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T h e N e p a lMarch 2011Volume13 No3CharteredAccountantJournal of the Institute of Chartered Accountants of NepalSERVICEPROFESSIONThe Nepal Chartered Accountant | March 2011 1

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CONTENTSEditorial 5President's Message 6Fair Value Accounting from Nepalese 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 of Nepal 14WCOA-The Olympics of Accountants 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 lCharteredAccountant(Quarterly Journal of The Institute of Chartered Accountants of Nepal)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 Institute of Chartered Accountants of Nepal,Babar Mahal, P O Box 5289, Kathmandu, NepalTel. 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, NepalSubscription 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 of the Institute. MemberBodies of Safa may quote or reprint any part of this Journal with dueacknowledgement. For others, solicitation is expected.Combating Insurance Fraud 45NewsSAFA SUMMIT-2010 5114 th Anniversary of the Institute 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 of members 55International ParticipationSAFA iTAG Committee Meeting 55Regional Standard Setters Conference (RSS) 5518 th World Congress of Accountants 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 of 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 ofthe 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 Nepal, the corporate and business house have beenacting as the funding agency or directly involved in the following social activities;- Construction of roads, bridges, Chautaras- Drinking water, canals- Orphan and elderly homes- Construction of schools- Advocacy program for social awareness- Scholarship for children- Sports activities and events- Community and VDC buildings, etc.Nowadays, the culture of doing CSR activities amongst the corporate house in Nepal is emerging as the importanceof the CSR activities is much more than any of the marketing activities. The CSR activities enhance the image ofthe 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 of which is analyzed in the form of the cost benefit analysis.Importance of 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 Nepalhave 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 of influence, a set of core value in the areas of human rights, labor standards, theenvironment and anti-corruption etc. There are 10 set of principles set out by the Global Compact as below;Principle 1: Business should support and respect the protection of internationally proclaimed human rights;Principle 2: Make sure that they are not complicit in human right abuses.Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right tocollective bargaining;Principle 4: The elimination of all forms of forced and compulsory labor;Principle 5: The effective abolition of child labor; andPrinciple 6: The elimination of discrimination in respect of 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 of environmentally friendly technologies.Principle 10: Businesses should work against all forms of 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 of companies.Let us advocate from our level to promote the CSR activities and adhere to the principles of 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 of it in effective manner and I am happy to inform themembers that having sole objective of harmonizing the relations with theregulating bodies, we have confirmed various interaction programs to createawareness on the limited liabilities of 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 Nepal 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 of the institution toprotect, safeguard and regulate its members.Specially, in the time like this when we have many instances of issues beingraised regarding the public responsibility and liability of 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 of the institutions are as follows.About activities of the Institutions• Successfully organize the annual day program with the chairmanship ofHon. Prime Minister Mr. Madhav Kumar Nepal.• The construction of the ICAN building has initiated.• Since the employees are the back bone of the organization, the requiredtrainings have been provided to the staff for enhancement of the capacity.Education and Examination Side• The preparation of the study material of various levels has been in highspeed with high priority to ensure quality of chartered accountancyeducation.• The study material of various levels has been in regular process ofevaluation and up gradation as per the need of the time.• The career counseling program has been conducted in Kathmandu and thevarious places of the country to educate the importance of the charteredaccountancy to the related persons through career counseling.• Regular inspection of the examination is in place for the improvement ofthe examination system as per need of time.

Members Service and Professional Development• With the objective of capacity enhancement of the members, the CPE trainingshave been conducting in the various places of the country with amendment ofthe subject matter.• The important Subject matter has been amended in the Nepal CharteredAccountants Rules 2061.• One man one profession has been already effective to Chartered Accountantsfrom 2067/09/20 and where as to registered auditor it will be effective from2070/04/01.• The provision of conducting the peer review of the audit firm by auditor is in laststage on the basis of the statement in peer review issued by the institute.• With the technical help from the Institute of Chartered Accountants of India(ICAI), the ISA course shall be run in April this year for the first time to themembers including the Chartered Accountant who have passed from this institutealso and IFRS Certification course are underway to run in the month of 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 Institute ofChartered Accountants of India (ICAI) to more harmonize who have contributedin development and expansion of 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 of 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 of support in the future.Thank you,CA. Sunir Kumar DhungelPresident

AUDITINGFair Value Accounting fromNepalese PerspectiveCA. Binod B. RajBhandary*Accountants trained in historicalcost concept are no different inNepal from those trained in theother parts of the world. Nepal isamong the developing nations inthe world. What is more importantfor the accountants in Nepal, 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 meaningof fair value surpassing beyondhistorical cost. The reasons soattributed are (i) privatizationand restructuring of public sectorenterprises, (ii) investment insecurities held by employeesretirement funds and life insurancecompanies, (iii) inadequate market,(iii) tax laws with respect toacquisition and disposal of 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 Nepal. Government ofNepal is having either full ownership or substantialshareholding in these public sector enterprises (PSEs).These PSEs hold large quantities of property, plantand equipments as well as inventories. They are allreporting their financial statements on historical costbasis. With the advent of liberalization, governmenthas been increasingly disposing of these assets andtheir business to private sector – either outright saleor long term lease, in the name of privatization andrestructuring. The question is: what government getsas purchase consideration in their handover processreflects fair value both in respect of the assets disposedof and handing over of the running business. Theaccounting profession should give response to therequirement of 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 of companies as well asgovernment. The securities held by them are eitherlisted or unlisted. The conventional way of accountingand reporting value of these securities in their financial* Mr. Rajbhandary is a past president of ICAN.8The Nepal Chartered Accountant | March 2011

AUDITINGstatements has been at lesser of cost or net realizablevalue. The question arises is: whether their reporting inthe financial statements responds to the requirementof fair value of these securities. Similarly, investmentby these funds on commercial properties which areso far reported on historical cost less depreciation donot also answer to the need of the fair value of theseproperties. Although the fair value of these investmentsshould equal to present value of estimated future cashflows from these securities, the question remains theprecise procedures involved and how they find place inthe financial statements within the context of financialreporting standards.Developing nation suffers from the syndrome of lackof market where transactions of various goods andservices freely take place at arms length transactions.Nepal 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. Nepal’sstock exchange and recently established commodityexchange should be encouraged to develop depth andwider coverage.Nepalese 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 professionseeking 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 of 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 of 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 comparabilityof their financial statements to ascertain the worth ofthese enterprises.The training and education for pursuing professionalaccountancy 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 professional 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 profession 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 of present value of 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 of the alternatives may be to prepare the specialpurpose financial statements based on fair value. Thistype of special purpose financial statements couldfind the place as supplementary to financial reportingbased on general purpose financial statement. Equallyimportant area is the ability to review of 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 of standardsfor arriving at the fair value. This will answer to thequestion: How fair is the fair value? The professionshould respond quickly on this very important subjectof fair value so as to maintain its long cherishedreputation of ‘true and fair’ reporting before beingdragged into ‘true but unfair’.The Nepal Chartered 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 of a smallentity compared to that of 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 of 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 of the frequently asked questionsrelated to implementation of Guidance Notes in itsessence.Q1: As a sole practitioner, do I really need todocument my system of 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 of 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 ofQC. However, the ultimate responsibility for the systemof 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 of engagement that would requiresuch a review, based on considerations of risk, size,complexity and potential public interest. It is worthemphasising that all audits of “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 of EQCRreviewers are given in NSQC1.Q4: I am a sole practitioner and have identified theneed for an EQCR reviewer on one of 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 of 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 of action for us?A5: First of all that firm should consider whether itis in a position to continue as auditor, particularlyfor the specialist audits. This will include assessmentof whether the firm has staff with the necessaryknowledge and experience. In terms of 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 of the Institute has called forparticipation in the Quality Assurance Process andhence it is but natural that all the practicing firmsand individuals should understand the requirement ofNSQC1. Active participation of the members of ICAN inPeer Review process will ensure quality of 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 of 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 Nepal Chartered Accountant | March 2011 11

