Accurate accounting records critical for accurate VAT: Chitty

Like everything else in life financial auditing is subjected to change. Development of standards that promotes transparency, accuracy and reliability.

Financial audits exist to add credibility to the implied assertion by an organization’s management that its financial statements fairly represent the organization’s position and performance, and in a world where businesses are conducted on a global scale, the stakes are high, and a simple mistake might ignite the engines of the steamroller.

In a conversation with the Arab-Times, David Chitty, the International Audit Director of Crowe Horwath International, a leading international network of professional firms affirmed the importance of financial and record keeping discipline amongst accountants as to prepare for some of the changes in International Financial Reporting Standards (IFRS)

Chitty has come to visit Kuwait as a part of their routine contact with member firms. They have a global management committee, and a very important part of their role is the outreach to their member firms, to discuss their businesses and the firm’s quality of procedures as all their members go through periodic reviews of the quality of their service.

What would you say are the unique strengths of Crowe Horwath as currently ranked the eighth largest network?

One of the reasons, like my visit to Kuwait, is to review the quality of the member firm as it is a key commitment to our network. We have a robust set of periodic quality reviews, it’s very important to give both our current and our perspective customers globally, assurance that the member firms they work with meet common quality standards. That gives the stakeholders of the clients confidence in the service they receive and the reports that we deliver. Another strength is that we bring together a global brand that embraces independent locally managed firms in more than 130 countries. That gives a very important balance of global brand supported by global resources such as a global audit platform but we have locally managed firms run by experienced partners who are experts in their local markets and what is going on within their local market. Our partners here in Kuwait are very much in contact with the network about the implications for businesses working with Kuwait when the VAT is introduced here. We achieve a successful balance between global and local.

Could you briefly explain what IFAC is?

IFAC is the International Federation of Accountants, it’s a global body that represents that accountancy profession. It has affiliated to it a body called The Forum of Firms, that brings together almost 30 global audit networks of audit firms including Crowe Horwath International. The role of the Forum of Firms is to bring together what are competing networks to collaborate in promoting audit quality. The Forum of Firms has a quality agenda, it’s there to give confidence to stakeholders such as investors, about the commitment of the audit profession. The Forum interacts with standard setters and regulators. Crowe Horwath International has been a member of the Forum of Firms since its initial establishment and we are very supportive of it. Last month, I was appointed the chair of the Forum’s agenda committee. This means I work with the Forum’s permanent management and representatives of the number of member networks, to put together the agendas for our two main meetings each year.

Please explain how Crowe Horwath International works with standard setters

There are bodies that set the standards that we work with, one of those bodies is the International Accounting Standards Board (IASB), that issues IFRS, which stands for International Financial Reporting Standard. We are a financial contributor to the IASB and very importantly we have a dialogue with them. We have had the privilege of having representatives of the IASB speak at a number of our member meetings and have the opportunity to discuss their standard setting activity with our members. Another very important body that we know very well is the IAASB, this stands for International Audit & Assurance Standards Board. That’s the body that sets all auditing standards, which are used globally. IAASB has a very important agenda at present, it is to reform and revise a number of its key standards, particularly its standards on quality control and audit risk. We are very much involved in the discussion of these new standards.

Could you briefly describe how Crowe Horwath supports local firms and ensure member firms across the world meet international professional standards.

Supporting the local firms is very important and we have a global audit platform that our member firms make use of. Also, very importantly providing additional support resources to member firms, so we are able to enter into agreements with suppliers to make technology resources available to member firms at favourable rates and often the firms may not be aware of because they aren’t marketed in their country. We run seminars and conferences, next month we will be holding a regional conference in the Middle East and Dubai. This will bring our Middle Eastern members together with a broad agenda covering business development as well as technical development and interaction with the business community, not only in Dubai but within the wider region. Standards are very important and we do have a global programme of periodic review of all our member firms to make sure they are meeting our standards and that they are aware of how standards are changing and evolving and help to prepare them for the changes that may come through in the future.

Is the IFRS 15 the latest standard?

