Monday, May 20, 2024
InterviewInternational standards for financial reporting: fighting an uphill battle?

International standards for financial reporting: fighting an uphill battle?

Best known for playing a big role in establishing the Association of Chartered Certified Accountant Ethiopia (ACCA), Hikmet Abdella is currently the Director-General of Accounting & Audit Board of Ethiopia (AABE). She has been holding the position since 2019 after replacing Gashe Yemane, the founding DG of the Board.

Hikmet has been tasked to complete the path to full implementation of International Financial Reporting Standard (IFRS) in the next three years.

The Reporter’s Ashenafi Endale sat down with the Director General as she reflects on the path taken to make Ethiopia’s audit and accounting standard comply with internationally accepted principles and rules. Excerpts:

The Reporter: How is the progress of Accounting & Audit Board of Ethiopia (AABE) in professionalizing Ethiopia’s auditing system?

Hikmet Abdella: Financial statement is the cornerstone of any institution, whether they are business entities or NGOs. But Ethiopia had no financial statement standards for a long time and there were also no standards for professionals.

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The Accounting and Auditing Board of Ethiopia (AABE) was established under such context. Before the AABE, the Auditor General (AG) used to provide licenses and undertake supreme audits for public institutions. So licensing auditors, accounts and firms was an additional job for the AG, at that time. It gave the licenses but had no capacity to control and regulate them.

A World Bank study in 2007 indicated that Ethiopia’s economy was growing faster and there is no accounting and auditing professionals that matched the growing businesses. The AABE was established based on this recommendation.

The AABE’s task is to license accountants, auditors, firms and regulate them. We also adopt and implement internationally accepted auditing standards in Ethiopia. These professionals undertake audits and submit documents to the AABE. We have a library of firms’ files.

Which companies are difficult to control? Which company structures are more complicated in Ethiopia?

Our prime priorities are Public Interest Entities (PIE) and the AABE is basically established to protect these entities from failing. If a company fails, it might not have much impact on the whole economy but if PIE fail it will have a wider economic impact.

Different countries have varying definitions for PIE.

PIE is defined qualitatively and quantitatively. For instance, financial institutions are PIE with huge numbers of shareholder’s with interests. They collect savings and give loans. So they must be protected from failing. Secondly, SOEs are protected because they are the highest taxpayers.

MFIs and share companies are our next priorities, while PLCs are our last priority. We don’t have to control vendors since they have absolutely no impact on the economy.

Every jurisdiction has its own definition. The AABE is currently developing its own definition for PIE and other business entities but we have to align with international standards.

Currently, a similar international definition for PIE is being debated and we have been participating in such debates virtually, due to the COVID-19. Probably by next year, we will have a new definition for PIEs. But there will not be much deviation from what we are using now.

The AABE’s task also relates to domestic resource mobilization. Big companies have to generate big taxes and the AABE controls big business entities strictly, than small businesses.

Ethiopia’s private sector is very new. It has only been 30 years since the communist regime changed and the only big players are financial institutions, followed by other share companies.

Generational companies, that have passed from generation to generation, have also a big role to play and we must be able to maintain family owned enterprises. They usually lie in the middle, between small and big companies.

Family owned enterprises, if well nurtured, can contribute up to 50 percent of the tax revenue. So they should be considered as PIE. But in Ethiopia, family owned enterprises are dying out currently, due to various reasons.

Scholars argue that the tax base should be diversified in Ethiopia. Is it big companies or small businesses that pay more taxes currently?

It is a matter of context. Large taxpayers have to get incentives in different mechanisms, so they can grow more robustly. A country cannot grow without diversifying its tax base at a small business level.

The number of taxpayers in Ethiopia must grow. Many small companies, pooled together, bring huge sums of tax revenues. But the tax authorities must be careful not to squeeze small businesses through stringent taxes. Small businesses must be relieved from stringent of taxes, so they can grow.

What is the AABE’s capacity in controlling and regulating Foreign Direct Investments since Ethiopia’s economy is integrating into the global economy?

The Prime Minister recently stated that the financial sector will open up. And the ongoing liberalization and privatization, as well as the World Trade Organization accession, need ultimate caution. It is good that big foreign players are coming to Ethiopia. But all regulatory institutions in Ethiopia, including the AABE, must sit down, and discuss whether we can handle it or not.

Ethiopia’s economy and regulatory institutions have been closed for a long time. Even neighboring countries have more capacity when it comes to regulatory capacity. There are also differences but we cannot remain closed. We must look for methods to bridge the regulatory limitations.

The east African block including Rwanda, Uganda, Kenya, have a system in which accounting and auditing professionals can move freely from one country to the other.