AUDITINGMandatory Auditor RotationPotential impact on financial reporting qualityCA. L. D. Mahat*BackgroundSection 111 of the Companies Act 2063requires mandatory rotation of auditor oraudit firm in every three years for all publiclimited companies. Also, Section 60 of theBanks and Financial Institutions Act requirescompulsory rotation of auditor or audit firmfor all banks and financial institutions. Thewisdom of the legislating mandatory rotationof auditor may be questioned, even thoughit is well intentioned. Mandatory rotation ofauditor as the effective tool to strengthenauditor independence and improve auditquality may have arguments in favor oragainst.Arguments in favor ofmandatory rotationThe mandatory rotation of auditors has longbeen recommended as a means to improveaudit effectiveness as it confers severalbenefits. The specific benefits that wouldaccrue from mandatory rotation of auditorfall into following areas:Effective peer review: Mandatory rotationof auditors contributes for the creationof 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 of conflicts of interest: Mandatory rotationof auditors contributes for the prevention of conflicts ofinterest that can easily arise from long-standing clientrelationships. When an auditor is allowed for the auditof an institution for a long period, audit quality maybe impaired due to the possibility of auditor gettinginvolved into matters relating to conflict of interest.The conditions affect issues of audit quality may includecloseness to client management, lack of attention todetail due to staleness and redundancy, and eagerness toplease the client.The nature of auditing requires that auditors interactextensively with their clients. Long-term relationshipsmay result in a troublesome degree of closeness betweenmanagement and the auditor. In Enron scam, Andersenauditors and consultants were given permanent officespace at Enron headquarters here and dressed businesscasuallike their Enron colleagues. They shared in officebirthdays, frequented lunchtime parties in a nearby parkand weekend fund-raisers for charities.Continuation of auditor for a fairly longer period maylead to a situation where auditor may become staleand view the audit as a simple repetition of 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 Chartered Accountant Member of Nepal.12 The Nepal Chartered 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 of a long-term relationship with the clientand possibility of 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 ofthe arguments in favor of auditor rotation.Promotion of more competitive market: Promotion ofa more competitive market for audit firms, which wouldlead to higher quality audits.Arguments against mandatoryrotationThere are plenty of arguments against mandatoryrotation of auditor. These are described below:Increased cost: Mandatory rotation of auditors leadsto a substantial increase in the total cost of auditingcomprising of 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 of historicalaccounts, review of the tax situation and creation of apermanent archive. Rotation of auditor at shorter intervalresults in incurrence of such costs by the auditor morefrequently which ultimately will be passed on the client.From the client’s perspective, a change of 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 of 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 ofthe client, and during that period, the quality of auditmay be impaired. Rotation of auditor may, in fact, reducethe effectiveness of audit as the new auditor will needtime to become familiarised with and understand thebusiness of the company. Diminution in audit qualitywould also result from disrupting the ongoing relationshipthat typically provides an auditor with comprehensiveknowledge of 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 of 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 Actof 2002. Reform introduced by the Sarbanes-Oxley Actdirectly related to auditors include the establishmentof the Public Company Accounting Oversight Board,increased audit committee responsibilities, andmandatory rotation of lead and reviewing audit partnersafter five consecutive years on an engagement.It is important to note that even Sarbanes-Oxley Actrequires compulsory rotation of audit partners, not theaudit firm and that too at the interval of five years. Veryfew countries such as Italy, Brazil and South Korea havestipulated mandatory rotation of the audit firms, mostothers have stipulated only rotation of audit partners.It makes more sense to have mandatory audit partnerrotation rather than having firm rotation which confersbenefits of rotation by also addressing drawbacks ofrotation.ConclusionThere are plenty of arguments in favor of as well asagainst mandatory rotation of auditor specially therotation of audit firm. While mandatory rotation ofauditor or audit firm confers benefits like effective peerreview, prevention of conflict of interest and promotionof 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 of five years ratherthan having firm rotation.The Nepal Chartered Accountant | March 2011 13

ACCOUNTINGCash or Accrual Accounting– An Alternative for the Government of NepalDr. pawan adhikariramesh k. sharma 1Accrual accounting in the publicsectorOngoing financial reforms in many countries are oftenclaimed to be a consequence of 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 of NPM also referred to as New PublicFinancial Management (NPFM) imply the adoption ofaccrual accounting in public sector organizations withthe primary objective of getting them to run better(Guthrie et al., 1999). Accrual accounting has beenenvisaged as a means of commercializing governmentactivities, as well as of enchaining the accountabilityof government to its stakeholders. In recent years, theimportance of accrual accounting is further emphasizedin order to demonstrate the costs and performanceof 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 professional organizations such as the InternationalFederations of Accountants (IFAC) and the Federation ofEuropean Accountants (FEE) are the major propagatorsof 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 of accrual accounting in the public sector.Similarly, the widespread international frameworks forthe statistical approaches to accounting, including theUN’s 2008 System of National Accounts, the EuropeanSystem of Accounts 95, and the IMF’s GFS Manual2004, are now on the accrual basis. Internationalorganizations have envisaged the adoption of accrualaccounting in the public sector as both progress andself-evident.Overview of the adoption ofaccrual accountingAustralia and New Zealand are regarded as the highintensityaccrual accounting adopters. These twocountries embarked on the process of 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 of its membercountries have been using some forms of accruals atdifferent government levels ranging from agencies todepartments to central governments. Similarly, thereport of 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 of accrual accounting in their public sectors(Athukorala and Reid, 2003). In the context of SouthAsia, the South Asian Federation of Accountants (SAFA)(2006) has recommended its member countries to1 Dr.Pawan Adhikari from Bodø Graduate School of Business, University of Nordland,Norway and Mr. R.K. Sharma from Public Service Commission, Government of Nepal.14 The Nepal Chartered Accountant | March 2011

ACCOUNTINGpursue a phased-program for conversion of prevailingcash accounting into accrual accounting for thegovernment. In fact, India has already initiated theprocess of 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 of 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 processof implementing the accrual basis IPSASs. However,there is envisaged a lack of framework for adoptingand implementing accrual accounting in a unified wayat the global level. This has resulted in the emergenceof various forms of accrual accounting, ranging frompure to various modified versions of 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 of the statement of financial position, thestatement of financial performance, the cash flowstatement, and the statement of changes in netequity/assets, amongst others. The proponents ofaccrual 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 of accrual accounting both at the aggregatelevel (whole-of-government) and organizational level(Athukorala and Reid, 2003). It is claimed that at theaggregate level, the accrual-based information isuseful to enhance the effectiveness of governmentdecisions on aggregate demands, to reinforce theaccountability of executive government, and todemonstrate sustainability of 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 ofaccrual 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 of thoseresources,• to access the financial position, financialperformance, and cash flows of the entity; and• to undertake decisions about providing resourcesto, or doing business with, the entity.Arguments against accrualaccounting in the public sectorA large number of academicians and practitionersare yet to be convinced with the propagated benefitsof 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 of accrual accounting,particularly international organizations and professionalaccountants, 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 profit and ensure solvency.A challenging issue in accrual accounting has been therecognition and valuation of assets, mainly heritageassets, infrastructure assets, and community assets.There are also concerns about the non-neutrality ofaccrual accounting, particularly in dealing with noncashitems such as depreciation and impairment.Lessons drawn from the experience of countries thathave introduced accrual accounting reforms show thatthere is a lack of understanding and use of accrualinformation by potential users, as well as unintendedconsequences due to implementation difficulties. Forexample, although accrual accounting was introducedThe Nepal Chartered Accountant | March 2011 15

ACCOUNTINGin the UK at the beginning of the new century, themajority of 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 introductionof accrual accounting and budgeting has reallyresulted in improved efficiency and accountability forgovernments. Similarly, the use of 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 profitability and financialposition of the government.It has been acknowledged that a change towardsaccrual accounting should be a part of 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 seriesof preconditions that are to be considered prior tointroducing accrual accounting (Hepworth, 2003). Itis argued that accrual accounting reforms initiatedwithout recognizing the significance of these conditionsare tended to worsen rather than improve financialcontrol and management.Accrual accounting in thegovernment of NepalAccrual accounting is not a new phenomenon in thegovernment of Nepal. In fact, the need and relevancyof accrual accounting in Nepal has been a subject ofdiscussion 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 of accrual accounting.A diagnostic survey on Nepalese government accountingand auditing performance, conducted with technicalassistance from the ADB in the late 1990s, had alsoprovided recommendations regarding the use ofaccounting standards and accrual accounting. At thebeginning of the new century, the World Bank’s CFAAreport urged the government to develop a road-mapfor the medium to long term introduction of 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 of the high-levelexpenditure committee formed to seek out alternativesfor streamlining public expenditure management hadfavored a move towards the accrual basis of accounting,the other two reports issued in the same year, i.e.2005, were against the idea of an immediate transitiontowards accrual accounting. Both the joint financialaccountability assessment report of 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 of Nepalese public sectoraccounting and auditing standards and practices,conducted in close collaboration with governmentofficials and professional accountants in 2006, hadalso favored improvements in the prevailing cash basisaccounting system by complying with the cash basisIPSAS. The main argument of the World Bank was thatthe implementation of the cash basis IPSAS wouldhelp the government address many of the deficienciesenvisaged in the existing cash basis accounting andprovide a means of elevating the country’s capacity topractice accruals in the future. The PEFA report issuedby the FCGO in 2008 also recommended the use of thecash basis IPSAS to raise the score on a number of PFMindicators.Although the implementation of Nepal Public SectorAccounting Standard corresponding to the cash basisIPSAS has now been elevated on top of the governmentaccounting reform agenda, the debate on accrualaccounting is not yet finished. The IMF is seemedto be still emphasizing the need for the immediateimplementation of accrual accounting in Nepal. TheIMF’s report on observance of standards and code issuedin 2007 had suggested the government to initiate a steptowards the accrual basis of accounting. More recently,the budget management and public expenditurereevaluation committee of 2009 has presented asimilar recommendation enforcing the government todevelop a detailed plan for the introduction of accrual16 The Nepal Chartered 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 of accrualsappropriate for Nepal. The committee has clarifiedthat the existing cash basis accounting is inadequateto present a comprehensive financial situation ofthe government reincarnating the debate on accrualaccounting.Conclusion: What is the bestalternative for Nepal?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 of accrual accounting, are still in theprocess of 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 ofaccounting. Similarly, a large number of developingnations have been considering the adoption of the cashbasis IPSAS in the near future as part of improvementsin their existing cash accounting (IFAC, 2010).Given the poor infrastructure along with inadequateresources and expertise, Nepal is indeed not in aposition to reap the benefits of accrual accounting.Instead of debating on accrual accounting, anincremental approach, as stated by Athukorala andReid (2003), therefore seems to be a better alternativefor the government of Nepal. This alternative impliesimproving the existing cash basis accounting andfinancial reporting at the outset and gradually adoptinga modified version of accrual accounting using theaccrual basis IPSASs. International experience showsthat it takes a time period of around 8-10 yearsto fully implement accrual accounting even in theICAN OBJECTIVES• To play the role of regulatory body in order to encourage the members to carry on accountingprofession being within the limit of the code of conduct laid down so as tomake accounting profession transparent.• To develop, protect and promote the accounting profession by making the members andthe practicing accountants understand the responsibility towards the importance of theaccounting profession and the accountancy.• To provide quality professional education to accounting professionals in consonance withinternational norms and practice so as to make the accounting profession respectableand reliable.• To support the government with constructive suggestions towards the formulation andthe revision of 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 ofdiscloses in financial reporting practices.The Nepal Chartered Accountant | March 2011 17

