strong> wealth can and should go together. The ultimatecriterion <strong>of</strong> morality is the happiness <strong>of</strong> both oneself andothers. Economic activities should be for the welfare andhappiness <strong>of</strong> humans, which would not be achieved bycreating situations promoting greed and possessiveness.The economic activities without concern for the mankindand the environment, it is done purely for the sake <strong>of</strong>pr<strong>of</strong>it. That would generate lust, desire, greed and longinginstead <strong>of</strong> satisfying needs.The wise teachings <strong>of</strong> the saints and great men like theBuddha, Prophet Muhammad, Guru Nanak in the past andMahatma Gandhi <strong>of</strong> the present day emphasized that therighteous economic progress should take into account thewelfare <strong>of</strong> human as well as animals – the larger issue <strong>of</strong>a healthy environment. We must strive to fulfill humanneeds. It is certainly possible if we get rid <strong>of</strong> human greedwhich is a social cancer destroying what has been achievedor could be achieved. Sustainable development is closelylinked with the question <strong>of</strong> morality and ethics.This is precisely what is being realized in the recent yearsin the aftermath <strong>of</strong> global warming, economic breakdownsand corporate failures.Moral values – the essence <strong>of</strong>happinessTeaching <strong>of</strong> ethics alone is not adequate. Onlylearning the rules, unless one inculcates moral values,the tendency will be to go around and find ways tocircumvent the rules so that disciplinary actions couldbe avoided. Most important <strong>of</strong> all is to commit oneself tomoral life.I consider it a factor <strong>of</strong> the utmost importance thatwe release ourselves from the two bondages which areextremely difficult to break away from. They are thebondage <strong>of</strong> greed – how to be able to earn more andmore which does not have any end, and the bondage<strong>of</strong> fear – how to ensure oneself from losing the jobor engagement, which drives one to be, willingly orunwillingly, ignoring, compromising and even beinghelpful in the others committing crime.However, we are not endowed with omniscience likegods. A person <strong>of</strong> moral standing, in spite <strong>of</strong> a properperspective, may commit an <strong>of</strong>fense. It happens becausehe may not be able to anticipate every situation orcondition. We should thus devise ways and means toavoid such situation or condition. We do need a set <strong>of</strong>rules <strong>of</strong> discipline. However, they should only be to guidethe pr<strong>of</strong>essionals for right course <strong>of</strong> actions under thevarious situations.There should, however, be no absolute rules. Rules areformulated on the basis <strong>of</strong> the observations <strong>of</strong> whathad transpired and not on the basis <strong>of</strong> any absolutethesis independent <strong>of</strong> experience. The accommodation<strong>of</strong> changing circumstances and new situations may beneeded. The regulatory agencies, thus, should be alwaysreviewing the rules on a regular basis.Moral life is not abstaining from leading a good life, butthe essence <strong>of</strong> a happy life. The cardinal principles <strong>of</strong>morality have to be felt and sensed and ingrained in theattitude <strong>of</strong> the pr<strong>of</strong>essionals. This would not, probably,be transmitted only by lectures and discourses. This hasto be experienced. The meaning <strong>of</strong> HAPPINESS is to beunderstood in the inner mind.THANK YOU.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 33
anking“Altman Z Score: A Model towardsCredit Risk Management”CA. Asmita Gorkhali*Risk cannot be eliminated, riskis always present in any businessincluding lending but how bestone can mitigate risk is important.Generally, credit risk rating is donebased on many factors includingeconomic viability, businessanalysis, managerial competence,technological feasibility and financialviability. These analysis providesgrounds to track strengths andweaknesses <strong>of</strong> the borrower in terms<strong>of</strong> experienced background, regulardebt servicing capacity, net worth <strong>of</strong>promoters, liquidity management,quality <strong>of</strong> stock and debtors, existingand potential level <strong>of</strong> competition,potential for expansion, signal <strong>of</strong>overall industry can be viewed andits impact in the borrower’s businessand so on. This analysis helpsunderstand the credit worthinessand soundness <strong>of</strong> the borrower whichprovides grounds to mitigate creditrisk on the part <strong>of</strong> the lender.Can rating be donebased on financialstatement informationonly?Industry, business and managementare the causes which effects theoperations <strong>of</strong> any organization and itsoutcome can be obtained in the form<strong>of</strong> a report i.e financial statement.Definitely rating can be done based on financial statementinformation and a very strong and widely accepted modelknown as Altman Z score is discussed here which providesstrong evidences to predict the bankrupt, grey area orsound borrowers.BackgroundThe Z-score formula for predicting bankruptcy waspublished in 1968 by Edward I. Altman, who was, atthe time, an Assistant Pr<strong>of</strong>essor <strong>of</strong> Finance at New YorkUniversity. The formula may be used to predict theprobability that a firm will go into bankruptcy withinone year. Z-scores are used to predict corporate defaultsand financial distress status <strong>of</strong> companies. The Z-scoreuses multiple corporate income and balance sheetvalues to measure the financial health <strong>of</strong> a company. TheZ-score is a linear combination <strong>of</strong> five common businessratios, weighted by coefficients. The coefficients wereestimated by identifying a set <strong>of</strong> firms which had declaredbankruptcy and then collecting a matched sample <strong>of</strong>firms which had survived, with matching by industry andapproximate size <strong>of</strong> assets.Altman applied the statistical method <strong>of</strong> discriminantanalysis to a dataset <strong>of</strong> publicly held manufacturers. Theestimation was originally based on data from publiclyheld manufacturers, but has since been re-estimatedbased on other datasets for private manufacturing, nonmanufacturingand service companies.Z SCORE MODELGiven by Edward I AltmanThe original Z-score formula was as follows:Z = 0.012x1 + 0.014x2 + 0.033 x 3 + 0.006 x 4 + 0.999 x 5* Ms. Gorkhali is working in <strong>Nepal</strong> Rastra Bank as an Assistant Director.34 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 201134
ankingWhere,X1 = Working Capital / Total AssetsX2 = Retained Earnings / Total AssetsX3 = Earnings Before Interest and Taxes / Total AssetsX4 = Market Value <strong>of</strong> Equity / Book Value <strong>of</strong> TotalLiabilitiesX5 = Sales/ Total AssetsThis first model is not suitable for unlistedcompanies.The Five Variables Represent :X1 = Liquidity (Measures liquid assets in relation to thesize <strong>of</strong> the company.)X2 = Cumulative pr<strong>of</strong>itability (Measures pr<strong>of</strong>itability thatreflects the company’s age and earning power.)X3 = Pr<strong>of</strong>itability (Measures operating efficiency apartfrom tax and leveraging factors. It recognizesoperating earnings as being important to long-termviability.)X4 = Leverage (Adds market dimension that can show upsecurity price fluctuation as a possible red flag.)X5 = Efficiency ((Standard measure for sales turnoverwhich may vary greatly from industry to industry.Competitiveness)Alternative ModelFor Private firmsZ’ SCOREZ-score estimated for private firms:Z’ = 0.717 x1 + 0.847 x2 + 3.107 x3 + 0.420 x4 + 0.998 x5Where,X1 = (Current Assets-Current Liabilities) / Total AssetsX2 = Retained Earnings / Total AssetsX3 = Earnings Before Interest and Taxes / Total AssetsX4 = Book Value <strong>of</strong> Equity / Total LiabilitiesX5 = Sales/ Total AssetsThis second model is suitable both for listed and unlistedcompanies as it considers book value <strong>of</strong> equity underforth variable instead <strong>of</strong> market value as in the firstmodel (Z).Alternative ModelFor Non-Manufacturing FirmsZ’’ ScoreZ-score estimated for Non-Manufacturer Industrials& Emerging Market Credits:Z” = 6.56 x 1+ 3.26 x 2+ 6.72 x 3+ 1.05 x 4The variables are the same as in the second model(Z’).Cut-<strong>of</strong>f ScoresCut <strong>of</strong> scores under three models provided by Altmanprovides zones <strong>of</strong> discrimination. Altman modelsprovide grounds to take decision as it indicates signalas safe area, grey area or bankrupt at least one year inadvance.“Cut <strong>of</strong>f scores”Z ScoreZ’ScoreZ”ScoreBankrupt < 1.80 < 1.23 < 1.10GreyZoneSafeZone1.80 to2.991.23 to2.901.10 to2.60> 2.99 > 2.90 > 2.60Window Dressing and Z Score ModelsAltman Z Score model provides protection againstmanipulations in the financial statement that aredone to overstate or understate pr<strong>of</strong>itability and/orto overstate or understate the size <strong>of</strong> total assets. Forinstance, pr<strong>of</strong>it may be overstated through windowdressing by decrease in depreciation and provisions.Lower depreciation means ample amount <strong>of</strong> net fixedassets and lower provisions means larger amount <strong>of</strong>accumulated pr<strong>of</strong>it. As a consequence it will increasesize <strong>of</strong> balance sheet i.e. total assets. We can seethat out <strong>of</strong> five ratios provided by Altman, four ratiosconsider ‘total assets’ in denominator. Increase in totalasset leads to decrease in component ratios, as a resultcomposite Z score ratio will decrease. Lower the Zscore ratio prediction <strong>of</strong> higher chances <strong>of</strong> bankruptcy<strong>of</strong> the said organization. So Altman model is very usefuland provides check and balance against all possiblecombinations <strong>of</strong> window dressing in financial statement.RecommendationZ Score model provides some amount <strong>of</strong> protection. TheZ scores indicate possible failure signal at least one yearin advance. This model is applicable only in historicaldata and not on projected financials. This modelcan be used as parallel model by banks and financialinstitutions along with traditional approaches to checkviability <strong>of</strong> credit proposals.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 35
