AccountancyCyprus

Transcription

AccountancyCyprus

AccountancyCyprus
N 110MARCH2013
o
www.icpac.org.cy
THE TIME FOR THE resuscitation
OF THE CYPRUS ECONOMY
!
W
O
N
IS
The Journal of the Institute
of Certified Public Accountants
of Cyprus
ΠΕΡΙΟΔΙΚΟ
ΤΑΧΥΔΡΟΜΙΚΟ
ΚΛΕΙΣΤΟ ΕΝΤΥΠΟ
ΤΕΛΟΣ ΠΛΗΡΩΜΕΝΟ ΑΔΕΙΑ ΑΡ. 133
ΑΔΕΙΑ ΑΡ. 239
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President ’s Address
Dear members,
It is with great reflection that I communicate
with you following the events since Saturday
15 March which have laterally shaken our personal and professional lives.
Theo Parperis
President
Institute of Certified
Public Accountants
of Cyprus
The conditions set by Eurogroup and Troika for
the financing of Cyprus bail out are undoubtedly very harsh. They are harsh not because
of the tough financial terms imposed but because they have destroyed the confidence and
trust of our banking system and tarnished the
image of Cyprus as an International Business
Centre. This was the first time in Eurozone
that unsecured Depositors have been asked
to contribute significantly for the “bail-in” of
under-capitalised banks, in this case of Laiki
and Bank of Cyprus.
Top economists in the world (e.g. Nobel prize
winner Dr Krugman) and the top financial organisations and media e.g. FT, Moody’s’ etc
have described the decision as wrong, even,
irrational not only for Cyprus but for the whole
Eurozone. This decision is expected to cost
tens of billions of Euro deposits fleeing out of
Eurozone to UK, USA and the Far East.
In Cyprus, however, we have learned throughout the centuries not to cry over spilt milk but
rather concentrate on what we need to do the
next day. We have learned this throughout
our turbulent history, most recently after the
Turkish invasion of 1974. Without doubt our
political and Governmental system has disappointed us. The road culminating to the current crisis has been a long one. EU, top world
economists, the World Bank and rating agencies have been warning us for over 2 years,
about the dire state of our economy and banking sector.
Our Institute was one of the local bodies that
have been lobbying for almost two years asking the Government to cut costs, promote
growth and provide incentives which would
improve Cyprus competiveness as an International Business Centre. As early as autumn
2011 we, as ICPAC, have given specific proposals in writing to the Minister of Finance and
other Government bodies on how to regenerate the economy.
our views, proposals and opinions to the Government and we have also made them public in
order to be as effective as possible. Since the
crisis started, I have received an overwhelming
support from our members, other officials and
the public in general about the clarity and quality of our views and proposals.
Our Institute took the initiative to summon
other important stakeholders of the economy,
namely the Cyprus Chamber of Commerce
and Industry, the Cyprus Bar Association and
CIPA, and jointly prepared a common proposal
of 10+1 actions, which was sent to the President of the Cyprus. These 10+1 measures
constitute immediate actions necessary to be
taken in order to maintain Cyprus as an International Business centre.
We strongly believe that if the Government
adopts our 10 plus 1 proposals, then Cyprus
will continue to be a credible International
Business Centre with prospects. The message from the great majority of our International and local clients is clear. Despite their
losses and initial shock and understandable
disappointment they are willing to give Cyprus
a second chance, provided that Cyprus demonstrates that it has learned from its mistakes
and will not repeat them.
We will stay in the front line of events in order
to leverage the ocean of intellect and expertise
that our Institute possesses through its members, committees and firms, in order to ensure
that our profession continues to have a bright
future.
We owe this to the new generation of our
members who have shined in the recent world
exams of international accounting bodies such
as ICAEW and ACCA.
Finally our thoughts are with those members
that have lost their job and we wish them to get
back into employment the soonest possible.
Unfortunately although we have succeeded
in implementing some of these changes (e.g.
80% exemption on Intellectual Property, financing companies, Funds,) not enough was
done to avoid such a painful outcome.
What matters now is how we react! As I have
already stated it is in our DNA, to do rebound.
From the first day we, as ICPAC, have given
ACCOUNTANCY CYPRUS • VOLUME 110 • MARCH 2013
3
Contents
March 2013 – No. 110
ISSN 1450-2380
Accountancy Cyprus is published quarterly by the Institute of
Certified Public Accountants of
Cyprus and is sent free to all members of the Institute as well as to
a large number of other persons,
companies and organizations.
Editor
Ninos Hadjirousos, FCA
Deputy Editor
T. Anastasiades, B.Sc., M.A. (Econ.)
Editorial & Institute Offices
11 Byron Avenue, CY-1096 Nicosia
P.O.Box 24935
1355 Nicosia – Cyprus
Tel. 22870030, Telefax 22766360
The Institute can accept no responsibility for the accuracy of
contributed statements or articles
appearing in this publication and
any views or opinions expressed
are not necessarily endorsed by
the Institute, its Council or by the
Editors.
E-mail: [email protected]
URL:http://www.icpac.org.cy
Institute News
Professional Briefing
Interviews
P.4
P.7
P10
P11
P.14
Revised ICPAC Regulations for
P.18
Interview of Mr. Patrick Scullion,
practising the accounting
Ambassador of Ireland
profession as from 1/1/2013:
New practising certificates
Council’s Activities
Commitee’s Activities
New Members
Upcoming activities
GM’s corner
P.12
4