ACCOUNTINGWCOA–The Olympics of AccountantsCA. Paramananda Adhikari*Background/AbstractRecently, I have participatedin the 18 th World Congress ofAccountants (WCOA), fondlycalled “Accountants Olympics orWorld Cup” which took place inKuala Lumpur, Malaysia from 8-11November 2010. It has been, ofcourse, an awesome experiencefor me. It was world’s singlelargest gathering of 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 of the congresswere the International Federationof Accountants and the MalaysianInstitute of Accountants. Itwas held in the Kuala LumpurConvention Centre (KLCC), whichwas a wonderful venue next tothe Petronas Twin Tower, the prideof Malaysia that perfectly suiteda conference of the size of 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 of IFAC, the global organization for theaccountancy profession representing over 2.5 millionaccountants across 163 member organizations spreadover 124 countries. It is the foremost international eventfor the accountancy profession. This overwhelmingparticipation of the accountants is highly acclaimedacross the globe.The opening ceremony of the congress was amazing fromthe perspective of sitting in a room with over 6,000accountants. Robert Bunting, the outgoing presidentof IFAC opened the congress on 8 th evening. The PrimeMinister of 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 of congress was “Accountants: 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 ofthe accountants’ benefit to the performance of 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 of theirorganizations.* The author is Technical Director of ICAN and ex-Executive Secretary of SAFAThe Nepal Chartered Accountant | March 2011 19

ACCOUNTINGFurther, in my view, the theme of the congress clearlytransmits the message that our history of 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 of 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 of Finance, Prof. StavrosThomadakis, Chairman of the International PublicInterest Oversight Board, Sir David Tweedie, Chairmanof IASB, Mr. Michel Prada, Chairman of the InternationalValuation Standards Council, Dr. Zeti Akhtar Aziz,Governor, Bank Negara Malaysia, Dr. Paul Pacter, BoardMember IASB, Prof. In Ki Joo, President-CAPA, Mr.Goran Tidstrom, President, IFAC, Mr. Robert L. Bunting,outgoing President, IFAC, Prof. 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 of the subjects whichwere:PlenarySession1.2.TopicsAccountants : Sustaining Value Creation in theBorderless EconomyIslamic Finance : Strengthen the Global FinancialMarket3.4.Accounting for Sustainability : The ConnectedReporting FrameworkAccountants 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 of the IslamicFinance system is prohibition of the payment andreceived of interest (riba). Interest (riba) refers to anincrease or excess, which accrues to the owner in anexchange or sale of a commodity or by virtue of a loanarrangement without providing any equivalent value tothe other party. Money is not considered a commodityin Islam. The prohibition of interest arises from thefact that money is only perceived as a medium ofexchange and unit of 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 of 35, during the wholecongress program. Delegates who came from acrossthe globe attending the congress were to very eagerfor choice of topic when it comes to decide on whichconcurrent session they should to attend. With 35sessions to choose from, running on five tracks, a widerange of 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 of the accounting profession,corruption and money laundering, XBRL, climatechange, IFAC member body compliance, SMEs andSMPs, forensic accounting etc. Issues of convergenceof national standards with IFRS were also deliberated.The details of topics of the concurrent sessions aregiven in the following table.20 The Nepal Chartered Accountant | March 2011

ACCOUNTINGS.N. Concurrent Session-1: Topics1.2.International Financial Reporting Standards (IFRS)for Small and Medium Enterprises (SMEs)Developing the Profession Globally -The IFAC’sDriving Force3.Human Governance -The Nucleus of CorporateGovernance4.International Financial Reporting Standards (IFRS)Convergence-The Way Forward5.Corporate Reporting to Business Reporting – The WayForward6.Strengthening the Accounting Profession in EmergingEconomies7.Accounting Technicians – The Building Block of 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 of 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 of Small Medium Practices (SMP) in ProvidingBusiness Support Services2.International Ethics Standards Board (IESBA) –Adopting the New Code of Ethics3.The Effect of Shariah Principles on AccountingMethods for Islamic Banks4.Function of 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 Accountants7. Shaping the Next Generations of AccountantsS.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 of Islamic Finance in a GlobalFinancial MeltdownAmong the concurrent sessions, I attended thesession of IFRS Convergence. The prominent speakershighlighted about how to facilitate the adoption ofinternational 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 of 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 of 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 of job creation, socialcohesion, innovation and economic growth. In many, ifnot most, countries around the world, SMEs representThe Nepal Chartered Accountant | March 2011 21

ACCOUNTINGthe vast majority of entities as well as the majorityof private sector employment and GDP. According tothe OECD, SMEs accounts for over 95% of enterprisesand approximately 60–70% of employment in OECDcountries.The next session outlined IFAC initiatives for theSMP sector, which included more prominence of SMPmembers on boards, committees, and a change infocus to “small is beautiful” rather than the “big one”.Therefore, IFAC recognizes the importance of 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 of high quality; this in turn helps SMEs to growand develop.The final session I attended was related to Role of SMPsin Providing Business Support Services. The speakersdescribed it from their own country perspective andseem useful to be shared.Challenges to AccountingProfession and AccountantsThe event was important due to the attendance ofprominent players in the business world across theglobe. The congress served as an excellent platform forexchange of 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.Professional Accountants exist because of societallicense given to them by the society. They are thereforerequired to act in the best interest of the public andnot just serve the interest of a particular/sectionalgroup. Professional accountants operate in all facetsof the global economy creating value and upholdingbusiness integrity in both the private and publicsectors. In a world demanding short-term solutions, theprofessional accountants are challenged to sustain longtermgrowth in the current vibrant economy.The global bond of the profession will be moredeveloped in the days ahead because of borderlesseconomy. The shift of power to the emerging economieswill also influence the role of accountants in thecoming years. Ethical standards, social responsibilityand sustainable reporting, of course, will influenceinto the future corporate reporting. As a single set ofglobal financial reporting standards, known as IAS/IFRSbecame more popular globally and financial reportinghas changed radically over the past ten years. Theimpact of 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 professional accountants.SAFA Forum-2010For this year, the representative of ICAN, Mr. KomalChitracar has been elected to the high office, aspresident of South Asian Federation of Accountants(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 of WCOA. I was alsopart of the Forum since I was coordinating the programas the Executive Secretary of SAFA. The Forum playedhost to myriads of enthusiastic and curious professionalsfrom 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, Prof. Dr.Andreas Bergmann, Chairman, IPSAS Board, IFAC, Mr.Ken Pushpanathan, Board Member, Malaysian Accounting22 The Nepal Chartered Accountant | March 2011