ankingFOREIGN EXCHANGE RESERVEMANAGEMENTCA. Shrijana Bastola*Foreign exchange reserves (alsocalled Forex reserves or FXreserves) in a strict sense are onlythe foreign currency deposits andbonds held by central banks andmonetary authorities. However, theterm in popular usage commonlyincludes foreign exchange and gold,SDRs(Special Drawing Rights) and IMFreserve positions.Foreign exchange reserves alsoknown sometimes as <strong>of</strong>ficialinternational reserves or <strong>of</strong>ficialreserves consist <strong>of</strong> <strong>of</strong>ficial publicsector foreign assets that are readilyavailable to and controlled by themonetary authorities. Reserveasset portfolios usually have specialcharacteristics that distinguish themfrom other foreign currency assets.First and foremost, <strong>of</strong>ficial reserveassets normally consist <strong>of</strong> liquid oreasily marketable foreign currencyassets that are under the effectivecontrol <strong>of</strong>, and readily availableto, the reserve management entity.Furthermore, to be liquid andfreely useable for settlements <strong>of</strong>international transactions, they needto be held in the form <strong>of</strong> convertibleforeign currency claims <strong>of</strong> theauthorities on nonresidents (IMF,2001.)In most countries, the reserves are owned by thecentral bank; that is, they are on the central bank’sbalance sheet and the ultimate decisions on reservesmanagement are taken within the central bank’smanagement structure. But there are several counterexamplesto this (the United States, the UK and Japan,to name three) where the government formally ownsthe reserves, and takes the ultimate decisions on theirmanagement. (Usually theTreasury or Finance Ministry).Reserve management is a process that ensures thatadequate <strong>of</strong>ficial public sector foreign assets arereadily available to and controlled by the authoritiesfor meeting a defined range <strong>of</strong> objectives for a countryor union. In this context, a reserve management entityis normally made responsible for the management <strong>of</strong>reserves and associated risks.Reasons for holding reservesTypically, <strong>of</strong>ficial foreign exchange reserves are held forthe following reasons:• support and maintain confidence in the policies formonetary and exchange rate management includingthe capacity to intervene in support <strong>of</strong> the nationalor union currency;• limit external vulnerability by maintaining foreigncurrency liquidity to absorb shocks during times <strong>of</strong>crisis or when access to borrowing is curtailed andin doing so;• provide a level <strong>of</strong> confidence to markets that acountry can meet its external obligations;• demonstrate the backing <strong>of</strong> domestic currency byexternal assets;• assist the government in meeting its foreignexchange needs and external debt obligations; and* Ms. Bastola is working in <strong>Nepal</strong> Rastra Bank.36 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
anking• maintain a reserve for national disasters oremergencies.Finally, reserves may be held as an investment fund,primarily for financial gain. For any country, the reasonit holds reserves will play a very important part inplanning how those reserves should be managed and inwhat way they should be invested.SecurityReturnLiquidityThe Impossible Trilogy <strong>of</strong> objectives<strong>of</strong> reserve managementThere exists an impossible trilogy between theobjectives <strong>of</strong> foreign exchange reserve management.The objective to have security, liquidity and returncant be attained at the same time. In central bankingpractices the first priority is on security, second onliquidity and then on return. In order to gain thesecurity there must be compromise <strong>of</strong> return, it isvirtually impossible to have all the three met at sametime. To gain one there should be compromise <strong>of</strong> other.Overall the objective <strong>of</strong> <strong>of</strong>ficial reserves management ison to maximize return, subject to the maintenance <strong>of</strong>sufficient security <strong>of</strong> the assets and adequate liquidityfor meeting the requirement on the reserves.The Optimal Size <strong>of</strong> Foreign ExchangeReservesThere is no unified theoretical and practical standardregarding the size <strong>of</strong> an optimal foreign exchangereserve for a country. Various factors are taken intoconsideration in deciding the size <strong>of</strong> foreign reserve ina country. Relevant factors have traditionally includeda country’s monetary and exchange rate arrangements,and the size, nature, and variability <strong>of</strong> its balance <strong>of</strong>payments and external position. More recently, financialrisks associated with a country’s external debt positionand the volatility <strong>of</strong> its capital flows have receivedparticular attention, especially for economies withsignificant but not fully certain access to internationalmarkets. In the process, ensuring the availability<strong>of</strong> reserves will be influenced by the exchange ratesystem, and the particular objectives for which they areheld (IMF, 2001).Generally there are three ways to measure theadequacy <strong>of</strong> reserves:As per the Traditional (trade-related) rule reserve sizeis considered adequate if it is able to cover at least 3-6months <strong>of</strong> imports <strong>of</strong> the country.As per the Guidotti (debt-related) rule reserves shouldbe adequate as 1-year cover for short-term foreigncurrency debtAs per Calvo (money-based) rule reserve adequacy isdetermined by its ratio to broad money (M2)Risk ManagementForeign investment is considered as a high risk/ returnbusiness. Risk means the possibility <strong>of</strong> financial orother losses arising from an entity’s financial exposuresand/or the failure <strong>of</strong> its internal control systems. Thereshould be a framework that identifies and assesses therisks <strong>of</strong> reserve management operations and that allowsthe management <strong>of</strong> risks within acceptable parametersand levels. Reserve management involves a number <strong>of</strong>financial and operational risks. Some <strong>of</strong> them are asfollows:A. Market risk. Risks associated with changes in marketprices, such as interest rates and exchange rates.Changes in interest rates affect market prices <strong>of</strong>fixed income securities. Hence, shorter durationsecurities are at less risk than long-term, fixed ratesecurities.• Credit risk: The risk <strong>of</strong> nonperformanceor default by borrowers on loans or otherfinancial assets, or by counterparty on financialcontracts.• Currency risk: The risk <strong>of</strong> adverse movementsin foreign currency cross exchange ratesthat reduce the domestic currency value <strong>of</strong>international reserves. Currency risk also ariseswith an appreciation <strong>of</strong> the domestic currency.• Interest rate risk: Sometimes also referredThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 37
ankingto as an element <strong>of</strong> market risk, interest raterisk involves the adverse effects <strong>of</strong> increasesin market yields that reduce the present value<strong>of</strong> fixed interest investments in the reserveportfolio. Interest rate risk increases, ceterisparibus, with the duration <strong>of</strong> a portfolio• Liquidity risk. Liquidity risk refers to thepossible difficulties in selling (liquidating) largeamounts <strong>of</strong> assets quickly, possibly in a situationwhere market conditions are also unfavorable,resulting in adverse price movements.B. Transaction/Operational risk. A range <strong>of</strong> differenttypes <strong>of</strong> risks, arising from inadequacies,failures, or non-observance <strong>of</strong> internal controlsand procedures, which threaten the integrityand operation <strong>of</strong> business systems. Some <strong>of</strong> theoperational risks are as follows:• Dealing risk: Dealers exceed their authority indealing with counterparties or instruments, orincorrectly process a transaction.• Legal risk. The possibility <strong>of</strong> losses fromcontracts that are not legally enforceable or notproperly documented.C. Economic Risk: It is the risk associated with theadverse effect in the foreign exchange transactionsowing to the economic conditions <strong>of</strong> a country.D. Other Risks: Risks arising out <strong>of</strong> the factors otherthan market and operation can be categorizedas other risks. Although there are various otherrisks, some <strong>of</strong> the risks that have to be consideredthoroughly in treasury operations are as follows:• Reputation risk. An investment manager’sreputation and credibility may be called intoquestion as a result <strong>of</strong> inappropriate actions, orunauthorized release <strong>of</strong> information.• Settlement risk. The potential loss as a result<strong>of</strong> failure to settle, for whatever reason otherthan default, by the counterparty.• Sovereign risk. The risk that a foreign sovereigngovernment will restrict the ability <strong>of</strong> a holderto gain access to their assets or the proceedsfrom the sale <strong>of</strong> such assets. Sovereign risk is aninevitable feature <strong>of</strong> reserve management sinceassets are necessarily held in foreign countries,<strong>of</strong>ten in sovereign government securities <strong>of</strong>major investment currencies, and for whichthere are no better investment alternativesavailable.Although there is no set formula that suits allsituations, in practice, many reserve managemententities draw upon generally accepted portfoliomanagement principles in determining the strategyfor asset selection and allocation to control exposuresto external risks. Typically this involves establishingparameters for:• the currency holding and mix necessary tomaintain the ready availability <strong>of</strong> convertiblecurrencies, and also to maintain cross rateexposures within acceptable limits;• the permissible range <strong>of</strong> investment instrumentsthat meet liquidity and security requirements;and• maturity or duration requirements for limitingexposure to interest rate or market price risks.<strong>Nepal</strong>ese ScenarioAccording to the preamble <strong>of</strong> the <strong>Nepal</strong> Rastra BankAct 2002, one underlying reason for the establishment<strong>of</strong> NRB has been the formulation <strong>of</strong> the monetary andforeign exchange policies for attaining price stabilityand improving the balance <strong>of</strong> payments situation soas to bring about the sustainable development <strong>of</strong> theeconomy <strong>of</strong> <strong>Nepal</strong>. Formulation and implementation<strong>of</strong> the exchange rate system and management <strong>of</strong>the foreign exchange reserves in the capacity <strong>of</strong> thecustodian <strong>of</strong> these reserves have been specified amongthe core objectives <strong>of</strong> NRB.With respect to exchangerate management, <strong>Nepal</strong> has adopted fixed exchangerate with the Indian currency and floating exchangerate with other currencies.NRB has adopted cautious approach in the field <strong>of</strong>foreign exchange reserves management. The Board<strong>of</strong> Directors <strong>of</strong> NRB is the highest decision makingauthority for the management <strong>of</strong> such reserves.Investment <strong>of</strong> such reserves is made as per theInvestment Guidelines 2066. The Investment Committeecomprising deputy governor as chairman andexecutive directors <strong>of</strong> Foreign Exchange ManagementDepartment, Research Department and Banking Officeas member takes the decision, within the parameterset by the Investment Guidelines 2066, in respect <strong>of</strong>38 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