When Ethiopia opens up, they will bring their own systems and professionals. Ethiopia must produce its own professionals to control foreign firms. Currently, Ethiopia has no sufficient accounting and auditing professionals to support the economy.

We are currently preparing to establish the Ethiopian Institute of Certified Public Accountancy (EICPA). Hopefully, it will be operational this year and start to produce professionals. If you go to Kenya, there are close to 40,000 professional accountants but Ethiopia has around 250 professionals. We cannot support or handle the opening-up of the economy with such meager figures.

The Capital Market is nearing realization in Ethiopia, which requires precise and highly trained professionals. PIE will be affected if we launch a stock market without skilled professionals. In some countries, only firms listed on stock markets are considered PIE.

As soon as the stock market is opened, banks will be the first to be listed. These institutions must be valuated every three months, instead of annually as before.

Unless we have professionals to value the Initial Public Offerings, public interest will always be affected. Even statements made by politicians can affect the value of an IPO; so the listed firm must be valuated frequently. This is impossible without qualified accounting and auditing professionals.  

Officials at the National Bank of Ethiopia are saying it will take three years to create a fully-fledged stock market ecosystem. Can we reach that with the absence of professionals?

Big things can be done in three years. With the EICPA established now, and is backed with a sufficient budget, we can generate 5,000 professionals annually.

There are already many graduates but there is much to be done to create the right stock market ecosystem. Public interest must not be affected, until we try to fill the gap in lack of professionals.

There are many distortions in the commodity value chain and malpractices in the corporate world in Ethiopia. Even recently, importers and wholesalers have been blamed for hoarding edible oil, which has caused a crisis. Do you think the AABE has created a good corporate culture in Ethiopia?

We did not achieve much progress. There is no responsibility. Do you think money laundering is done without the knowledge of accountants? Is the accountant responsible to the public, government, or the company owner?

Ethics is the biggest problem. Accountants can build or destroy a country. The demand for accountants is always up, even at war times. Accountants can change small money into big, or vice versa.

Currently, Ethiopia is negotiating to start the Africa Continental Free Trade Area (AfCFTA) and also the WTO. It should be accountants that represent Ethiopia on the negotiation table. Accountants know what the agreement articles mean. They can tell you what it means ten years from now.

Does the AABE work with the auditor general? Do you have the capacity to take action on accounting misbehaviors?

The Auditor General audits institutions and we produce the professionals. We do not audit public institutions. We do SOEs, private companies and NGOs and the Ministry of Finance reviews the financial statements. Currently, we are reviewing SOEs parastatal financial statements. We will discuss with the PEHA, the MoF and the AG next week.

Ethiopia embarked on the road to privatization and liberalization three years ago to shift the economy from state-led to the private sector. But currently, regional states are building their own conglomerates, while the federal government also establishes the Ethiopian Investment Holding. Do you think this can create productive and efficient firms in the economy?

That is a difficult question. What is for sure is less is done concerning financial statements. Many SOEs, endowments and other firms vanished, or merged, without any consultations with the AABE.

There is a huge problem on this issue. There is no procedure at all in cases of shutting down SOEs, mergers or creating a holding company. Assets, liabilities and other complexities go without proper accounting, especially in mergers. Firms usually close or merge in the middle of the year, before the fiscal year ends and a financial statement is compiled. This is a big problem.

Usually, the Cabinet of Ministers decides on the formation, closure or merger of SOEs.

I have no knowledge on why the government is making changes when it comes to its role in the economy. But strengthening parastatals is common in many countries. We are also seeing progress to accede to the WTO.

Is there capacity to regulate foreign firms like MPESA and are foreign banks allowed? Do you think banks can survive foreign competition?

Ethiopia’s financial institutions are better than where they were ten years ago. If a single foreign bank had come ten years ago, local banks would have never survived, even if they merged into one.

But now, local banks are stronger. The problem is, local banks cannot grow more than they have now. They cannot diversify their products anymore and are very similar. If foreign banks or MPESA come, more products can come with them and support the economy.

But the banking sector will not be opened at once and will be gradual and managed. Unless the regulatory capacity grows parallel and equally, Ethiopia will be in danger.

What do you think is the competitive edge of local banks?

There is not much but their organic growth is very appealing. But the quest for access to finance in Ethiopia is beyond the capacity of existing banks. The economy grew very fast but the access to finance did not.

Even now, we are facing a liquidity problem, which has affected the construction industry due to the lack of credit. The construction industry massively contributes to the economy. But it depends on finances.

The return on shares also remains very positive. But some banks are reaching their ceilings. Many people bought shares because there were no other alternative investment areas at the time. And once the stock market is opened, there will be more opportunities, even for the layman.