ACCOUNTINGStandards Board, Mr. Nishan Fernando, Past President,Institute of Chartered Accountants of Sri Lanka andMr. Federico Diomeda, CEO, European Federation ofAccountants and Auditors. Mr. Kevin Stevenson wasthe moderator of the panel discussion while Mr. A. N.Raman, Vice President, SAFA highlighted the objectiveof holding the SAFA Forum and expected outcome.At the outset, Mr. Kevin briefed about the topic andrequested each speaker of the panel to speak fromtheir country perspective on the topic specific. Prof.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 of 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 of the national standard-setterwhen international standards are to be adopted?• What is the role of 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 of the panel discussion, participantsunanimously viewed that this kind of programfacilitates to understand the sharing of 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 of Malaysia, in person. Dr. Mahathir isknown for his unconventional insights, ideas and viewson the present issue of 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 Nepal Chartered 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 of Pakistani currency unitRs.86 is equal to 1 USD and Pakistani Rs. 26 is equal to 1Malaysian Ringgit. Is this a symbol of strong economy ofMalaysia 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 oflaughter, 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.”Nepalese Delegates at WCOA 2010 with Nepalese Ambassador to MalayasiaDr. Rishi Adhikariprofession? Are we really benefitted from the“Accountants Olympics”? Are we, going to contributesomething to the Nepalese accounting profession?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:Nepal had a significant presence, eleven in number, atthe Congress as per the size of its current membership.Eleven Nepalese were part of over 6,000 delegates from134 countries. In fact, Nigeria had the second largestnumber of 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 ofthe team, working as the Executive Secretary of SAFA.In appreciation of the participation of the Nepaleseaccountants, the Nepalese Ambassador to Malaysia Dr.Rishi Adhikari attended the opening ceremony of WorldCongress of Accountants 2010. The ambassador fullypraised the Nepalese accountants for being the prideof the country by making their strong presence at thecongress.Adieu to the WCOA 2010The beauty of the Kuala Lumpur city and the levelof economic and technological development of theMalaysia were palpably incredible. Suffice to saythat the organization of the congress was marvelous.Moreover, the participants from all over the countriessavored it all. The programme ended on Thursday 11November 2010 with fond memories of Kuala Lumpurthat will remain in our memory indelible for a longtime. The President of 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 profession. I hope it is same for all 6,000delegates across the globe.Nevertheless, for Nepalese, the question was ‘’whenwill we be capable to strengthen our accounting24 The Nepal Chartered Accountant | March 2011

organizationOrganizational CultureCA. Mahesh DhakalOrganizational culture describes thepsychology, attitudes, experiences,beliefs and values (personal andcultural values) of an organization.It has been defined as the specificcollection of 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 kindsof goals members of an organizationshould pursue and ideas about theappropriate kinds or standards ofbehavior organizational membersshould use to achieve these goals.From organizational values developorganizational norms, guidelinesor expectations that prescribeappropriate kinds of behavior byemployees in particular situations andcontrol the behavior of 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 ofthe values, customs, traditions andmeanings that make a company unique.Corporate culture is often called “the character ofan organization” since it embodies the vision of thecompany’s founders. The values of 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 of behavior that specifically reflect theobjectives of 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 of the organization, but their presencecan influence the culture of the organization.Strong culture is said to exist where staff respond tostimulus because of their alignment to organizationalvalues. In such environments, strong cultures help firmsoperate like well-oiled machines, cruising along withoutstanding execution and perhaps minor tweaking ofexisting 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 Nepal Chartered Accountant | March 2011 25

organizationof another phenomenon, Groupthink. Groupthink asdescribed by Irving L. Janis is a quick and easy wayto refer to a mode of thinking that people engagewhen they are deeply involved in a cohesive ingroup,when members’ strivings for unanimity override theirmotivation to realistically appraise alternatives ofaction. 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 of their identity (avoidance ofconflict). In fact group think is very common, it happensall the time, in almost every group. Members that aredefiant are often turned down or seen as a negativeinfluence by the rest of the group, because they bringconflict.We can observe culture of an organization and askquestions in the manner listed below-Observe Culture• What do offices looklike• How are peopledressed• Where do they eatlunch• How would you characterizethe peoplein the hall-formal orinformal & laughing orserious• What kinds of pictures,signs, jokes are onthe walls? Listen forparticular languageAnd, notice the features ofculture of 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 of theorganization.Culture is very hard to change and employees needtime to get used to the new way of 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 of 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 of the organization, aswillingness to change of the senior management isan important indicator. The top of the organizationshould be very much in favour of the change inorder to actually implement the change in the restof the organization.3. Model culture change at the highest level: In orderto show that the management team is in favour ofthe change, the change has to be notable at first atthis level. The behaviour of the management needsto symbolize the kinds of values and behavioursthat should be realized in the rest of the company.It is important that the management shows thestrengths of 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 of 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 Nepal Chartered Accountant | March 2011

organizationOne of the key factors for successful operation isoperating environment and it is largely influenced bythe culture. Taking in another way, one can find theculture of an organization by looking at the arrangementof furniture, what they brag about, what members wear- similar to what one can use to get a feeling aboutsomeone’s personality.Organizational change efforts often fail because oflack of understanding about the strong role the cultureplays in organizations. That’s one of the reasons thatmany strategic planners now place as much emphasison identifying strategic values as they do mission andvision. The strongest component of culture is the beliefsand attitudes of 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 of culture in anorganization-Power CultureRole CultureTask CulturePerson CultureEach culture, stems from different assumptions aboutthe basis of 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 of 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 ofseasonal 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 of 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 offices look, the type of clothing thatis allowed are all symbolic reflectors of 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 of 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 Nepal Chartered Accountant | March 2011 27

organizationMake employee learning an ongoing practiceChange of 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 often resist changes hence it isthe task of 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 of 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 of clan.28 The Nepal Chartered Accountant | March 2011

IFRSIFRS and First Time AdoptionCA. Sewa Pathak*Never in the history and development ofinternational 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 of 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 ofthe 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 of IFRS is a full retrospectiveapplication of all IFRS standards that are effective asof the closing balance sheet date or reporting date ofthe first IFRS financial statements. IFRS 1 requires thecompanies to• Identify first IFRS financial statements.• Prepare an opening balance sheet at the date oftransition 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 of 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 of ICAN.The Nepal Chartered Accountant | March 2011 29

IFRSfaced at first time adoption. To make lessen the burdenof 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 ofall subsequent accounting under IFRS and is preparedat the date of transition which is the beginning of 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 of1 Srawan 2066. That would also be the date of openingIFRS balance sheet.IFRS 1 requires the opening IFRSBalance Sheet.• Include all of 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 of 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 ofchange in accounting policies in certain situations cannotbe performed with sufficient reliability. Therefore IFRS1 contains four mandatory exceptions to the generalprinciple of retrospective application.30 The Nepal Chartered Accountant | March 20111. De-recognition of financial assets and financialliabilities.2. Hedge Accounting3. Accounting Estimates and4. Assets classified as held or sale or discontinuedoperations.What is Optional Exemptions?In number of areas, retrospective application of IFRSshall require significant resources and may in certainsituations be impractical. In such circumstances, IASBhas decided that the cost of applying IFRS retrospectivelymay exceed the benefits in certain instances. IFRSprovides optional exemptions to general principles ofretrospective 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 of subsidiaries• Designation of 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 offers many benefits tothe companies specifically in terms of consistency,comparability and efficient use of 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 benefitsof 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 of datagaps, consolidation of differences in present accountingstandards and IFRS and consideration of choices ofaccounting policies.

generalICAI International Conference4th – 6th January 2011 at Vigyan Bhawan, New DelhiAccountancy Profession: 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 momentsof joy with some of my personalthoughts on a subject that is veryclose to my heart. It is recognitionfor SAFA and ICAI’s commitment tofoster the cooperation with the fellowprofessionals of the region I extendhearty thanks to the organizers for thewarm reception and kind hospitalityextended to me, my wife and theNepal 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 of Delhi is experiencing these fewdays.I would like to felicitate ICAI on behalfof 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 of thecontributions that the profession can and should makein ensuring sustainable development. The grandeurof the conference with a large participation from thevarious countries – developed and developing – is highlyimpressive.SAFA and ICAIBefore entering into the topic of 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 profession in SAARC Regionand ensuring its continued eminence in the world ofaccountancy, in the public interest, and towards broadeconomic development of the region.SAFA is dedicated to ensure its continued eminence inthe world of accountancy; in the public interest andtowards broad economic development of the region.SAFA endeavours to contribute towards the economicdevelopment of the region by promoting adherenceto high-quality professional 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 of developing economies isessential for addressing their special needs.ICAI is one of the founders of SAFA which now havenine member bodies. Sri PN Shah of ICAI served asits first President in the year 1984-1985. ICAI hasbeen continuously contributing towards achieving theThe Nepal Chartered Accountant | March 2011 31

generalcherished goals of SAFA. I thank ICAI for extending handsof cooperation for the growth of the profession in theSouth Asian Region.SAFA has been helpful in developing profession in theeconomies in the region. Nepal is proud to be in SAFAand has benefitted immensely from the support of themember bodies, particularly of ICAI in establishmentand development of ICAN. With the active support,advocacy and encouragement from SAFA, the Nepaleseprofessionals have been able to be recognized as astatutory body with the establishment of ICAN in 1997.In line with the decision of SAFA, technical cooperationbetween ICAN and ICAI helped institutionalize anddevelop the profession in Nepal. As I was personallyinvolved in the process, I recall with fond memory thewarmth and goodwill with which ICAI extended the handsof cooperation to us. I thank all the officials of 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 challengesof high standards and excellence in professionalcapabilities. Together we can contribute towardsuplifting the lives of the large mass of unfortunatepeople from hunger, disease and poverty.Achievements of 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 professional resources for sustainabledevelopment and successfully held an internationalconference on Sustainable development in SAARCRegion.• The SAFA Forum was held in Kuala Lumpur on theoccasion of the World Congress of Accountantswhen 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 of discussion Good governance and ethics arethe prerequisite for sustained economic growth.Accounting profession 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 of 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 of finding right balance betweencompeting demands of economic development, protectingenvironment from degradation for the future of humanity,and ensuring social stability. Sustainable developmentinvolves cooperation on a global scale to develop a waythat benefits the widest range of sectors across bordersand between generations.Sustainable development is about applying the principlesof sound management and good governance to managingcommon pool of resources. It is about generating longlastingpositive results for the greater benefit of humansocieties.Economic growth has costs which cannot be ignored.Growth has also resulted in income inequality – majority ofthe people has not experienced tangible benefits – pushingthem always back to destitution and injustice. This gaverise to political instability and disturbance in peace inmany parts of 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 of a good life and the modern dayeconomists tend to postpone the practice of morals untilthe good life has been achieved and enjoyed.The enormous fast development in science and technologyin the modern world that helped the production ofmaterial 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 of the problem.There is a sea difference between a good life and a happy32 The Nepal Chartered Accountant | March 2011