ankingcurrency composition and assets allocation. The foreignexchange management department carries out theday-to-day operation and management <strong>of</strong> the reserves.NRB follows passive reserve management strategy byfollowing the guideline—Safety and Liquidity whileReturn is the last priority.<strong>Nepal</strong>’s reserve management strategy has given highestpriority to the safety and liquidity <strong>of</strong> the reserves. Itaims at ensuring that reserves are readily availableat the time when they are in need. The investmentguidelines has ensured that 40 percent <strong>of</strong> the totalreserve maintained by the <strong>Nepal</strong> Rastra Bank is in theform <strong>of</strong> liquid assets – such as call/current account,investment in government securities and other highlyliquid instruments. This is to ensure that the countrydoes not face a liquidity crisis in the foreign exchangemarket.Investment Portfolio<strong>Nepal</strong> Rastra Bank does not involve in active trading<strong>of</strong> foreign securities. Most <strong>of</strong> its investment is onsovereign instruments, which virtually are risk-free. Atpresent NRB is investing its foreign exchange reservesin the following areas:• Time deposits with commercial banks• US Government Treasury Bills and German Bubills• Interest Bearing Call account with Central Banks• US Government Bond• Bank for International Settlements instrumentsTourism, remittances, foreign assistance and foreigndirect investment are the major sources <strong>of</strong> foreignexchange earning in <strong>Nepal</strong>. For the last couple <strong>of</strong>years, remittances have remained a dominant source<strong>of</strong> foreign exchange earnings in <strong>Nepal</strong>. In mid-July2010, the gross foreign exchange reserves declinedby 4.28 percent to Rs. 268 billion from the level <strong>of</strong>Rs 279.98 billion in mid-July 2009. Such reserves hadincreased by 31.7 percent in the corresponding period<strong>of</strong> the preceding year. In US dollar terms, gross foreignexchange reserves declined by 15.04 percent to USD3.05 billion in mid July 2010 from the level <strong>of</strong> US$ 3.59billion in mid-July, 2009. Such reserves had risen by15.6 percent in the same period <strong>of</strong> the previous year.Based on the import figures, the foreign exchangereserve is adequate to finance merchandise imports <strong>of</strong>8.1 months and merchandise and service imports <strong>of</strong> 6.8months.2062/63FY2005/062063/64FY2006/072064/65FY2007/082065/66FY2008/092066/67FY2009/10Remittance 114.69 137.24 184.91 237.90 279.97Foreign Aid 36.82 39.84 49.79 45.51 45.35ExportEarningsTourismEarningsAnnualAverageBuying Rate83.57 84.77 91.31 89.78 74.9213.26 14.45 28.74 37.33 30.2672.08 70.05 64.91 74.90 73.90Rs in BillionReserve Size300250200150Rs in Billion1005002062/63 2063/64 2064/65 2065/66 2066/67Fiscal YearSize <strong>of</strong> <strong>Nepal</strong>’s Foreign Exchange ReserveSources <strong>of</strong> Foreign ExchangeSources <strong>of</strong> Foreign CurrencyIn USD CroreRisk managementNRB has adopted minimum-risk policy while makinginvestment decisions. Credit risk has been in focus sincethe onset <strong>of</strong> the credit crisis in the US financial marketsand its contagion effect on other economies leading toglobal financial crisis during the second half <strong>of</strong> 2008 andduring 2009. NRB continues to apply stringent creditcriteria for selection <strong>of</strong> counterparties. Credit exposurevis-a-vis sanctioned limit in respect <strong>of</strong> approvedcounterparties is monitored continuously. Besides,the financial strength <strong>of</strong> counterparties is constantlyThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 39
ankingunder watch. The basic objective <strong>of</strong> such an on-goingexercise is to assess whether counterparty’s creditquality is under potential threat. Similarly interestrate risk is minimised by investing in very shortmaturity instruments such as three and six months U STreasury Bills and time deposits. In order to minimizethe losses arising from adverse changes in the rates<strong>of</strong> exchange, the investment committee reviews thecurrency composition <strong>of</strong> the reserve and monitorsthe Bank’s compliance with the limits establishedfor foreign currency compositions by the board. Toreduce the risk <strong>of</strong> fraud, separation <strong>of</strong> functions atthe operational level is a fundamental requirementin all investment operations. Most importantly, thereshould be complete separation <strong>of</strong> those who initiatetransactions (front <strong>of</strong>fice) and those who arrangethe settlement <strong>of</strong> transactions (back <strong>of</strong>fice). In theForeign Exchange Management Department segregatedactivities are performed in the front, middle and theback <strong>of</strong>fice <strong>of</strong> the Investment Section.Management During the GlobalFinancial Crisis<strong>Nepal</strong>i economy was least affected by the globalfinancial crisis. <strong>Nepal</strong> witnessed a growth in each<strong>of</strong> the five core sectors - Export, Tourism, ForeignAid, Foreign Direct Investment and Remittances -that were identified globally as sectors affected byworld financial Crisis. The reserve held with the NRBincreased by USD 400 million within July 2008 to July2009. This was mainly due to substantial increase inworkers’ remittance from 1.85 billion USD to 2.37billion USD. One major area that was hard hit byglobal financial crisis was the interest income <strong>of</strong> the<strong>Nepal</strong> Rastra Bank. Interest rates are now showinggradual improvements but with the announcement<strong>of</strong> second stimulus package by the US governmentfinancial markets outlook still seem uncertain.Conclusion<strong>Nepal</strong> has been facing deficit in the balance <strong>of</strong>payments since last fiscal year owing to huge imports.This has directly affected the reserve size <strong>of</strong> thecountry. Also, the escalating need for Indian currencyis being met by selling the US Dollar.The challenges ahead for <strong>Nepal</strong> Rastra Bank in itsreserve management lies in maintaining its adequacyamidst ever growing imports and unfavorable balance<strong>of</strong> payments situation. In addition coping up with themovements in the international financial markets isalso a must. Efficient risk management is a crucialtask as the global financial market has not yet fullyrecovered from the crisis that started in 2008.40 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
ankingUnderstanding Banking Frauds& Fraud Risk ManagementCA. Nil Sarunil.saru@nbsm.com.npFor some time on, time andagain we have been reading thenews <strong>of</strong> frauds happening acrossthe <strong>Nepal</strong>ese Banks & FinancialInstitutions. Although there has notbeen any news <strong>of</strong> fraud syndicateshappening in <strong>Nepal</strong>ese BankingHistory so far but frauds involvingcrores <strong>of</strong> amount has been takingheadlines <strong>of</strong> Business Channels thesedays. Moreover losses from theunreported fraud cases are severaltimes higher than the reportedones, as the same were not reporteddue to the reputational risk <strong>of</strong> theBanks.Despite the fact that <strong>Nepal</strong>eseBanking Industry is way behindthe sophistication <strong>of</strong> MultinationalBanks, However since the frequency<strong>of</strong> frauds in <strong>Nepal</strong>ese BankingIndustry has increases, it hasnecessitated the banks and financialinstitutions to know and implementthe frameworks <strong>of</strong> Fraud RiskManagement day by day.Understanding BankingFraud:Fraud is an intentional or willful actcommitted to secure an unfair orunlawful gain.In a generalized Sense Fraud canbe broadly categorized into twoCategories:A. Internal Frauds (Employee Related Frauds)B. External FraudsInternal Frauds (Employee relatedFrauds):Employee related fraud happens with the direct orindirect involvements <strong>of</strong> the employees <strong>of</strong> the Banks.The Normal Frauds being reported in <strong>Nepal</strong>ese Banksare <strong>of</strong> this nature. Employee related frauds are veryharmful to the Banks as its chances <strong>of</strong> non-detectionare very high. Since employees are well aware <strong>of</strong> thesystem in place they can easily siphon huge amount <strong>of</strong>money without getting the same detected for long time.Even if it is detected it is very difficult to find out theemployees involvement. Moreover the Employee relatedfrauds causes huge reputational damage to the Banksaffecting the entire business <strong>of</strong> the Bank.Employee related fraud generally arises from twoaspects:A. Where there are loopholes in the various processes<strong>of</strong> the Bank, employees take advantages from theprocess lapses. Frauds are normally being done bythe employees themselves or by third parties withthe involvements <strong>of</strong> the employees. Frauds beingreported in <strong>Nepal</strong>ese Banking Industry are normally<strong>of</strong> this type, where employees have caused hugeloss to the banks taking the advantages <strong>of</strong> theprocess lapses.B. Where there is sound internal control system inplace, Employees with fraudulent intentions takesthe advantages <strong>of</strong> the casualness amount the peers.Despite having proper maker and checker system inplace, employees override the parameters out <strong>of</strong>casualness and the fraudsters take the advantagesout <strong>of</strong> it.* Mr. Saru is a <strong>Chartered</strong> Accountant member <strong>of</strong> ICAN.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 41