Did the new Commercial Code, which was amended after 62 years, bring changes to company structures and accounting systems?

Allowing the creation of a holding company, one person PLC and other minor changes have occurred. The code also allowed foreign accounting firms to come to Ethiopia. The big four, which include KPMG and PWDC, are allowed to operate in Ethiopia.

But these international financial institutions can only partner with local companies. They are allowed to have a 49 percent stake. They are currently requesting us for a license. This is one of the signs that the economy is opening.

The big four will have a big role in capacity building but are very unhappy with the 49/51 proportion. But for me, it is perfect.

So auditing is allowed for foreigners now?

Yes, but this was only made possible after the commercial code was amended.

Recently Ethio telecom’s CEO, Frehiwot Tamiru rejected the 80 billion birr asset valuation of the company. Some say the low valuation is intentional, and conspiracy concerning the valuator has been raised.

I am very concerned of the valuation issue in Ethiopia. Valuation is one input for accounting. In the old days, the value of vehicles dropped every year and on the tenth year, the value gets to zero. The Tax Law also states it must depreciate by ten percent annually. The IFRS states an assets value must be stated in its current market value, which shows the true value of a company.

In Ethiopia, the value of vehicles keeps appreciating. A Toyota bought with 200,000 birr ten years ago is now 2,000,000 million birr. So according to IFRS, the vehicle is worth 2,000,000 birr. But the tax system does not demand depreciation.

Who is the right valuator in Ethiopia? There are only three certified valuators in Ethiopia.

The conspiracy issue when it comes to foreign valuators is not a new issue. That is why I say the opening up of the country must be cautious. Ethiopia has been closed for so long that the process must be done step by step. The reasons why the big four hate the 49/51 ratio is because they want to come at once and manipulate the weak regulatory system.

Whatever your background, you care about your country. But foreign firms care only about their profit. The loyalty of their accountants and auditors is not to the Ethiopian public or the government. It is for their parent company abroad. This is why we must produce our own professionals, to maintain the balance.

Which institutions have shown progress in implementing IFRS?

That would be financial institutions. They have the money and IFRS is expensive. If a company can afford the expensive professionals, it is simple to implement IFRS. There is a huge demand for the professionals, but there are very few. The demand shot-up since the AABE came.

Financial institutions are implementing IFRS because they have the money and managed to engage international financial consultants, but SOEs are the first to bring an IFRS report four years ago.

Banks are blamed for engaging in informal financing including the black market, and informal Hawala services. Do you think IFRS brought transparency to the banking system?

Every time an economic system is closed, informal doors are opened, including corruption. Many problems will be solved, if the economy is opened but as long as it remains closed, it creates many loopholes.

New banks have come into the picture in the past three years. But lately, the PM has said the sector will open up soon. When should it be opened?

When foreign competition comes, it will be all about survival of the fittest. How long will it take for our banks to be fit? If they have to merge to be competitive, let it be. Mergers should be encouraged. It is better to have a few strong, internationally competitive banks than many banks.

So far, Ethiopian banks are not even going into regional states, because they did not even satisfy the urban clients while Kenyan and Nigerian banks are working at continental levels. That should be our direction.

What would be your expectations of the upcoming stock market?

It will engage the ordinary people. Only few have been able to buy bank shares. But in a capital market, people can have a stake in the stock market. Anybody can invest in profitable businesses, in a stock market.

Will the EICPA produce professionals for the stock market?

Yes. The institute will generate mainly certified public accountants, to address the diversified demand of professionals from different institutions.

Various institutions want to install their own institute to produce such professionals. But that would be unaffordable. So it should be the EICPA that branches-out and addresses these diversified interests.

Who will be listed on the IPO first?

Financial institutions, then SOEs, share companies, and family owned enterprises. The last one may need discussions on whether they want to go public.

Cross listing is also possible. For instance, companies like Coca Cola, which are listed in other countries and also operating in Ethiopia, can be listed in Ethiopia.

Why is it still difficult to solve under-invoicing and over-invoicing challenges in Ethiopia’s import-export business?

Our concern is how to address it through a transparent accounting system. But there are varying scholarly debates on this issue.

Lately, the Ethiopian Investment Holding company has been formed to be an umbrella company for SOEs. Do you think such a mammoth holding company, run by a government, can be efficient given that SOEs are known for wasting resource?

I believe such trend of creating holding companies is a good start. If there is a strong accounting and valuations system, SOEs and holding companies can be efficient.

Liability and asset management company (LAMC) was also recently formed to soak up SOEs’ debts. Credit default swaps, or trading credit derivatives, is common in other countries. In Ethiopia too, some banks are buying defaulted debts from prospective enterprises. Do you think the trend is recognized by the AABE in Ethiopia?