generallife. When one seeks only pleasure and crave to lead agood life, the person can never be happy.In one of his discourses, the Buddha narrated the story ofChakkavatti, the Universal Monarch. He first decided torule according to his wishes which resulted in a breakdownin law and order. He then instituted righteous means ofsecurity, 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 of gaining king’s favour. Finally, theking had to mete out severe punishment for stealing andother crimes.Equal distribution of 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 ofthe 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 acquisitionof wealth can and should go together. The ultimatecriterion of morality is the happiness of both oneself andothers. Economic activities should be for the welfare andhappiness of 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 ofprofit. That would generate lust, desire, greed and longinginstead of satisfying needs.The wise teachings of the saints and great men like theBuddha, Prophet Muhammad, Guru Nanak in the past andMahatma Gandhi of the present day emphasized that therighteous economic progress should take into account thewelfare of human as well as animals – the larger issue ofa healthy environment. We must strive to fulfill humanneeds. It is certainly possible if we get rid of human greedwhich is a social cancer destroying what has been achievedor could be achieved. Sustainable development is closelylinked with the question of morality and ethics.This is precisely what is being realized in the recent yearsin the aftermath of global warming, economic breakdownsand corporate failures.Moral values – the essence ofhappinessTeaching of 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 of all is to commit oneself tomoral life.I consider it a factor of the utmost importance thatwe release ourselves from the two bondages which areextremely difficult to break away from. They are thebondage of greed – how to be able to earn more andmore which does not have any end, and the bondageof 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 of moral standing, in spite of a properperspective, may commit an offense. 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 ofrules of discipline. However, they should only be to guidethe professionals for right course of actions under thevarious situations.There should, however, be no absolute rules. Rules areformulated on the basis of the observations of whathad transpired and not on the basis of any absolutethesis independent of experience. The accommodationof 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 of a happy life. The cardinal principles ofmorality have to be felt and sensed and ingrained in theattitude of the professionals. This would not, probably,be transmitted only by lectures and discourses. This hasto be experienced. The meaning of HAPPINESS is to beunderstood in the inner mind.THANK YOU.The Nepal Chartered 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 of the borrower in termsof experienced background, regulardebt servicing capacity, net worth ofpromoters, liquidity management,quality of stock and debtors, existingand potential level of competition,potential for expansion, signal ofoverall industry can be viewed andits impact in the borrower’s businessand so on. This analysis helpsunderstand the credit worthinessand soundness of the borrower whichprovides grounds to mitigate creditrisk on the part of the lender.Can rating be donebased on financialstatement informationonly?Industry, business and managementare the causes which effects theoperations of any organization and itsoutcome can be obtained in the formof 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 Professor of 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 of companies. The Z-scoreuses multiple corporate income and balance sheetvalues to measure the financial health of a company. TheZ-score is a linear combination of five common businessratios, weighted by coefficients. The coefficients wereestimated by identifying a set of firms which had declaredbankruptcy and then collecting a matched sample offirms which had survived, with matching by industry andapproximate size of assets.Altman applied the statistical method of discriminantanalysis to a dataset of 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 Nepal Rastra Bank as an Assistant Director.34 The Nepal Chartered Accountant | March 201134

ankingWhere,X1 = Working Capital / Total AssetsX2 = Retained Earnings / Total AssetsX3 = Earnings Before Interest and Taxes / Total AssetsX4 = Market Value of Equity / Book Value of TotalLiabilitiesX5 = Sales/ Total AssetsThis first model is not suitable for unlistedcompanies.The Five Variables Represent :X1 = Liquidity (Measures liquid assets in relation to thesize of the company.)X2 = Cumulative profitability (Measures profitability thatreflects the company’s age and earning power.)X3 = Profitability (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 of Equity / Total LiabilitiesX5 = Sales/ Total AssetsThis second model is suitable both for listed and unlistedcompanies as it considers book value of equity underforth variable instead of 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-off ScoresCut of scores under three models provided by Altmanprovides zones of discrimination. Altman modelsprovide grounds to take decision as it indicates signalas safe area, grey area or bankrupt at least one year inadvance.“Cut off 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 profitability and/orto overstate or understate the size of total assets. Forinstance, profit may be overstated through windowdressing by decrease in depreciation and provisions.Lower depreciation means ample amount of net fixedassets and lower provisions means larger amount ofaccumulated profit. As a consequence it will increasesize of balance sheet i.e. total assets. We can seethat out of 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 of higher chances of bankruptcyof the said organization. So Altman model is very usefuland provides check and balance against all possiblecombinations of window dressing in financial statement.RecommendationZ Score model provides some amount of 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 of credit proposals.The Nepal Chartered 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 officialinternational reserves or officialreserves consist of official 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, official reserveassets normally consist of liquid oreasily marketable foreign currencyassets that are under the effectivecontrol of, and readily availableto, the reserve management entity.Furthermore, to be liquid andfreely useable for settlements ofinternational transactions, they needto be held in the form of convertibleforeign currency claims of 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 official public sector foreign assets arereadily available to and controlled by the authoritiesfor meeting a defined range of objectives for a countryor union. In this context, a reserve management entityis normally made responsible for the management ofreserves and associated risks.Reasons for holding reservesTypically, official 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 of the nationalor union currency;• limit external vulnerability by maintaining foreigncurrency liquidity to absorb shocks during times ofcrisis or when access to borrowing is curtailed andin doing so;• provide a level of confidence to markets that acountry can meet its external obligations;• demonstrate the backing of domestic currency byexternal assets;• assist the government in meeting its foreignexchange needs and external debt obligations; and* Ms. Bastola is working in Nepal Rastra Bank.36 The Nepal Chartered 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 of objectivesof reserve managementThere exists an impossible trilogy between theobjectives of 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 of return, it isvirtually impossible to have all the three met at sametime. To gain one there should be compromise of other.Overall the objective of official reserves management ison to maximize return, subject to the maintenance ofsufficient security of the assets and adequate liquidityfor meeting the requirement on the reserves.The Optimal Size of Foreign ExchangeReservesThere is no unified theoretical and practical standardregarding the size of an optimal foreign exchangereserve for a country. Various factors are taken intoconsideration in deciding the size of foreign reserve ina country. Relevant factors have traditionally includeda country’s monetary and exchange rate arrangements,and the size, nature, and variability of its balance ofpayments and external position. More recently, financialrisks associated with a country’s external debt positionand the volatility of its capital flows have receivedparticular attention, especially for economies withsignificant but not fully certain access to internationalmarkets. In the process, ensuring the availabilityof 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 of reserves:As per the Traditional (trade-related) rule reserve sizeis considered adequate if it is able to cover at least 3-6months of imports of 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 of financial orother losses arising from an entity’s financial exposuresand/or the failure of its internal control systems. Thereshould be a framework that identifies and assesses therisks of reserve management operations and that allowsthe management of risks within acceptable parametersand levels. Reserve management involves a number offinancial and operational risks. Some of 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 offixed income securities. Hence, shorter durationsecurities are at less risk than long-term, fixed ratesecurities.• Credit risk: The risk of nonperformanceor default by borrowers on loans or otherfinancial assets, or by counterparty on financialcontracts.• Currency risk: The risk of adverse movementsin foreign currency cross exchange ratesthat reduce the domestic currency value ofinternational reserves. Currency risk also ariseswith an appreciation of the domestic currency.• Interest rate risk: Sometimes also referredThe Nepal Chartered Accountant | March 2011 37