ankingExternal Frauds:External Frauds are frauds being perpetrated by theOutsiders to the Bank. External Frauds can be targetedto the Bank as well as to the customers. External Fraudsmay be perpetrated across the products <strong>of</strong> the Bank.Among all Credit Card product has been seen as mostvenerable to the Fraud globally.Credit Card frauds generally happens at two levelsA. Transaction Level andB. Card/Account LevelIn transaction Level Frauds, frauds happen to the Card<strong>of</strong> genuine customers. The various types <strong>of</strong> TransactionLevel Frauds are:• Lost/Stolen• Card Never Received• Card not Present• Account Takeover• Imposter/Pick Up• CounterfeitIn Card/Account Level Frauds, Credit Cards are beingissued to the Fraudsters. Account Level Frauds generallyinvolvesA. Application Frauds:Wherein fraudster applies for the Credit Cards usingthe forged documents and the forged documentanyhow passes the banks verification processB. Impersonation:Wherein fraudster impersonate himself as thegenuine customer and gets the card delivered tohim.Frauds normally seen in other products <strong>of</strong> the Banks areamong others Cheque Kiting, Internet Frauds, MortgageFrauds etc. Likelihood <strong>of</strong> Cheque Kiting & InternetFrauds is very high in comparison to the MortgageFrauds. However, where Mortgage fraud happens, thefraud loss to bank will be very high.Apart from the bank and financial institution specificfrauds mentioned above, frauds that can happen to anyorganizations like the following may also hit the banks:• Fraudulent Financial Reporting (e.g. improperrevenue recantation, overstatement <strong>of</strong> assets)• Misappropriation <strong>of</strong> Assets (e.g. payroll frauds,cash embezzlements)• Expenses or liabilities incurred for fraudulent orillegal acts (e.g. briberies)• Revenue <strong>of</strong> assets gained by fraudulent orillegal acts (e.g. overbilling customers, bogusrevenue)Fraud Risk Management:Risk management is defined as the ‘process <strong>of</strong>understanding and managing risks that the entityis inevitably subject to in attempting to achieveits corporate objectives’. In the language <strong>of</strong> RiskManagement, Fraud Risk Management is the process <strong>of</strong>understanding and managing fraud risks <strong>of</strong> the entity.The major objective <strong>of</strong> Fraud Risk Management is to:• Minimize fraud related losses by initiatingproactive control procedures, early detectionsystems and appropriate follow up activities• Eliminate potential fraud risk by• by ensuring security standards across variousprocesses both internal and external• through regular training <strong>of</strong> employees,customer and the related agencies• Assist business and functional units throughinvestigating frauds cases, following up with lawenforcements agencies where applicable andrecovery <strong>of</strong> the losses.Components <strong>of</strong> Fraud Risk Management involves1. Fraud Prevention & Detection:Fraud PreventionFraud Prevention involves the Controls designedto reduce risk <strong>of</strong> fraud and misconduct fromoccurring in the first place.Process & PolicyChangesFraud Prevention& DetectionLearningInvestigationFollow UP& Recovery42 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
ankingVarious activities which can be carried on toproactively prevent frauds include ProcessReviews, Fraud & Risk Assessment, Employee andThird Party Due Diligence, Communication andTrainings, Code <strong>of</strong> Conducts etc.Fraud DetectionFraud Detection involves Controls designed todiscover fraud and misconduct when it occurs.Fraud Detection may be done by monitoring allmost all transactions <strong>of</strong> the bank in differentstages <strong>of</strong> the product cycle. At the beginning <strong>of</strong>product cycle where customers are introduced,Monitoring is normally done by eyeballing all thetransactions and related documents and out <strong>of</strong>the same some percentage <strong>of</strong> transactions best onthe triggers are sampled and tested. Whereas postintroduction <strong>of</strong> the customer, when transactionwill be started with the bank, monitoring isnormally done by the monitoring s<strong>of</strong>tware andbased on the samples taken by the s<strong>of</strong>tware,testing is done.It also involves the mechanism <strong>of</strong> Hotlines and Whistleblower, Auditing & Monitoring and Data Analysis.2. Fraud Investigation:Frauds being detected from the Bank’s InternalDetection Unit or Frauds being reported by thecustomer then will be investigated. Fraud Investigationcan be done by using the Internal Investigation Teamor Enforcement Authorities.3. Learning:The Fraud Identified in different product and differentarea <strong>of</strong> operation will be analyzed by the Bank. Theroot cause analysis will be done to find out causes<strong>of</strong> the Frauds, Trends being seen across the bankingindustry will be analyzed in collaboration with otherbanks and will be communicated to the Business Owners<strong>of</strong> the Bank.4. Process & Policy Changes:Based on the fraud trends/analysis and its route causes,Policy and Processes will be restructured so as tostrengthen the controls <strong>of</strong> the Organization.Fraud Risk Management an ongoingProcessAn effective fraud risk management approach providesan organization with tools to help manage risk in amanner consistent with regularity requirements aswell as the entity’s business needs and market placeexpectations. As described below developing such anapproach can be achieved in key phases:Assessment <strong>of</strong> Risks:Assessing the needs <strong>of</strong> organization based on thenature <strong>of</strong> fraud and misconduct that risk controlsare intended to mitigate and adequacy <strong>of</strong> existingcontrols.EvaluationAssessment <strong>of</strong> RiskInternal Investigation will be done by following upthe leads available. Some Frauds are very difficult toinvestigate. Based on the Cost and Benefit Analysis <strong>of</strong>the Frauds happened, extent <strong>of</strong> investigation will bedetermined.Learning,Process & PolicyChangesPrevention &DetectionFollow UP & Recovery:Once the fraud is established and the Fraudster isidentified, follow up and recovery procedure maybe initiated. Depending upon the severity <strong>of</strong> thecase and the reputational risk <strong>of</strong> the bank, Extentup follow up will be done. At times EnforcementAuthorities or the External Agencies may alsobe incorporated in the follow up and recoveryprocedures.ImplementationInvestigationDesignDesign:Developing controls to prevent, detect, and respondto identified risks in a manner consistent with legaland regularity criteria and other leading practices.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 43
INSURANCECombating Insurance FraudShiva Hari Silwal*BackgroundEver since there has been insurance,there has been insurance fraud.It may sound jingoistic, but it issaid that “Insurance companiesmust abolish frauds, or frauds willabolish insurance companies”. So,Insurers must be made to see if theproblem is becoming increasinglyuncontrollable. The best illustrationfor this is that <strong>of</strong> Panworld, thelargest insurance company inUganda, which went out <strong>of</strong> businessbecause <strong>of</strong> large scale fraud in theirhealth insurance scheme for thepoor.Fraud is a much discussed, muchstudied, very troubling and costlyconcern <strong>of</strong> the insurance industry.Fraud impacts organizations inseveral areas including financial,operational, and psychological.While the monetary loss owing t<strong>of</strong>raud is significant, the full impact<strong>of</strong> fraud on an organization can bestaggering. The losses to reputation,goodwill, and customer relationscan be devastating. As fraud canbe perpetrated by any employeewithin an organization or by thosefrom the outside, it is important to have an effectivefraud management program in place to safeguard theorganization’s assets and reputation.A. What is Insurance Fraud?Gill, Woolley, and Gill (1994) define insurance fraudas “knowingly making a fictitious claim, inflating aclaim or adding extra items to a claim, or being in anyway dishonest with the intention <strong>of</strong> gaining more thatlegitimate entitlement”.B. Types <strong>of</strong> Insurance Fraud:Types <strong>of</strong> insurance fraud are very diverse, and occur inall areas <strong>of</strong> insurance. It may be in auto claim, thirdparty (TP) claim, own damage claim, health care claim,personal accident claim, fire claim, marine claim etc.For example, common schemes in auto claims areainclude:• Purchasing policies to report accidents or theftsthat never actually occurred;• Intentionally causing damage to vehicles• Deliberately stopping in front <strong>of</strong> unsuspectingdrivers to create rear-end auto accidents; and• Lying about the extent <strong>of</strong> damage to vehicles andinjuries arising from real accidentsC. General Overview <strong>of</strong> InsuranceFraud in <strong>Nepal</strong>:Different authorities like Coalition against InsuranceFraud, Insurance Information <strong>Institute</strong>, Association <strong>of</strong>British Insurers, and Massachusetts Fraud Bureau and* Mr. Silwal is a CA final Level student <strong>of</strong> ICAN.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 45