This area should be researched. Many new trends are emerging in Ethiopia’s economy and its contribution must be analyzed.

Before the Ukraine war and COVID-19, scholars were saying globalization is invincible. Now, self-sufficiency is becoming irreplaceable. We have been dependent on FDIs, but they abandon industrial parks when they want. Yet, Ethiopia is pushing for privatization and more integration in the international economic system.

Don’t you think it is time to focus on economic sovereignty, including import substitution? I am not talking about closing the economy, but where should be the boundary?

No country is economically self-sufficient, including the US. Their economy was stuck when Chinese supply declined during COVID-19. Many companies closed in the US, because the supply chain was disrupted. Ethiopia cannot think of self-sufficiency with a nascent manufacturing industry.

But I believe it is time to re-prioritize our policies. Especially, our negotiation skills on international economic activities must grow. The level of our negotiation skill determines the level of external debt stress on our economy.

Many countries have long term plans, up to a century. We must be clear and have a realistic plan on where we want to go in the long term, regarding self-sufficiency, import substitution, even on Chinese imports. For instance, we export oilseed and import edible oil at expensive prices. This can be replaced locally.

Many investments were damaged due to the conflict in northern Ethiopia and COVID-19 pandemic before that. Can they be compensated rightly?

Knowing their accurate accounting is critical, to determine their losses and compensations. We also need to produce professionals on investment insurance policies.

How man licensed auditing firms are there?

Basically, the AABE gives two kinds of licenses. Authorized accountants prepare financial statements. There are around 2,000 authorized accountants, at federal and regional levels and there are 162 independent auditors.

What are its challenges?

There are many challenges. The AABE is a regulatory body. We are expected to have much more capacity than those we control. One of the challenges relates to professionals earning more money if they operate privately, than work for the AABE.

Professionals in regulatory institutions, have less incentive. If the professionals have more power than the regulator, it is difficult to regulate. For the time being, the board is using consultants who are paid by the World Bank, with approval from the Ministry of Finance.

ACCA supported us too. Currently, the AABE is in good position. We know how to review audit reports, and control licensed professionals. Some companies take up to four years to finalize financial statements, but we always begin to review from the first year.

The world is celebrating March 8th. Do you think the affirmative actions provided in Ethiopia have really empowered women?

I do not know what incentives are provided. March 8th is good to highlight the challenges women face. But nobody cares about the details on normal days. Those women like us, who have succeeded, should share our experiences and become role models to young people. We have much homework ahead.

The statistics of women in higher corporate and leadership positions, is alarming. I think there is only one bank president currently and this is not because women lack capacity. If you look at the boards of banks, women constitute less than 10 percent. It is the same in SOEs.

Our definition of democracy is distorted. Ethiopians think ideological semblance comes from similar people. That is wrong. Successful women must nurture the young.

Some European banks which survived the 2008 financial crisis, were banks led by women. Do you think making women CEOs is a guaranteed success?

Women have different management philosophy than men. Women lead with humility. It is not because we have more capacity but because we have intense concern for humanity.

Usually women empowerment issues are used or raised during March 8th or elections. When will equal opportunity become embedded in the publics thought?

We live in a man’s world. The existing trend must change completely, to accommodate women. A new world and country that equally accommodates women and men must be created.

Radical feminists argue a new social order should be created from scratch.

That would be good, if it is possible.

But other groups argue the existing world can accommodate women, with some adjustments.

I agree with this one. But I do not think we should try everything foreigners tell us, especially on feminism. Context and culture are very important. Ethiopia has a different context from the west. We can create an indigenous system for Ethiopia.

First, we have to reconfigure what the education system, society and the media tells about equality. The narrations and practice must be seamless, while extremist views on gender issues only harms the efforts.

If completely erasing the existing system and creating a new order is possible, it should have been simple to reshape the country.

For instance, there are some jobs where women earn less for the same position. Can it be solved by policy actions?

There are various challenges posed on women, some to be solved by the government, some by the private sector, or the society. For instance, board compositions can be solved only by policy. Chambers can also do more work to bridge the inequality gap. And some challenges are inherently solved through time.

There is this discussion over equal opportunity versus equal outcome. There is opportunity for all. Both boys and girls go to school. But that equal opportunity does not continue. Women give birth and then must take care of children.

The inequality will change as more women come into leadership roles. No challenge can be solved overnight, through policies or campaigns. For instance, the AABE can play a role in board compositions because corporate governance is one of its tasks.

We must draw lessons from countries that have bridged the gender gap successfully. In some institutions, they say there are no women qualified to be board members. That is wrong.

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