ankingto as an element of market risk, interest raterisk involves the adverse effects of increasesin market yields that reduce the present valueof fixed interest investments in the reserveportfolio. Interest rate risk increases, ceterisparibus, with the duration of a portfolio• Liquidity risk. Liquidity risk refers to thepossible difficulties in selling (liquidating) largeamounts of assets quickly, possibly in a situationwhere market conditions are also unfavorable,resulting in adverse price movements.B. Transaction/Operational risk. A range of differenttypes of risks, arising from inadequacies,failures, or non-observance of internal controlsand procedures, which threaten the integrityand operation of business systems. Some of theoperational risks are as follows:• Dealing risk: Dealers exceed their authority indealing with counterparties or instruments, orincorrectly process a transaction.• Legal risk. The possibility of 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 of a country.D. Other Risks: Risks arising out of the factors otherthan market and operation can be categorizedas other risks. Although there are various otherrisks, some of 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 of inappropriate actions, orunauthorized release of information.• Settlement risk. The potential loss as a resultof failure to settle, for whatever reason otherthan default, by the counterparty.• Sovereign risk. The risk that a foreign sovereigngovernment will restrict the ability of a holderto gain access to their assets or the proceedsfrom the sale of such assets. Sovereign risk is aninevitable feature of reserve management sinceassets are necessarily held in foreign countries,often in sovereign government securities ofmajor 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 of convertiblecurrencies, and also to maintain cross rateexposures within acceptable limits;• the permissible range of investment instrumentsthat meet liquidity and security requirements;and• maturity or duration requirements for limitingexposure to interest rate or market price risks.Nepalese ScenarioAccording to the preamble of the Nepal Rastra BankAct 2002, one underlying reason for the establishmentof NRB has been the formulation of the monetary andforeign exchange policies for attaining price stabilityand improving the balance of payments situation soas to bring about the sustainable development of theeconomy of Nepal. Formulation and implementationof the exchange rate system and management ofthe foreign exchange reserves in the capacity of thecustodian of these reserves have been specified amongthe core objectives of NRB.With respect to exchangerate management, Nepal has adopted fixed exchangerate with the Indian currency and floating exchangerate with other currencies.NRB has adopted cautious approach in the field offoreign exchange reserves management. The Boardof Directors of NRB is the highest decision makingauthority for the management of such reserves.Investment of such reserves is made as per theInvestment Guidelines 2066. The Investment Committeecomprising deputy governor as chairman andexecutive directors of Foreign Exchange ManagementDepartment, Research Department and Banking Officeas member takes the decision, within the parameterset by the Investment Guidelines 2066, in respect of38 The Nepal Chartered Accountant | March 2011

ankingcurrency composition and assets allocation. The foreignexchange management department carries out theday-to-day operation and management of the reserves.NRB follows passive reserve management strategy byfollowing the guideline—Safety and Liquidity whileReturn is the last priority.Nepal’s reserve management strategy has given highestpriority to the safety and liquidity of the reserves. Itaims at ensuring that reserves are readily availableat the time when they are in need. The investmentguidelines has ensured that 40 percent of the totalreserve maintained by the Nepal Rastra Bank is in theform of 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 PortfolioNepal Rastra Bank does not involve in active tradingof foreign securities. Most of 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 of foreignexchange earning in Nepal. For the last couple ofyears, remittances have remained a dominant sourceof foreign exchange earnings in Nepal. In mid-July2010, the gross foreign exchange reserves declinedby 4.28 percent to Rs. 268 billion from the level ofRs 279.98 billion in mid-July 2009. Such reserves hadincreased by 31.7 percent in the corresponding periodof 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 of US$ 3.59billion in mid-July, 2009. Such reserves had risen by15.6 percent in the same period of the previous year.Based on the import figures, the foreign exchangereserve is adequate to finance merchandise imports of8.1 months and merchandise and service imports of 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 of Nepal’s Foreign Exchange ReserveSources of Foreign ExchangeSources of Foreign CurrencyIn USD CroreRisk managementNRB has adopted minimum-risk policy while makinginvestment decisions. Credit risk has been in focus sincethe onset of the credit crisis in the US financial marketsand its contagion effect on other economies leading toglobal financial crisis during the second half of 2008 andduring 2009. NRB continues to apply stringent creditcriteria for selection of counterparties. Credit exposurevis-a-vis sanctioned limit in respect of approvedcounterparties is monitored continuously. Besides,the financial strength of counterparties is constantlyThe Nepal Chartered Accountant | March 2011 39

ankingunder watch. The basic objective of 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 ratesof exchange, the investment committee reviews thecurrency composition of the reserve and monitorsthe Bank’s compliance with the limits establishedfor foreign currency compositions by the board. Toreduce the risk of fraud, separation of functions atthe operational level is a fundamental requirementin all investment operations. Most importantly, thereshould be complete separation of those who initiatetransactions (front office) and those who arrangethe settlement of transactions (back office). In theForeign Exchange Management Department segregatedactivities are performed in the front, middle and theback office of the Investment Section.Management During the GlobalFinancial CrisisNepali economy was least affected by the globalfinancial crisis. Nepal witnessed a growth in eachof 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 of theNepal Rastra Bank. Interest rates are now showinggradual improvements but with the announcementof second stimulus package by the US governmentfinancial markets outlook still seem uncertain.ConclusionNepal has been facing deficit in the balance ofpayments since last fiscal year owing to huge imports.This has directly affected the reserve size of thecountry. Also, the escalating need for Indian currencyis being met by selling the US Dollar.The challenges ahead for Nepal Rastra Bank in itsreserve management lies in maintaining its adequacyamidst ever growing imports and unfavorable balanceof 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 Nepal Chartered 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 of frauds happening acrossthe Nepalese Banks & FinancialInstitutions. Although there has notbeen any news of fraud syndicateshappening in Nepalese BankingHistory so far but frauds involvingcrores of amount has been takingheadlines of 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 of theBanks.Despite the fact that NepaleseBanking Industry is way behindthe sophistication of MultinationalBanks, However since the frequencyof frauds in Nepalese BankingIndustry has increases, it hasnecessitated the banks and financialinstitutions to know and implementthe frameworks of 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 of the employees of the Banks.The Normal Frauds being reported in Nepalese Banksare of this nature. Employee related frauds are veryharmful to the Banks as its chances of non-detectionare very high. Since employees are well aware of thesystem in place they can easily siphon huge amount ofmoney 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 of the Bank.Employee related fraud generally arises from twoaspects:A. Where there are loopholes in the various processesof the Bank, employees take advantages from theprocess lapses. Frauds are normally being done bythe employees themselves or by third parties withthe involvements of the employees. Frauds beingreported in Nepalese Banking Industry are normallyof this type, where employees have caused hugeloss to the banks taking the advantages of theprocess lapses.B. Where there is sound internal control system inplace, Employees with fraudulent intentions takesthe advantages of the casualness amount the peers.Despite having proper maker and checker system inplace, employees override the parameters out ofcasualness and the fraudsters take the advantagesout of it.* Mr. Saru is a Chartered Accountant member of ICAN.The Nepal Chartered 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 of 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 Cardof genuine customers. The various types of 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 of the Banks areamong others Cheque Kiting, Internet Frauds, MortgageFrauds etc. Likelihood of 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 of assets)• Misappropriation of Assets (e.g. payroll frauds,cash embezzlements)• Expenses or liabilities incurred for fraudulent orillegal acts (e.g. briberies)• Revenue of assets gained by fraudulent orillegal acts (e.g. overbilling customers, bogusrevenue)Fraud Risk Management:Risk management is defined as the ‘process ofunderstanding and managing risks that the entityis inevitably subject to in attempting to achieveits corporate objectives’. In the language of RiskManagement, Fraud Risk Management is the process ofunderstanding and managing fraud risks of the entity.The major objective of 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 of employees,customer and the related agencies• Assist business and functional units throughinvestigating frauds cases, following up with lawenforcements agencies where applicable andrecovery of the losses.Components of Fraud Risk Management involves1. Fraud Prevention & Detection:Fraud PreventionFraud Prevention involves the Controls designedto reduce risk of fraud and misconduct fromoccurring in the first place.Process & PolicyChangesFraud Prevention& DetectionLearningInvestigationFollow UP& Recovery42 The Nepal Chartered 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 of 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 of the bank in differentstages of the product cycle. At the beginning ofproduct cycle where customers are introduced,Monitoring is normally done by eyeballing all thetransactions and related documents and out ofthe same some percentage of transactions best onthe triggers are sampled and tested. Whereas postintroduction of the customer, when transactionwill be started with the bank, monitoring isnormally done by the monitoring software andbased on the samples taken by the software,testing is done.It also involves the mechanism of 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 of operation will be analyzed by the Bank. Theroot cause analysis will be done to find out causesof the Frauds, Trends being seen across the bankingindustry will be analyzed in collaboration with otherbanks and will be communicated to the Business Ownersof 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 of 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 of Risks:Assessing the needs of organization based on thenature of fraud and misconduct that risk controlsare intended to mitigate and adequacy of existingcontrols.EvaluationAssessment of RiskInternal Investigation will be done by following upthe leads available. Some Frauds are very difficult toinvestigate. Based on the Cost and Benefit Analysis ofthe Frauds happened, extent of 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 of thecase and the reputational risk of 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 Nepal Chartered 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 of Panworld, thelargest insurance company inUganda, which went out of businessbecause of large scale fraud in theirhealth insurance scheme for thepoor.Fraud is a much discussed, muchstudied, very troubling and costlyconcern of the insurance industry.Fraud impacts organizations inseveral areas including financial,operational, and psychological.While the monetary loss owing tofraud is significant, the full impactof 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 of gaining more thatlegitimate entitlement”.B. Types of Insurance Fraud:Types of insurance fraud are very diverse, and occur inall areas of 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 of unsuspectingdrivers to create rear-end auto accidents; and• Lying about the extent of damage to vehicles andinjuries arising from real accidentsC. General Overview of InsuranceFraud in Nepal:Different authorities like Coalition against InsuranceFraud, Insurance Information Institute, Association ofBritish Insurers, and Massachusetts Fraud Bureau and* Mr. Silwal is a CA final Level student of ICAN.The Nepal Chartered Accountant | March 2011 45