INSURANCEmany others have all pegged the minimum percentage<strong>of</strong> fraudulent claims as 10%. However, due to the nature<strong>of</strong> insurance business in <strong>Nepal</strong>, it is reasonable toexpect that the magnitude <strong>of</strong> insurance fraud is in thevicinity <strong>of</strong> 20%.According to the statistics provided by the InsuranceBoard <strong>of</strong> <strong>Nepal</strong> as published in The Himalayan Timeson August 16, 2010, total premium collected by no-lifeinsurers during FY 2066/67 was Rs 6.5 billion. If weaccept that claims paid accounts for approximately35% <strong>of</strong> total premium received, then rough amount <strong>of</strong>total claims paid comes to be Rs. 2.28 billion. And ifwe multiply this amount by 20%, then we end up with afraudulent incurred claims figure in <strong>Nepal</strong> <strong>of</strong> almost Rs456 million in FY 2066/67.Why this sorry state <strong>of</strong> affairs? Among others, this mustbe the fact that we <strong>Nepal</strong>ese possess a remarkablyhigh level <strong>of</strong> “corruption-tolerance” and this laid-backattitude is mainly responsible for our careless approachto the implementation <strong>of</strong> any fraud prevention program.Let us not forget that Transparency International ratedour country as one <strong>of</strong> the most corrupted country in theworld.D. Insurance Fraud: CostsInsurance fraud is costly to individuals and the insuringcompanies. It is a misconception to regard insurancefraud as a ‘victimless’ or ‘hidden’ crime. Fraudulentclaims cost hundreds <strong>of</strong> billions <strong>of</strong> dollars annuallyworldwide.Cost <strong>of</strong> Insurance Fraud to Individuals:Higher premiums and higher prices for goods andservicesReduced availability <strong>of</strong> insuranceDelayed settlement <strong>of</strong> genuine claimsCost <strong>of</strong> Insurance Fraud to Insurers: Even thoughinsurance companies typically pass the costs <strong>of</strong>insurance fraud on to the consumer in order to operateat a pr<strong>of</strong>it, insurance companies are directly impactedby insurance fraud. The following are examples <strong>of</strong> thecosts <strong>of</strong> fraud to insurance companies:• Every rupee that is spent on insurance fraud directlyimpacts the pr<strong>of</strong>itability for the company as claimcosts rise.• Insurance companies incur increased humanresource costs by employing fraud units toinvestigate claims.• Insurance companies that do not effectivelyprevent fraud may lose business when their ratesincrease due to fraud.• Insurance companies also lose investment incomewhen a fraudulent claim is filed.E. Fraud Indicators:• Information about the person making the claim:From the very beginning, insurance companiesshould always verify that the claimant is who hesays he is.• Economic Motives: The most common form <strong>of</strong>insurance fraud is inflating <strong>of</strong> loss. The mostcommon manifestation <strong>of</strong> economic motives ininsurance fraud is arson and murder.• Claims History: “The man who wins the lotteryonce is envied; the one who wins it twice isinvestigated.” Specifically, insurers should beexamining the number, frequency and nature <strong>of</strong> aclaimant’s prior claims.• Claims made shortly after the policy inceptiondate: A claim made soon after the inception date<strong>of</strong> a policy can indicate fraud.There may be various other indicators depending onthe nature <strong>of</strong> the insurance policy. Obviously, thecircumstances <strong>of</strong> each claim and investigation areunique and there is no single set <strong>of</strong> rules that can beused to correctly handle and resolve each matter.F. Fight Against Insurance Fraud:The fraud detection and prevention strategies <strong>of</strong> theinsurers will play the most crucial role to sustain thebusiness agility and to maintain the solvency positionin the marketplace. Insurer needs to combine thehistorical claims fraud experience, best practices,industry knowledge, consumer insights, externalavailable resources, and technology to get the bestresults for their fighting initiatives to make them morepr<strong>of</strong>itable, more competitive and more compliant.This can be further elaborated with the help <strong>of</strong> thefollowing points.1. More Thorough Claim Handling – Use <strong>of</strong>Computerized Statistical Analysis: Conning &Co, a leading research firm, has stated -“Not allinsurers are taking fraud seriously. Some are doingsomething only because they are required to do so,46 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
INSURANCEsome are doing little because they don’t see it asimportant, and some are unaware <strong>of</strong> the problemand just don’t know what to do.”Too <strong>of</strong>ten, claims decisions are made withouta thorough effort to obtain or review any suchinformation. While in short term that approachmay be viewed as more efficient and less costly,it will most assuredly increase costs and createinefficiencies in the long term by signaling tothose involved in fraud that the insurer is open topaying suspicious claims. Thorough claims handlingprocedures can provide insurers with informationsufficient to make informed claims decisions and,at the same time, send a message to those involvedin fraud- that the risks <strong>of</strong> getting caught whilesubmitting a fraudulent claim far outweigh anypotential benefits.Due to the sheer number <strong>of</strong> claims submitted eachday, it would be far too expensive for insurancecompanies to have employees check each claimfor symptoms <strong>of</strong> fraud. Instead, many companiesuse computers and statistical analysis to identifysuspicious claims for further investigation.2. Use <strong>of</strong> Information Technology:a. Creation <strong>of</strong> a Centralized Data Exchange:If we are serious about combating insurancefraud using IT, the Centralized Data Exchangewould be an invaluable source <strong>of</strong> information forvarious agencies. As on date we have about ninelife insurers and 16 General Insurers operatingin <strong>Nepal</strong>. It is certain that the operations <strong>of</strong> allthese insurers would be computerized and theywould all be having a centralized database <strong>of</strong> somekind. Irrespective <strong>of</strong> the kind <strong>of</strong> s<strong>of</strong>tware used, itis certainly possible to export a set <strong>of</strong> given datainto an Excel file with certain specific columns.If we could adopt a specific format containing acertain number <strong>of</strong> fields, with a standard size foreach field, it would be possible for every generalinsurer to generate in less than hour, an Excel filecontaining the given data in the specified format.This Excel file could be sent to the Centralized DataExchange within a matter <strong>of</strong> minutes by uploadingit through FTP to a central server. Since the formatis a uniform one and the size <strong>of</strong> the fields arealso same, it would be easy for the data <strong>of</strong> all theinsurers to be integrated into a single large Excelfile which in turn, could be used to form the inputfor the Centralized Exchange database.However, the problem is that we are not preparedto treat our next insurer as a brother in the samepr<strong>of</strong>ession. Sharing <strong>of</strong> information is rarely done.Change <strong>of</strong> attitude is a prime factor in this regard.b. Increase the level <strong>of</strong> IT-awareness among insurancepersonnel:The message should go out that a computer is notjust a glorified typewriter or an input device foryour database, or is meant for sending and receivingemails, but is a valuable communication andresearch tool with tremendous potential.c. Encourage the usage <strong>of</strong> the resources <strong>of</strong> theInternet:Not many down-the-line <strong>of</strong>ficials realize that theInternet is a most valuable source for ascertainingvarious facts pertaining to their day-to-day work.For example, for a person handling a Marine policyor dealing with a Marine claim, 10 minutes on thenet would give complete history, fleet, previousmovements, current location, etc <strong>of</strong> ships. But thequestion is – how many <strong>of</strong>ficials are serious aboutusing the Net to gather information like this?d. Development <strong>of</strong> s<strong>of</strong>tware for Data analysis and forgenerating potential fraud indicators:Use <strong>of</strong> IT in the West: IT is being used as a toolin insurance fraud prevention and detection formore than two decades. Examples have been givenbelow. The aim <strong>of</strong> below mentioned databases isthreefold. First, they provide a way <strong>of</strong> verifying theinformation supplied by claimants. Second, theyallow companies to assess whether claimants havea history <strong>of</strong> suspicious or similar claims. Third, theyprovide repositories for sharing information aboutclaims histories across companies and with otherparties. Consider the following examples:1. Motor Insurance Anti-Fraud and Theft Registry(MIAFTR), is a UK based database set up in 1987and contains details <strong>of</strong> vehicles and owners(vehicle identification numbers and ownerdetails). Stolen and total loss vehicle details arefed into the database and if there is a “match”with a previous entry, it triggers <strong>of</strong>f the hunt forfurther details.2. Claims and Underwriting Exchange (CUE) isanother database which has been marketed asThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 47
INSURANCEthe greatest weapon against insurance fraud.Set up in 1994, this contains details <strong>of</strong> motorand household claims made over the past years.3. Link Analysis S<strong>of</strong>tware is the brainchild <strong>of</strong>ABI (Association <strong>of</strong> British Insurers and i2 (anInformation Technology provider). This s<strong>of</strong>twareis more analytical and goes into the cause <strong>of</strong>loss, type and value <strong>of</strong> claim, business sector(cross-checking whether the business is a fallingmarket or rising market, etc).4. National Insurance Crime Bureau was set upin 1992 and is a non-pr<strong>of</strong>it making organization,comprising over 1000 insurance companies <strong>of</strong>the USA.5. PILR (Property Insurance Loss Register) isprimarily a database containing data pertainingto Fire claims and is widely used by the insurersin the USA.3. Proper legislation to check fraudsters withprovisions for stringent penalties: Countries likeUSA, Canada, UK and most <strong>of</strong> European countrieshave classified insurance fraud as a crime andhave made it punishable with fine, penalty andimprisonment. However, in <strong>Nepal</strong> neither InsuranceAct nor any other acts prescribe insurance fraud asa crime.Take for example the clause in Rule 31(5) <strong>of</strong> theInsurance Regulation, 1993. The clause statesthat “If it is found, while making an inquiry intothe details pursuant to sub-rule (4) that theInsurance claim need not to be paid by determiningthe liability, the Insurer shall provide writteninformation to the applicant clearly stating thereasons there<strong>of</strong>.”Similarly, Section 36 <strong>of</strong> Insurance Act, 1992 statesthat, “If any Insurer or the Director <strong>of</strong> the Insurer,employee or Surveyor, Broker or Insurance Agentknowingly violate this Act or the Rules made underthis Act or order or directives or does not performany function to be performed or does any act notto be done, the Board may punish to such Insureror the Director, employee or Surveyor, Broker orInsurance Agent with a fine ranging from threethousand rupees to ten thousand rupees. If such<strong>of</strong>fense has been made frequently, he will be finedat the rate <strong>of</strong> extra five hundred rupees for eachsubsequent <strong>of</strong>fense.”What is the message which is going out to anypotential fraudster? That if s/he files a fraudulentclaim, the utmost insurers would do is to repudiatehis/her claim and not return the premium paidby him. Can’t we change this and replace it withsomething like this?