It is one of the newest standards and its subject is revenue recognition, how companies record revenue in their accounts. The importance of IFRS 15 is that adopting it gives greater transparency in the accounts the company presents about how they’ve earned their revenue and where they have long running contracts, the assumptions they have made in recognising revenue. In a contract you earn your revenue over a period of time as you deliver the contract. The standards that IFRS 15 have replaced are quite old and didn’t require the disclosure of particularly detailed information about how the revenue was being earned and the assumptions about the revenue. It meant that there were different practices and whilst those practices weren’t necessarily wrong, they were sometimes not consistent between companies. With the limited information being disclosed it meant the shareholders were sometimes confused and didn’t fully understand the basis on how revenue was being recorded and it was difficult to compare companies. IFRS 15 is now good for shareholders and the business partners of companies to be clearer on how revenue is being recognised.

The standard that was set prior to the IFRS 15, when was it introduced, at least here in Kuwait and how would it impact Kuwaiti companies that adopt it?

Standards are issued on different themes and in fact there are about 40 International Accounting Standards, which are issued on different subjects and different themes.  IFRS 15 has replaced some very old standards and it has been a priority area for the International Accounting Standards board for a number of years, to modernize its standards on revenue. The main impact is on companies that have contracts that run over a period of time. When you have let’s say, a construction contract for a building, you are delivering that contract over a number of years. The challenge is when you show the revenue that you’ve earned in your accounts. Do you show it at the end of your contract? Then you’ve had no income for maybe 5 years or do you show it in stages as you build the building? That’s what IFRS 15 seeks to provide in regards to much better standards on how and when you show that revenue in your accounts.

Could you shed some light over your experience of with companies adopting the IFRS 15?

A very important part of the experience of adopting this is that companies do have to prepare for the implementation because they will be required by the end of this year, in the accounts they prepare, to comply with this new standard. Any company which have contracts that run for a period of time, needs to assess the impact of the standard and if they haven’t done so yet, they really need to do so urgently. This is the impact of countries around the world putting time and effort into the implementation.

What about IFRS 16, it is going to be implemented in 2019, how would it impact Kuwaiti companies that adopt it?

IFRS 16 is the next standard issued by the International Accounting Standards Board. It addresses leases. The core of the existing standards date back to the early 1980’s, but is now felt that there was a need for a new treatment that treats all leases in the same way. Current there are two types of lease, “finance leases” and “operating leases”. Operating leases are being abolished and finance leases will be only type of lease in accounting. An example of an operating lease is when you rent a space in an office building. In the past, the commitment you take on to rent that space for let’s say 5 years, would not have appeared on your company’s balance sheet as an obligation. Under IFRS 16, that obligation of renting the office must be shown as a debt in your company’s accounts. So, the impact of IFRS 16 is that companies will have more liabilities on their balance sheets, now that might confuse readers of accounts who are not experts in accountancy. Therefore, its very important for all accountants whether they work for the business or as auditors, to explain very clearly to the companies they work with and business partners this change. It does not mean that companies are suddenly insolvent, it simply means they are being more transparent about their commitments and there is one common approach. 

Kuwait is planning to introduce VAT in 2019, from an accounting and regulatory prospective, what would be its implications?

I have visited all the GCC countries in the recent months, and I’m aware of the preparations for the introduction of VAT. What is very clear to me is that there has been a much increased emphasis in all the GCC countries on the quality of company accounting records, and there are different efforts in each individual GCC country that addresses the strengthening of the registration authorities that companies file their annual accounts with, because accurate accounting records are critical for accurate VAT. The challenge for companies is that they will be subjected to greater transparency in the future, as registration authorities would periodically review their records., The authorities could perform periodic monitoring visits of compliance and look at accounting records. And if companies do not have accurate accounting records, they could face fines and penalties. I understand that another challenge that some businesses in Kuwait and all the GCC countries experience is that they are not always disciplined in issuing their invoices, which might leave them finding themselves in a situation where their VAT liability falls due.

What would be your advice to accountants in regards to executing their VAT related functions?

It is very important for them to use their accounting systems properly, and for them to strongly encourage financial and record keeping discipline. It is also very important for accountants in leadership roles to ensure that their teams are up to date with processing transactions, and the credit control team have a proper process and are in contact with customers and get invoices paid. Companies do not want to find themselves having to pay VAT on invoices that have not been paid. Senior accountants should also work very closely with their auditor, receiving feedbacks about their accounting systems and how these systems could be improved.