INSURANCEmany others have all pegged the minimum percentageof fraudulent claims as 10%. However, due to the natureof insurance business in Nepal, it is reasonable toexpect that the magnitude of insurance fraud is in thevicinity of 20%.According to the statistics provided by the InsuranceBoard of Nepal 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% of total premium received, then rough amount oftotal 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 Nepal of almost Rs456 million in FY 2066/67.Why this sorry state of affairs? Among others, this mustbe the fact that we Nepalese possess a remarkablyhigh level of “corruption-tolerance” and this laid-backattitude is mainly responsible for our careless approachto the implementation of any fraud prevention program.Let us not forget that Transparency International ratedour country as one of 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 of billions of dollars annuallyworldwide.Cost of Insurance Fraud to Individuals:Higher premiums and higher prices for goods andservicesReduced availability of insuranceDelayed settlement of genuine claimsCost of Insurance Fraud to Insurers: Even thoughinsurance companies typically pass the costs ofinsurance fraud on to the consumer in order to operateat a profit, insurance companies are directly impactedby insurance fraud. The following are examples of thecosts of fraud to insurance companies:• Every rupee that is spent on insurance fraud directlyimpacts the profitability 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 ofinsurance fraud is inflating of loss. The mostcommon manifestation of 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 of aclaimant’s prior claims.• Claims made shortly after the policy inceptiondate: A claim made soon after the inception dateof a policy can indicate fraud.There may be various other indicators depending onthe nature of the insurance policy. Obviously, thecircumstances of each claim and investigation areunique and there is no single set of rules that can beused to correctly handle and resolve each matter.F. Fight Against Insurance Fraud:The fraud detection and prevention strategies of 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 moreprofitable, more competitive and more compliant.This can be further elaborated with the help of thefollowing points.1. More Thorough Claim Handling – Use ofComputerized 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 Nepal Chartered Accountant | March 2011

INSURANCEsome are doing little because they don’t see it asimportant, and some are unaware of the problemand just don’t know what to do.”Too often, 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 of getting caught whilesubmitting a fraudulent claim far outweigh anypotential benefits.Due to the sheer number of claims submitted eachday, it would be far too expensive for insurancecompanies to have employees check each claimfor symptoms of fraud. Instead, many companiesuse computers and statistical analysis to identifysuspicious claims for further investigation.2. Use of Information Technology:a. Creation of a Centralized Data Exchange:If we are serious about combating insurancefraud using IT, the Centralized Data Exchangewould be an invaluable source of information forvarious agencies. As on date we have about ninelife insurers and 16 General Insurers operatingin Nepal. It is certain that the operations of allthese insurers would be computerized and theywould all be having a centralized database of somekind. Irrespective of the kind of software used, itis certainly possible to export a set of given datainto an Excel file with certain specific columns.If we could adopt a specific format containing acertain number of 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 of minutes by uploadingit through FTP to a central server. Since the formatis a uniform one and the size of the fields arealso same, it would be easy for the data of 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 sameprofession. Sharing of information is rarely done.Change of attitude is a prime factor in this regard.b. Increase the level of 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 of the resources of theInternet:Not many down-the-line officials 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 of ships. But thequestion is – how many officials are serious aboutusing the Net to gather information like this?d. Development of software for Data analysis and forgenerating potential fraud indicators:Use of 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 of below mentioned databases isthreefold. First, they provide a way of verifying theinformation supplied by claimants. Second, theyallow companies to assess whether claimants havea history of 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 of 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 off the hunt forfurther details.2. Claims and Underwriting Exchange (CUE) isanother database which has been marketed asThe Nepal Chartered Accountant | March 2011 47

INSURANCEthe greatest weapon against insurance fraud.Set up in 1994, this contains details of motorand household claims made over the past years.3. Link Analysis Software is the brainchild ofABI (Association of British Insurers and i2 (anInformation Technology provider). This softwareis more analytical and goes into the cause ofloss, type and value of 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-profit making organization,comprising over 1000 insurance companies ofthe 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 of European countrieshave classified insurance fraud as a crime andhave made it punishable with fine, penalty andimprisonment. However, in Nepal neither InsuranceAct nor any other acts prescribe insurance fraud asa crime.Take for example the clause in Rule 31(5) of 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 thereof.”Similarly, Section 36 of Insurance Act, 1992 statesthat, “If any Insurer or the Director of 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 suchoffense has been made frequently, he will be finedat the rate of extra five hundred rupees for eachsubsequent offense.”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 of false and fraudulent insurance claims isan offence 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) of drafted Insurance Act,2066 mentions that if any one does any act againstthe provision of this Act to directly harm theinsured, insurer or insurance business, the claimedproperty shall be confiscated and fine of amountnot exceeding three times of claimed property orimprisonment of 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 ofinsurance fraud can be known from the fact thatduring early 1700s, England passed one of 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 of most of the insurers are not adequateenough to combat the constantly evolving andgrowing amounts of fraud. Currently, insurersoperate primarily on a reactive fire fighting modewhich normally is limited to the four walls of 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 millionsof 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 Nepal Chartered 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 profitable, more competitive andmore compliant.5. Launching a fraud-prevention campaign: Amassive campaign could be launched to bringabout a change in the mindset of not just theinsurance companies or the insurance officials,but the insuring public at large. The role of thefraudster has to be exposed and the aim of 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 of frauds in raisingpremium rates:7. Toll-free number for reporting frauds with rewardto informants.8. Sharing of 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 offunding required if any serious headway is to bemade. A sustained publicity campaign in the massmedia would eat up millions of 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 of Nepal.A portion of IT budget of 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 of 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 often than not, especiallyin the Nepalese scenario, frauds on the insurancecompanies are perpetrated with the activeconnivance of these cousins. However these in-housecousins are capable of causing severe damage ontheir own too.The Nepal Chartered 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{ofg’;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}+of ;Dd .-u_ u au{sf] k]zfut k|df)fkq k|fKt ;b:on] 10-b;_ s/f]* ?k}+of ;Dd .-#_ # au{sf] k]zfut k|df)fkq k|fKt ;b:on] 1-Ps_ s/f]* ?k}+of ;Dd .-ª_ n]vf k|fljlwssf] k]zfut k|df)fkq k|fKt JolQmn] 10 -b;_ s/f]* ?k}+of ;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 . of] 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 of] 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]% .• of] lgod t" ’?Gt nfu" ’ x" ’g] % .50 The Nepal Chartered Accountant | March 2011

NEWSSAFA SUMMIT-2010Sustainable Development inSAARC RegionThe South Asian Federation ofAccountants (SAFA) was formed in1984 as a federation of professionalaccounting bodies in the SAARCRegion. Currently, it has ninemember bodies from five countriesnamely Bangladesh, India, Nepal,Pakistan and Sri Lanka which has abond of culture and homogeneity ofprofessional environment. It is anApex Body of South Asian Associationfor Regional Cooperation (SAARC) anda Regional Grouping of InternationalFederation of Accountants (IFAC).The first SAFA summit was held by theInstitute of Chartered Accountantsof Nepal on 10-12 December, 2010at Kathmandu after its 25 years ofestablishment. President of Republicof Nepal His Excellency Dr. Ram BaranYadav Inaugurated the Summit andThe Finance Minister of Nepal, 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) of the Summit SAFA boardMeeting and SAFA Committee onHarmonization of Fiscal TariffRegime were organized. Similarly,in the Second Day of the SummitSAFA iTAG Committee Meeting washeld and Last day of the summitBPA awards were presented andlastly “Kathmandu DeclarationLetter-2010” was published.Preview of 15th SAFA Board Meeting, 10 December, 2010, KathmanduPreview of SAFA Harmonization of 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 Institute of Chartered Accountants of Nepal.Preview of SAFA iTAG Committee, 11 December, 2010, KathmanduThe Nepal Chartered 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 of BPA Award with Honorable Finance Minister Mr. Surendra Pandey.14 th Anniversary of theInstituteStaff members of ICAN with Rt. Honorable Prime Minister.The Institute celebrated the 14 th Anniversary amidst afunction held on Magh 17, 2067. The Chief Guest Rt.Honorable Prime Minister Mr. Madhav Kumar Nepalinaugurated the function. While addressing the participantsMr. Nepal expressed his gratitude to the Institute and theauditors associated with it. He suggested the auditors toremember their Code of Ethics while auditing and alsorequested them to audit with in the framework prescribed bythe Institute.Similarly, Mr. Rameshwore Khanal, Finance Secretaryaddressed his opinion during this program. He thanked theICAN team for positive step for the development of theInstitute in the very short period. He pointed out someshortcomings prevailing in the Institute and hoped theInstitute to make the progression on those shortcomings infuture.Likewise, Acting Auditor General, Mr. Khem Prasad Dahal,thanked the Institute for its contribution for developmentand expansion of audit profession.Rt. Honorable Prime Minister inaugurating 14 th Anniversary Programof the Institute.Besides, Chartered Accountant students’ securing highestmark at various levels of Chartered Accountancy course wasfelicitated by the Chief Guest Rt. Honorable Prime MinisterMr. Madhav Kumar Nepal 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 of thanks fromVice President of the Institute, CA. Sudarshan Raj Pandey.The students of different levels who has secured highest marks inBoard exam with Rt. Honorable Prime Minister.52 The Nepal Chartered Accountant | March 2011