“Lodging <strong>of</strong> false and fraudulent insurance claims isan <strong>of</strong>fence under the Insurance Act. Offenders areliable to be punished with imprisonment up to 3years and/or fine up to Rs.10,000/-”Although Section 106(3) <strong>of</strong> drafted Insurance Act,2066 mentions that if any one does any act againstthe provision <strong>of</strong> this Act to directly harm theinsured, insurer or insurance business, the claimedproperty shall be confiscated and fine <strong>of</strong> amountnot exceeding three times <strong>of</strong> claimed property orimprisonment <strong>of</strong> three years or both shall imposedon such person, the section is still not clear withregard to insurance fraud.How important it is to consider the impact <strong>of</strong>insurance fraud can be known from the fact thatduring early 1700s, England passed one <strong>of</strong> thestrictest insurance fraud statutes ever, providingfor death by hanging as a penalty for conviction, iffound guilty for insurance fraud.4. Using predictive analytics:The existing fraud detection and preventionmethods <strong>of</strong> most <strong>of</strong> the insurers are not adequateenough to combat the constantly evolving andgrowing amounts <strong>of</strong> fraud. Currently, insurersoperate primarily on a reactive fire fighting modewhich normally is limited to the four walls <strong>of</strong> theSpecial Investigation Units (commonly known asSIUs).Predictive analytics coupled with business acumencan not only detect fraud with accuracy but alsolocate the hidden data patterns from millions<strong>of</strong> records which will help insurers gain insightsinto preventing future fraudulent transactions.Comprehensive, consistent, clean and current dataenables the statistical and data mining techniquesbeing used in predictive analytics to produce and48 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
INSURANCEpredict effective results. It can be applied to theentire insurance value chain to predict variousaspects such as customer preferences, customerbehavior and customer churn, payment defaults,fraud possibility, claims propensity, litigation andsubrogation possibility etc. Leading insurers in thewest have been successfully employing analyticsto be more pr<strong>of</strong>itable, more competitive andmore compliant.5. Launching a fraud-prevention campaign: Amassive campaign could be launched to bringabout a change in the mindset <strong>of</strong> not just theinsurance companies or the insurance <strong>of</strong>ficials,but the insuring public at large. The role <strong>of</strong> thefraudster has to be exposed and the aim <strong>of</strong> thecampaign should be to ensure that the public’stolerance to fraud is completely nullified.Though it takes time, there would definitely be awelcome change in attitude.6. Educate the public about role <strong>of</strong> frauds in raisingpremium rates:7. Toll-free number for reporting frauds with rewardto informants.8. Sharing <strong>of</strong> knowledge and training procedures byindustry and law enforcement agencies.G. Funding:An important aspect which cannot be overlookedin the war against fraud is the massive amount <strong>of</strong>funding required if any serious headway is to bemade. A sustained publicity campaign in the massmedia would eat up millions <strong>of</strong> rupees in no time.For that legislation should make it compulsory forinsurers to allocate funds for fighting fraud, and alsoto make information sharing with a governmentnominatedrepository like Insurance Board <strong>of</strong> <strong>Nepal</strong>.A portion <strong>of</strong> IT budget <strong>of</strong> every insurer should beallocated to fraud-prevention and detection.H. And what about In-housefrauds?Combating insurance fraud would be incompletewithout touching upon a fractional but importantsegment <strong>of</strong> insurance fraud – the In-house fraud.One generally tends to talk about fraudsters asthose outside the insurance company, but theseoutside fraudsters have their cousins within thecompany too, and more <strong>of</strong>ten than not, especiallyin the <strong>Nepal</strong>ese scenario, frauds on the insurancecompanies are perpetrated with the activeconnivance <strong>of</strong> these cousins. However these in-housecousins are capable <strong>of</strong> causing severe damage ontheir own too.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 49
{g]kfn rf6{8{ PsfpG6]G6\;lgodfjnL @)^! df ePsf] ;+zf]wg af/] ;"rgfoxL 2067 kf}if 20 ut]sf] g]kfn ;/sf/, cy{dGqfnosf] -dfggLo= dGqL:t/Lo_lg)f{<strong>of</strong>g’;f/ g]kfn rf^{*{ PsfpG^]G^\; lgodfjnL 2061 df ;b:ox?;+u ;DjlGwt lgDgadf]lhd ;+zf]wg ePsf] s"’/f ;DjlGwt ;a}sf] nflu hfgsf/Lsf] nflu cg"’/f]w % .• k]zfut k|df)fkq k|fKt lgDgfg"’;f/ auL{s[t ;b:on] g]kfn rf^{*{ PsfpG^]G^\; -klxnf];+zf]wg_ lgodfjnL 2067 sf] 53 adf]lhd kl/ifb\n] tf]s]sf] cfrf/ ;+lxtfsf] clwgdf/xL lgDgfg’";f/ /sdsf] xb;Dd n]vfk/LIf)f ug{ ;Sg]% .-s_ s au{sf] k]zfut k|df)fkq k|fKt ;b:on] hlt;’s} /sd klg .-v_ v au{sf] k]zfut k|df)fkq k|fKt ;b:on] 40 -rfnL;_ s/f]* ?k}+<strong>of</strong> ;Dd .-u_ u au{sf] k]zfut k|df)fkq k|fKt ;b:on] 10-b;_ s/f]* ?k}+<strong>of</strong> ;Dd .-#_ # au{sf] k]zfut k|df)fkq k|fKt ;b:on] 1-Ps_ s/f]* ?k}+<strong>of</strong> ;Dd .-ª_ n]vf k|fljlwssf] k]zfut k|df)fkq k|fKt JolQmn] 10 -b;_ s/f]* ?k}+<strong>of</strong> ;Dd .• ;+zf]lwt lgodfjnL cg"’;f/ ;]jf/t ;b:ox?n] k]zfut k|df)fkq kfpg] %}gg\ eg]kfO{ /x]sf ;b:ox?sf] :jtM :yug x’"g]%, gjLs/)f x’"g]%}g . <strong>of</strong>] k|fjwfg rf^{*{PsfpG^]G^ ;b:ox?sf] xsdf t’"?Gt nfu’" x’"g]% eg] btf{jfnf n]vfk/LIfs ;b:ox?sf]xsdf ldlt 2070 >fj)f 1 ut] b]lv k|f/De x"’g]% .• btf{jfnf n]vfk/LIfs ;b:ox?n] rf^{*{ PsfpG^]G;L lzIff xfl;n ug{rfx]df olb dfGotf k|fKt ljb]zL rf^{*{ PsfpG^]G^\; ;+:yfaf^ dWod txsf]k/LIff pQL)f{ u/]df o; ;+:yfsf] dWod txsf] k/LIff %’ "^ kfOg]% eg] To:tf ljb]zL;+:yfaf^ dWod txsf] s’g} ;d'x ptL)f{ ePdf ;f]xL ljifox? o; ;+:yfsf] dWodtxdf /x]% eg] pQm ljifox? %" ’^ kfO{g] % . To:t} n]vf, n]vfk/LIf)f tyf s/;DjGwL d" ’Vo ljifo lnO{ jfl)fHozfqdf :gfts jf :gftsf]Q/ u/L pNn]lvt txdf 50-krf;_ k|ltzt c+s k|fKt u/]sf] ljifox? rf^{*{ PsfpG^]G;L lzIffsf] dWod txsf]ljifo / clwsf+z kf&\oqmd ldNg] /x]% eg] pQm ljifo %’ "^ kfpg]% .• g]kfn rf^{*{ PsfpG^]G^\; -klxnf] ;+zf]wg_ lgodfjnL 2067 sf] 52-3_ adf]lhdk]zfut k|df)fkq k|fKt ;b:on] Ps} ;dodf u}/ n]vf Joj;flos ;]jf jf k]zf ug’x’b}g . k]zfut k|df)fkq k|fKt ;b:on] n]vf Joj;fo afx]s cGo s’g} k]zf Joj;foug] { ePdf cGo k]zf Joj;fo ug’ {eGbf slDtdf ;ft lbg cufj} ;f] cjlwe/ cfkm\gf]k]zfut k|df)fkq :yug u/fpg lgj]bg lbg" ’ kg] {% . rf^{*{ PsfpG^]G^ ;b:ox?sf]xsdf <strong>of</strong>] lgod t’?Gt nfu’ x’g]% eg] btf{jfnf n]vfk/LIfs ;b:ox?sf] xsdf ldlt2070 >fj)f 1 ut] b]lv k|f/De x" ’g]% .• <strong>of</strong>] lgod t" ’?Gt nfu" ’ x" ’g] % .50 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
NEWSSAFA SUMMIT-2010Sustainable Development inSAARC RegionThe South Asian Federation <strong>of</strong><strong>Accountants</strong> (SAFA) was formed in1984 as a federation <strong>of</strong> pr<strong>of</strong>essionalaccounting bodies in the SAARCRegion. Currently, it has ninemember bodies from five countriesnamely Bangladesh, India, <strong>Nepal</strong>,Pakistan and Sri Lanka which has abond <strong>of</strong> culture and homogeneity <strong>of</strong>pr<strong>of</strong>essional environment. It is anApex Body <strong>of</strong> South Asian Associationfor Regional Cooperation (SAARC) anda Regional Grouping <strong>of</strong> InternationalFederation <strong>of</strong> <strong>Accountants</strong> (IFAC).The first SAFA summit was held by the<strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong><strong>of</strong> <strong>Nepal</strong> on 10-12 December, 2010at Kathmandu after its 25 years <strong>of</strong>establishment. President <strong>of</strong> Republic<strong>of</strong> <strong>Nepal</strong> His Excellency Dr. Ram BaranYadav Inaugurated the Summit andThe Finance Minister <strong>of</strong> <strong>Nepal</strong>, Mr.Surendra Pandey was present in theclosing ceremony.15 CPE Credit hours were grantedto the ICAN member participants onthe Summit.In the first day (December 10,2010) <strong>of</strong> the Summit SAFA boardMeeting and SAFA Committee onHarmonization <strong>of</strong> Fiscal TariffRegime were organized. Similarly,in the Second Day <strong>of</strong> the SummitSAFA iTAG Committee Meeting washeld and Last day <strong>of</strong> the summitBPA awards were presented andlastly “Kathmandu DeclarationLetter-2010” was published.Preview <strong>of</strong> 15th SAFA Board Meeting, 10 December, 2010, KathmanduPreview <strong>of</strong> SAFA Harmonization <strong>of</strong> Fiscal lawsand Tariff Regime, 10th December, 2010,KathmanduDuring the Summit different Paperswere presented by the reputedexperts from South Asian Countries.His Excellency Dr. Ram Baran YadavInaugurating the SAFA Summit-2010, hosted byThe <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong>.Preview <strong>of</strong> SAFA iTAG Committee, 11 December, 2010, KathmanduThe <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 51
SAFA BPA Awardand SAFA CorporateGovernance DisclosureAwardSAFA Best Presented AccountsAwards were presented fordifferent Seven Categories andSAFA Corporate GovernanceDisclosure Award was alsopresented on that occasion.Winners <strong>of</strong> BPA Award with Honorable Finance Minister Mr. Surendra Pandey.14 th Anniversary <strong>of</strong> the<strong>Institute</strong>Staff members <strong>of</strong> ICAN with Rt. Honorable Prime Minister.The <strong>Institute</strong> celebrated the 14 th Anniversary amidst afunction held on Magh 17, 2067. The Chief Guest Rt.Honorable Prime Minister Mr. Madhav Kumar <strong>Nepal</strong>inaugurated the function. While addressing the participantsMr. <strong>Nepal</strong> expressed his gratitude to the <strong>Institute</strong> and theauditors associated with it. He suggested the auditors toremember their Code <strong>of</strong> Ethics while auditing and alsorequested them to audit with in the framework prescribed bythe <strong>Institute</strong>.Similarly, Mr. Rameshwore Khanal, Finance Secretaryaddressed his opinion during this program. He thanked theICAN team for positive step for the development <strong>of</strong> the<strong>Institute</strong> in the very short period. He pointed out someshortcomings prevailing in the <strong>Institute</strong> and hoped the<strong>Institute</strong> to make the progression on those shortcomings infuture.Likewise, Acting Auditor General, Mr. Khem Prasad Dahal,thanked the <strong>Institute</strong> for its contribution for developmentand expansion <strong>of</strong> audit pr<strong>of</strong>ession.Rt. Honorable Prime Minister inaugurating 14 th Anniversary Program<strong>of</strong> the <strong>Institute</strong>.Besides, <strong>Chartered</strong> Accountant students’ securing highestmark at various levels <strong>of</strong> <strong>Chartered</strong> Accountancy course wasfelicitated by the Chief Guest Rt. Honorable Prime MinisterMr. Madhav Kumar <strong>Nepal</strong> with Medals and Certificates.Similarly “the best staff for the year”, was also announced. .Likewise, in the same occasion Certificate and Prizes weredistributed to the winners in the various sports programorganized by the Staff Union.The Program was concluded with the vote <strong>of</strong> thanks fromVice President <strong>of</strong> the <strong>Institute</strong>, CA. Sudarshan Raj Pandey.The students <strong>of</strong> different levels who has secured highest marks inBoard exam with Rt. Honorable Prime Minister.52 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