Seminar on “IFRS Issues and Challenges”The Institute of Chartered Accountants of Nepal (ICAN)has played a pioneering role in designing courses to carterto ever- increasing learning and developmental needs ofprofessional 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 of ICAN’s 14thAnniversary. Total 58 participants were present on theprogram.CA. Praeep Kumar Shrestha on IFRS presentation.The President of the Institute CA. Sunir Kumar Dungel in hiswelcome speech highlighted on the purpose of seminar andalso about various activities of ICAN.Students CornerChartered Accountancy Examination December2010The Chartered Accountancy Examination December2010 was held from December 1 to December 9,2010. The details of applicants who had appeared andobtained a degree from the examination are as follows.Total number of 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 of 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 of 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 of applicant, appeared andpassing students of December 2010 board exam of theInstitute.The Nepal Chartered Accountant | March 2011 53

CA Membership ExaminationThe CA Membership Examination was held fromNovember 15, 2010 to November 19, 2010, the detailsof applicants are as follows.Applicant 33Appeared 32Qualified for Membership 9Student Enrollment StatusThe Enrollment of students in different levels ofChartered Accountancy Course has been considerablyincreasing day by day. Following is the status ofenrollment.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 CharteredAccountancy Education in Nepal and facilities thereof available. The Program included the detailsdeliberation on the eligibility criteria for enrollment inCA Course, future prospects, international recognitionand membership criteria of the Institute, and helpedstudents by solving their queries in various aspect of CACourse. Education department has aimed to conductcareer counseling program every week in differentcolleges. Since last few months education departmenthas successfully conducted 6 sessions of 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 of members (as of 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 of Members, COP and Firms showing in the diagram .Curves showing the status of enrollment of students indifferent levels on CA Course.Career CounselingCareer Counseling program has been organized indifferent Institutions inside and outside KathmanduAbout CPE TRAININGTo enhance the capacity of the members of theInstitute, various CPE training classes has beenconducted. The list of CPE classes conducted during theperiod is listed as follows:54 The Nepal Chartered 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 Nepalgunj 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 of membersThe provision of annual listing ofauditors for the purpose of the auditof 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 ofdifferent 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 of the NepaleseAuditing Firms1 Suvod AssociatesName of 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 of Government of Nepal, (Ministerial Level Meeting).They are as follows:Preview of 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 of the IFRSas the National Accounting Standardswere discussed and shared with theparticipants.The Nepal Chartered Accountant | March 2011 55

About 1100 delegates attended the conference acrossthe world. The Conference proved to be an aptopportunity for accountancy professionals and gavethem opportunity to update themselves on emergingparadigms in the context of international economicdevelopments and changes.Participants of 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 of Accountants18th World Congress of Accountants 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 of ICAN CA. Sudarshan RajPandey, SAFA President CA. Komal Bahadur Chitrakar,Executive Secretary CA. Paramananda Adhikari. Likewise, The Council Members of 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 of IFRS & IPSAS in DevelopingCountries”.Among the sessions of the conference, one was relatedwith SAFA member bodies’ panel discussion on countryperspective on governance & ethics. Past-President ofSAFA 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 of the founders of SAFAand commended ICAI support in development ofSAFA. He stressed the need for raising a united voiceat international level to address the problems ofgovernance and ethics from the SAFA region too.CA. Sunir Kumar Dhungel, President ICAN and one of thepanelists at the session said that he was proud to be amember of the ICAI. He talked about the history of ICANand various arrangements and memorandums that theInstitute had undergone in the past.The other members of 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 Institute ofChartered Accountants of Nepal to participate inthe international conference organized by ICAI onthe theme “Accountancy Profession: Catalyst toSustained Economic Growth” on January 4-6, 2011 inNew Delhi on the issues of contemporary relevance toaccountancy profession, and to deliberate on issuesrelated to governance, financial engineering, regulatorycompliance, creation of stakeholder values, corporatesocial responsibility, etc.Participants of 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 Nepal Chartered 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 of the Assembly of 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 byNepal, was handed over to Mr. A.N. Raman of ICWA Indiaon the occasion.Blood Donation ProgramIn the association with Nepal Red Cross Society, NepalChartered Accountants employee union and NepalChartered Accountants Student Association has jointlyorganized the blood donation program on the premisesof the institute on Magh 5, 2067. In the program 120blood donors donated the blood.OrthersIn-house Training Program for StaffsThe Institute has organized two days in-house trainingprograms for the staff members of the Institute 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 of the Training was “LEADERSHIP THROUGHEXCILLENCE”. Thirty Six staffs were present at in-housetraining and it was led by the Executive Director of ICAN,Mr. Binay Prakash ShresthaStaff Members and Students of 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{;dofjwL 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{sfof{Gjog ug{ kl/ifbsf] 146 cf}+ j}&sn] of]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 of]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 of]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 Institute of Chartered Accountants of Nepal(Established under the Nepal Chartered Accountants Act, 1997)The Nepal Chartered Accountant | March 2011 57

ICAN IntroductionThe Institute of Chartered Accountants of Nepal (ICAN) was established under a special act, TheNepal Chartered Accountants Act, 1997 to enhance social recognition and faith of people at largein the accounting profession by raising public awareness towards the importance of accountingprofession as well as towards economic and social responsibility of the accountants, and to contributetowards economic development of the country. The Institute is an autonomous body andthe Council is fully authorized by the Act to undertake accountancy profession in Nepal.ICAN History1934 The first ever Companies Act in Nepal legislated1956 New Companies Act enacted.Books of accounts to be maintained specified. Accounts to be audited by an auditor licensed bythe Dept of Industries1974 Auditors' Act legislated, which entrusted the Office of Auditor General (OAG) to issue auditor'slicense and set qualification of auditors in four different classes of Registered Auditors.Chartered Accountants with five years experience given Class A license with unlimited authorityto audit any organization. Others are given license of 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 of the Association of Chartered Accountants of Nepal (ACAN) as a voluntary socialorganization with an initial membership of 15 Nepali 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 of Finance1984 ACAN invited to participate in the South Asian Federation of Accountants (SAFA) as an Observer.1985 SAFA formed a Committee to assist ACAN in recommending to the Government for the formationof an accounting body in Nepal.SAFA committee submitted a report.1988 HMG formed a high level study group to recommend on the formation of an autonomous selfregulatory accounting body in Nepal.1990 ACAN held a SAFA international seminar, which was inaugurated by the Prime Minister who committedthe formation of an accounting body in NepalAccounting profession's image was uplifted.1997 Nepal Chartered Accountants Act, 1997 received the royal seal on 30 January 1997.The Institute of Chartered Accountants of Nepal (ICAN) established.ICAN to have two classes of members: Chartered Accountants 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 of ICAN.First Council of ICAN formed on 1 August 1997.Membership of the South Asian Federation of Accountants (SAFA)New Companies Act enacted with revised provision on accounting and auditing1998 MOU on technical cooperation signed with the Institute of Chartered Accountants of India.Membership of the Confederation of Asian and Pacific Accountants (CAPA) 1999 Nepal CharteredAccountants Regulation1999 came into effect on 29 September 1999Launching of ICAN along with an international seminarHMG signed technical assistance agreement with ADB for capacity building of ICAN for a projectof 12 months period.2000 First CA Examination held in November 20002002 First Amendment of Nepal Chartered Accountants Act, 1997ICAN was made the only regulating authority in accounting profession when the Act was amended.2003 ICAN became Associate Member of IFAC in 20032004 ICAN signed second MOU with ICAI in July 20042008 ICAN Become a Member of IFAC in 2008 November.58 The Nepal Chartered Accountant | March 2011

ICAN ACTIVITIESHis Excellency Ram Baran Yadav, President of Nepal inauguratingSAFA Summit, 2010.Foreign Delegates and ICAN Officials with His ExcellencyPresident of Nepal.SAFA BPA Award Winners with Finance Minister Mr. SurendraPandey.Dignities on Dash on the occasion of 14th Anniversary ofthe Institute.Rt. Honorable Prime Minister Madhav Kumar Nepal on theSpeech.President of ICAN CA. Sunir Kumar Dhungel on the Speech.The Nepal Chartered Accountant | March 2011 59

60 The Nepal Chartered Accountant | March 2011