Seminar on “IFRS Issues and Challenges”The <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong> (ICAN)has played a pioneering role in designing courses to carterto ever- increasing learning and developmental needs <strong>of</strong>pr<strong>of</strong>essional in practice as well as in employment in variousSectors.The Seminar on IFRS: “Issues and Challenges” was organizedby ICAN on 17 Magh, 2067 on the occasion <strong>of</strong> ICAN’s 14thAnniversary. Total 58 participants were present on theprogram.CA. Praeep Kumar Shrestha on IFRS presentation.The President <strong>of</strong> the <strong>Institute</strong> CA. Sunir Kumar Dungel in hiswelcome speech highlighted on the purpose <strong>of</strong> seminar andalso about various activities <strong>of</strong> ICAN.Students Corner<strong>Chartered</strong> Accountancy Examination December2010The <strong>Chartered</strong> Accountancy Examination December2010 was held from December 1 to December 9,2010. The details <strong>of</strong> applicants who had appeared andobtained a degree from the examination are as follows.Total number <strong>of</strong> level wise students applicants for December,2010 Board ExaminationS.N.LevelBothgroupGroup IGroupIITotal1 Foundation 6 10 13 292 Intermediate 14 25 13 523 Final 24 15 17 564 CAP I 471 69 66 6065 CAP II 414 114 106 6346 CAP III 27 8 13 48Total number <strong>of</strong> level wise students appeared for December,2010 Board examinationS.N.LevelBothgroupGroup IGroupIITotal1 Foundation 3 10 10 232 Intermediate 13 24 13 503 Final 23 14 14 514 CAP I 448 64 59 5715 CAP II 406 99 99 6046 CAP III 27 8 12 47Total no <strong>of</strong> Students who obtained the positive result onDecember, 2010 board examinationS.N.LevelBothgroupGroup IGroupIITotal1 Foundation 1 2 1 42 Intermediate 0 5 1 63 Final 1 0 6 74 CAP I 131 45 51 2275 CAP II 32 12 44 886 CAP III 1 0 7 8Level CAP I CAP II CAP III Foundation Intermediate FinalApplicants 606 634 48 29 52 56Appeared 571 604 47 23 50 51Passed 227 88 8 4 6 7Diagram showing the status <strong>of</strong> applicant, appeared andpassing students <strong>of</strong> December 2010 board exam <strong>of</strong> the<strong>Institute</strong>.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 53
CA Membership ExaminationThe CA Membership Examination was held fromNovember 15, 2010 to November 19, 2010, the details<strong>of</strong> applicants are as follows.Applicant 33Appeared 32Qualified for Membership 9Student Enrollment StatusThe Enrollment <strong>of</strong> students in different levels <strong>of</strong><strong>Chartered</strong> Accountancy Course has been considerablyincreasing day by day. Following is the status <strong>of</strong>enrollment.YearCAP I(Foundation)LevelCAP II(Intermediate)99/00 98 - -00/01 112 56 -01/02 68 74 -02/03 195 99 703/04 360 109 2004/05 361 123 2105/06 185 152 2106/07 672 147 4707/08 897 213 5808/09 1101 461 6809/10 1004 609 10110/11(Till February end, 2011) 729 404 61CAPIII(Final)Valley to create the awareness about the <strong>Chartered</strong>Accountancy Education in <strong>Nepal</strong> and facilities there<strong>of</strong> available. The Program included the detailsdeliberation on the eligibility criteria for enrollment inCA Course, future prospects, international recognitionand membership criteria <strong>of</strong> the <strong>Institute</strong>, and helpedstudents by solving their queries in various aspect <strong>of</strong> CACourse. Education department has aimed to conductcareer counseling program every week in differentcolleges. Since last few months education departmenthas successfully conducted 6 sessions <strong>of</strong> CareerCounseling program in 4 different colleges and freeseminar on 18th February, 2011 in the ICAN Premises. 47prospective students participated the free seminar.Members’ CornerMember StatusThe Present status <strong>of</strong> members (as <strong>of</strong> March end, 2011)is as follows.Category/Status Total Member Total COP Total FirmsFCA/CA 535 497 402RAB 3364 3109 869RAC 1576 1436 301RAD 2343 2144 193Total 7818 7186 1765Total number <strong>of</strong> Members, COP and Firms showing in the diagram .Curves showing the status <strong>of</strong> enrollment <strong>of</strong> students indifferent levels on CA Course.Career CounselingCareer Counseling program has been organized indifferent Institutions inside and outside KathmanduAbout CPE TRAININGTo enhance the capacity <strong>of</strong> the members <strong>of</strong> the<strong>Institute</strong>, various CPE training classes has beenconducted. The list <strong>of</strong> CPE classes conducted during theperiod is listed as follows:54 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
S.N DATE VENUENO. OFPARTICIPANTSORGANISER1 2067/08/10, 11 & 12 Mahendranagar 75 AUDAN2 2067/08/10, 11 & 12 Kathmandu 50 ICAN3 2067/08/17, 18 & 19 Bhairahawa 149 AUDAN42067/08/24, 25 & 26SAFA SUMMITKathmandu(15 credit)150 ICAN5 2067/08/24, 25 & 26 Dhangadi 114 AUDAN6 2067/09/02, 03 & 04 Pokhara 132 AUDAN7 2067/09/02, 03 & 04 Biratnagar 92 ICAN8 2067/09/09, 10 & 11 Rajbiraj 51 INCA9 2067/09/09, 10 & 11 Dang 77 CAI10 2067/10/07, 08 & 09 Dharan 69 AUDAN11 2067/10/07, 08 & 09 Butwal 154 ICAN122067/10/17(seminar on IFRS)Kathmandu(8 credit)58 ICAN13 2067/10/21, 22 & 23 <strong>Nepal</strong>gunj 160 AUDAN14 2067/10/21, 22 & 23 Birgunj 93 ICAN15 2067/10/28,29 & 11/1 Narayanghat 110 ICAN16 2067/10/28,29 & 11/1 Baglung 59 AUDAN17 2067/11/13, 14 &15 Hetauda 66 INCA18 2067/11/13, 14 &15 Kathmandu 69 AUDAN19 2067/11/20, 21 &22 Ilam 43 AUDAN20 2067/11/20, 21 &22 Kathmandu 61 ICAN212067/10/28(Seminar on Income Tax and E-filing )Biratnagar(6 Credit)95 ICANListing <strong>of</strong> membersThe provision <strong>of</strong> annual listing <strong>of</strong>auditors for the purpose <strong>of</strong> the audit<strong>of</strong> District Development Committeeand Education Department has beendiscarded finally.InternationalParticipationSAFA iTAG CommitteeMeetingSAFA iTAG Committee meeting washeld at New Delhi, India on November28 to 29, 2010. ICAN President CA.Sunir Kumar Dhungel and TechnicalDirector CA. Paramananda Adhikariattended the meeting. The meetingevaluated the annual reports <strong>of</strong>different organizations and selectionsfor SAFA BPA Awards were made.International AffiliationFollowing Auditing firms registered with ICAN has approved the affiliationpermission with the following International Audit firms.S. No.Name <strong>of</strong> the <strong>Nepal</strong>eseAuditing Firms1 Suvod AssociatesName <strong>of</strong> the international firmsThe international Accounting Group(TIAG)2 Joshi and Bhandari Ernst & Young International Limited3 B. R. S Neupane & Co.4 K. B. Chitrakar & Co. Alliott GroupDeloitte Touche Tohmatsu,A Swill Verien (DTT)5 Banskota & Co. Baker Tilly International6 G. P. Rajbahak & Co. B. K. R. international7 P. L. Shrestha & Co. HLB InternationalAmendment in the ICAN Regulation, 2061Few provisions under the ICAN regulation, 2061 have been amended withthe due approval <strong>of</strong> Government <strong>of</strong> <strong>Nepal</strong>, (Ministerial Level Meeting).They are as follows:Preview <strong>of</strong> SAFA iTAG Committee, 28-29,November, 2010, New DelhiRegional Standard SettersConference (RSS)Regional Standard Setters Conference(RSS) was held at New Delhi, Indiaon November 30 and December1, 2010. ICAN President CA. SunirKumar Dhungel and SAFA ExecutiveSecretary CA. ParamanandaAdhikari attended the conference.In the conference the currentactivities for Accounting Standard indifferent countries and process forconvergence or adoption <strong>of</strong> the IFRSas the National Accounting Standardswere discussed and shared with theparticipants.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 55
About 1100 delegates attended the conference acrossthe world. The Conference proved to be an aptopportunity for accountancy pr<strong>of</strong>essionals and gavethem opportunity to update themselves on emergingparadigms in the context <strong>of</strong> international economicdevelopments and changes.Participants <strong>of</strong> RSS Conference, 30th November to 1 December, 2010,New Delhi.Left to Right: Mr. Sanath Fernando, CA. Pradeep K. Shrestha, CA.Paramananda Adhikari, Mr. Riyaz Mihlur, Mr. Nishan Fernando and CA.Sunir Kumar Dhungel18 th World Congress <strong>of</strong> <strong>Accountants</strong>18th World Congress <strong>of</strong> <strong>Accountants</strong> was held inMalaysia, Kuala Lumpur on November 8 to 11, 2010. TheCongress was participated by the ICAN President CA.Sunir Kumar Dhungel along with other nine participantsincluding Vice President <strong>of</strong> ICAN CA. Sudarshan RajPandey, SAFA President CA. Komal Bahadur Chitrakar,Executive Secretary CA. Paramananda Adhikari. Likewise, The Council Members <strong>of</strong> ICAN CA. Suvod KumarKarn, CA. Madhu Bir Pande, CA. Sujan Kumar Kafle,RA. Mohan Regmi, RA. Dev Bahadur Bohara and RA.Krishna Prasad Paudel also joined the conference.During the Congress four Preliminary Session andthirty five Concurrent Sessions were organized. Inthe mean time SAFA Forum Organized the programcalled “Implementation <strong>of</strong> IFRS & IPSAS in DevelopingCountries”.Among the sessions <strong>of</strong> the conference, one was relatedwith SAFA member bodies’ panel discussion on countryperspective on governance & ethics. Past-President <strong>of</strong>SAFA CA. Komal B. Chitracar was the keynote speakerat the session and in his keynote address he spoke atlength about SAFA and its initiatives. He acknowledgedthat the ICAI had been one <strong>of</strong> the founders <strong>of</strong> SAFAand commended ICAI support in development <strong>of</strong>SAFA. He stressed the need for raising a united voiceat international level to address the problems <strong>of</strong>governance and ethics from the SAFA region too.CA. Sunir Kumar Dhungel, President ICAN and one <strong>of</strong> thepanelists at the session said that he was proud to be amember <strong>of</strong> the ICAI. He talked about the history <strong>of</strong> ICANand various arrangements and memorandums that the<strong>Institute</strong> had undergone in the past.The other members <strong>of</strong> the delegation were CA.Sudarshan Raj Pandey, Vice President, CA. BinayPrakash Shrestha, Executive Director, CA. ParamanandaAdhikari, Technical Director, Mr. Binod Prasad Neupane,Joint Director and CA. Achyut Raj Joshi, Member.President led the delegation to DelhiPresident CA. Sunir Kumar Dhungel, led theseven member delegation from the <strong>Institute</strong> <strong>of</strong><strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong> to participate inthe international conference organized by ICAI onthe theme “Accountancy Pr<strong>of</strong>ession: Catalyst toSustained Economic Growth” on January 4-6, 2011 inNew Delhi on the issues <strong>of</strong> contemporary relevance toaccountancy pr<strong>of</strong>ession, and to deliberate on issuesrelated to governance, financial engineering, regulatorycompliance, creation <strong>of</strong> stakeholder values, corporatesocial responsibility, etc.Participants <strong>of</strong> 72 nd SAFA Assembly Meeting at Chennai, IndiaSitting left to right: Mr. Md. Abdul Aziz (ICMAB), Mr. B.M. Sharma(ICWAI), CA. Komal Chitrakar (ICAN), Mr. A.N Raman (ICWAI), Mr. Muhammad Rafi (ICMAP), Mr. Laxman R. Watawala (ICMASL), Mr. AmarjitChopara (ICAI).Standing left to right: Mr. Sudhir Sharma (ICWAI), Mr. Md. ShahadatHossain (ICAB), Mr. M. Gopalakrishna (ICWAI), Mr. G. Rameswamy(ICAI), CA. Suvod Kumar Karn (ICAN), CA. Sudarshan Raj Pandey (ICAN), Mr. Sujeewa Rajapakse (ICASL), Mr. Mudit Bashistha (ICAI) and CA.Paramananda Adhikari (ICAN).56 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
72 nd SAFA Assembly Meeting at Chennai,IndiaVice President Mr. Sudarshan Raj Pandey led the 4member delegation from ICAN to participate in the72nd meeting <strong>of</strong> the Assembly <strong>of</strong> SAFA which was heldat Hotel Taj Connemara, Chennai, India on 9th January2011. Mr. Komal Chitracar, President SAFA, Mr. SuvodKumar Karn, Board Member, SAFA and Mr. ParamanandaAdhikari, Executive Secretary SAFA attended theAssembly meeting. The presidency, which was held by<strong>Nepal</strong>, was handed over to Mr. A.N. Raman <strong>of</strong> ICWA Indiaon the occasion.Blood Donation ProgramIn the association with <strong>Nepal</strong> Red Cross Society, <strong>Nepal</strong><strong>Chartered</strong> <strong>Accountants</strong> employee union and <strong>Nepal</strong><strong>Chartered</strong> <strong>Accountants</strong> Student Association has jointlyorganized the blood donation program on the premises<strong>of</strong> the institute on Magh 5, 2067. In the program 120blood donors donated the blood.OrthersIn-house Training Program for StaffsThe <strong>Institute</strong> has organized two days in-house trainingprograms for the staff members <strong>of</strong> the <strong>Institute</strong> toempower their leadership capacity. The program washeld at a Patleban Vineyard Resort, Kathmandu on 20 and21 Magh, 2067. The resource persons for that trainingprogram were Mr. L P Bhanu Sharma and Mr. Navin KumarJha. The topic <strong>of</strong> the Training was “LEADERSHIP THROUGHEXCILLENCE”. Thirty Six staffs were present at in-housetraining and it was led by the Executive Director <strong>of</strong> ICAN,Mr. Binay Prakash ShresthaStaff Members and Students <strong>of</strong> ICAN are participating in the blooddonation program.ju{a[l4 ;DjGwL ;"rgfxfn} ;+;f]wg ePsf] g]kfn rf^{*{ PsfpG^]G^\; lgodfjnL, 2061 Dff ePsf] ;+;f]wgn] lgod 54 -8_ df b]xfo adf]lhd Joj:yf u/]sf] % .æ2067 ;fn cfiff( d;fGt;Dd afl)fHo ljifodf :gfts tx pQL)f{ ul/;s]sf æ#Æ au{sf k]zfut k|df)fkq k|fKt btf{jfnf n]vfk/LIfsx?nfO{;d<strong>of</strong>jwL tf]sL lgj]bg cfJxjfg u/L Ps k^ssf] nflu dfq æuÆ ju{sf] k]zfut k|df)f kqsf] ju{df a[l$ ug{ ;Sg]%Æ pQm Joj:yfnfO{sf<strong>of</strong>{Gjog ug{ kl/ifbsf] 146 cf}+ j}&sn] <strong>of</strong>]Uo ;b:ox?af^ oxL 2068 kf}if d;fGt leq b/vf:t lbg ;"lrt ug]{ lg)f{o eP cg';f/ ju{j[l$sf]nflu pNn]lvt <strong>of</strong>]Uotf k'u]sf æ#Æ au{sf k]zfut k|df)fkq k|fKt btf{jfnf n]vfk/LIfs ;b:ox?nfO{ 2068 kf}if d;fGt leq b/vf:t k]zug'{x'g ;"lrt ul/G% .tf]lsPsf] ;doeGbf kl% k|fKtx'g] lgj]bgdf s'g} sf/jfxL gx'g] ePsf]n] ;f] ldlt leq pNn]lvt <strong>of</strong>]Uotf v'Ng] z}lIfs k|df)fkq ;lxt lgj]bglbg'x'g ;d]t hfgsf/L u/fO{G% . b/vf:t kmf/d ;+:yfaf^ jf ;+:yfsf] j]j;fO{^af^ *fpgnf]* ug{ ;lsg]% . kmf/d z'Ns ? 100 -cIf?kLPs ;o dfq_ x'g]% .g]kfn rf^{*{ PsfpG^]G^\; ;+:yfThe <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong>(Established under the <strong>Nepal</strong> <strong>Chartered</strong> <strong>Accountants</strong> Act, 1997)The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 57
ICAN IntroductionThe <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong> (ICAN) was established under a special act, The<strong>Nepal</strong> <strong>Chartered</strong> <strong>Accountants</strong> Act, 1997 to enhance social recognition and faith <strong>of</strong> people at largein the accounting pr<strong>of</strong>ession by raising public awareness towards the importance <strong>of</strong> accountingpr<strong>of</strong>ession as well as towards economic and social responsibility <strong>of</strong> the accountants, and to contributetowards economic development <strong>of</strong> the country. The <strong>Institute</strong> is an autonomous body andthe Council is fully authorized by the Act to undertake accountancy pr<strong>of</strong>ession in <strong>Nepal</strong>.ICAN History1934 The first ever Companies Act in <strong>Nepal</strong> legislated1956 New Companies Act enacted.Books <strong>of</strong> accounts to be maintained specified. Accounts to be audited by an auditor licensed bythe Dept <strong>of</strong> Industries1974 Auditors' Act legislated, which entrusted the Office <strong>of</strong> Auditor General (OAG) to issue auditor'slicense and set qualification <strong>of</strong> auditors in four different classes <strong>of</strong> Registered Auditors.<strong>Chartered</strong> <strong>Accountants</strong> with five years experience given Class A license with unlimited authorityto audit any organization. Others are given license <strong>of</strong> Class B, C, and D depending upon theeducation and experience as specified in the Auditors' Act.Disciplinary powers vested upon the Auditor General who was to receive recommendation froma Disciplinary Committee.1978 Formation <strong>of</strong> the Association <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong> (ACAN) as a voluntary socialorganization with an initial membership <strong>of</strong> 15 <strong>Nepal</strong>i chartered accountants.ACAN applied for registration under the Societies Registration Act 1979 New Companies Actenacted. 1982 ACAN registered under the Societies Registration ActACAN formally inaugurated by the Minister <strong>of</strong> Finance1984 ACAN invited to participate in the South Asian Federation <strong>of</strong> <strong>Accountants</strong> (SAFA) as an Observer.1985 SAFA formed a Committee to assist ACAN in recommending to the Government for the formation<strong>of</strong> an accounting body in <strong>Nepal</strong>.SAFA committee submitted a report.1988 HMG formed a high level study group to recommend on the formation <strong>of</strong> an autonomous selfregulatory accounting body in <strong>Nepal</strong>.1990 ACAN held a SAFA international seminar, which was inaugurated by the Prime Minister who committedthe formation <strong>of</strong> an accounting body in <strong>Nepal</strong>Accounting pr<strong>of</strong>ession's image was uplifted.1997 <strong>Nepal</strong> <strong>Chartered</strong> <strong>Accountants</strong> Act, 1997 received the royal seal on 30 January 1997.The <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> <strong>Nepal</strong> (ICAN) established.ICAN to have two classes <strong>of</strong> members: <strong>Chartered</strong> <strong>Accountants</strong> and Registered Auditors.Auditors' Act to be repealed upon the notification in the Official Gazette.All Registered Auditors holding audit license invited to apply for the membership <strong>of</strong> ICAN.First Council <strong>of</strong> ICAN formed on 1 August 1997.Membership <strong>of</strong> the South Asian Federation <strong>of</strong> <strong>Accountants</strong> (SAFA)New Companies Act enacted with revised provision on accounting and auditing1998 MOU on technical cooperation signed with the <strong>Institute</strong> <strong>of</strong> <strong>Chartered</strong> <strong>Accountants</strong> <strong>of</strong> India.Membership <strong>of</strong> the Confederation <strong>of</strong> Asian and Pacific <strong>Accountants</strong> (CAPA) 1999 <strong>Nepal</strong> <strong>Chartered</strong><strong>Accountants</strong> Regulation1999 came into effect on 29 September 1999Launching <strong>of</strong> ICAN along with an international seminarHMG signed technical assistance agreement with ADB for capacity building <strong>of</strong> ICAN for a project<strong>of</strong> 12 months period.2000 First CA Examination held in November 20002002 First Amendment <strong>of</strong> <strong>Nepal</strong> <strong>Chartered</strong> <strong>Accountants</strong> Act, 1997ICAN was made the only regulating authority in accounting pr<strong>of</strong>ession when the Act was amended.2003 ICAN became Associate Member <strong>of</strong> IFAC in 20032004 ICAN signed second MOU with ICAI in July 20042008 ICAN Become a Member <strong>of</strong> IFAC in 2008 November.58 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011
ICAN ACTIVITIESHis Excellency Ram Baran Yadav, President <strong>of</strong> <strong>Nepal</strong> inauguratingSAFA Summit, 2010.Foreign Delegates and ICAN Officials with His ExcellencyPresident <strong>of</strong> <strong>Nepal</strong>.SAFA BPA Award Winners with Finance Minister Mr. SurendraPandey.Dignities on Dash on the occasion <strong>of</strong> 14th Anniversary <strong>of</strong>the <strong>Institute</strong>.Rt. Honorable Prime Minister Madhav Kumar <strong>Nepal</strong> on theSpeech.President <strong>of</strong> ICAN CA. Sunir Kumar Dhungel on the Speech.The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011 59
60 The <strong>Nepal</strong> <strong>Chartered</strong> Accountant | March 2011