Think’n ahead
Contents
Auditing and Accounting
P.60
P.61
P.62
Economy
P.24 Banking Sector: The Economic
Crisis as an Opportunity to Design
and Implement the Right Strategy
P.26 Breaking Down Barriers, Boosting
Growth
P.28 Economic crisis and women
the European Parliament’s view
P.29 Issue and offer of financial
instruments to the investing public
P.30 Overcoming the present economic
crisis
P.32 Innovative Entrepreneurship:
Why Israel succeeds and Cyprus
fails?
P.34 The End of the Innocence
Time and money have finally run
out for the government but there
is an even greater underlying
problem in Cyprus
P.36 The reactivation of the Cyprus
Economy
P.38 Austerity Measures and
Restructuring: The lessons we
didn’t get
P.42 The benefits derived from the
Cyprus Double Tax Treaty
network under the current
economic circumstances
P.44 The Aftermath from the Elections:
What Lies Ahead?
P.46 Should Cyprus be grateful for
Euro Zone Financial Assistance?
P.48 Back to the pound,
what does it mean?
P.50 The Implementation of Quality
Management System ISO
9001:2008 in the Cyprus Public
Sector
P.52 PIMCO’s expected loss and its
accounting treatment
P.53 Are deposits in danger, or is there
something else hidden behind this
threat?
P.54 Privatisations – benefits and
concerns
P.56 ECONOMIC BULLETIN
The Cyprus and International
economy
Control under IFRS 10
Sharing auditors’ insights
IFRS has been transformational
for international investors
what next?
Business
P.64 The importance of the
development of the Energy Sector
through the Cyprus Stock
Exchange (CSE)
P.66 Opportunity through Enterprise
Commonwealth Theme for 2013
P.68 Why the new government should
pay attention to business
P.70 IBAN expands!
P.72 A leader is one who knows the
way, goes the way, and shows
the way – communicating with
impact
P.76 Shipping industry in distress
A second wave calls for
restructuring and consolidation
P.78 Ethical principles in business
P.80 Residency and Employment of
European Citizens in Cyprus
P.82 The protection of Intellectual
Property of Software protects
companies and creates jobs
P.84 The meanings of natural
monopoly and of the electricity
sector restructuring
P.86 Yes! There are Business
opportunities in the Balkans
P.88 Project Management:
Methodologies and
Implementation
P.90 Family businesses Managing
culture and behaviour in the family
business
P.92 Flexitime as a working time
schedule: How to increase
productivity of the workforce by
better reorganisation of working
time
Internal Audit
P.96
The future of Internal Audit is now
Fraud
P.98
Corruption in Cyprus:
Perceptions and suggestions
P.100 FORENSIC ACCOUNTING:
Using Computer Forensics to
Uncover Financial Fraud
P.102 Accusations about money
laundering
P.104 The Cyprus EU bailout and the
money laundering Spanner in the
works
IT
P.108 The Excel Wizard
Real Estate
P.110 Permanent Residency & Home
Buying
P.112 Disrespect to Real Estate Agents
The Institute Council
President:Theodoros Parperis, BSc (Econ), ACA
Vice President: * Marios Skandalis, FCCA, FIFC, CFC, CFE
Secretary: * Demetris Halios, BSc (Acc), CPA
Members:
Panicos Charalambous, FCCA
*Ioannis Charilaou, FCCA, FAIA, MBA
Nicos Chimarides, ACA, BSc
Christis Christoforou, BA(Econ.), FCA, MBIM
Stavros Pantziaris, B.Eng., FCA (22/1/2013)
Maria Pastellopoulou, FCCA
Nicos Syrimis, FCA
*Demetris Taxitaris, ACA
Demetris Vakis, FCA, BSc, CF
*Denotes member not in practice
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Institute News
Council’s Activities
During the initial quarter of 2013 the Council of the Institute
convened four times and considered various matters of significant interest to ICPAC and to the profession in general. The
main activities of the Council included the following:
Meetings with Officials and other important
activities
The President, Council Members and the General Manager during the first quarter of 2013 held the following meetings with
Government, political, business and other officials:
• On 21/1/2013 the President and the General Manager of
the Institute, accompanied by representatives of the firms that
contributed to this end, visited the University of Cyprus and met
with the Rector of the University Prof. Constantinos Christofides
and with the prof. Andreas Haritou. The purpose of the visit was
to present to the Rector a cheque of €17.000 which constituted
the Institute’s grant to the University for the research activities
of the Department of Public and Business Administration.
• Mr George Kourris informed the Council in December 2012
of his decision to retire from the Council for personal reasons.
The Council exercising its discretionary powers decided in its
meeting on 22/1/2013 to appoint Mr Stavros Pantzaris to the
Council, in order to fill the vacancy. Mr Pantzaris’ appointment
expires at the forthcoming Annual General Meeting of the Institute, and if he wishes, he may seek election from the members.
• On 22/1/2013 the Council of the Institute met with His Beatitude the Archbishop of Cyprus Chryssostomos B’ at the Holy
Archbishopric. The Institute donated €5.000 to the Archbishopric for the needs of the community grocery. After the meeting,
the Archbishop offered lunch to the Council members and the
members of the senior team of the Institute.
• Mr Sha Ali Khan, Head of Practice Assurance of ACCA,
was invited to the Council meeting on 22/1/2013, during which
he presented the results of the monitoring visits for the year
2012.
• On 23/1/2013 the President of the Institute Mr Theo Parperis and the General Manager Mr Kyriakos Iordanou met with
the new members of the Public Oversight Board. At the meeting, Mr Sha Ali Khan and the practise review team of ACCA in
Cyprus presented the methodology that ACCA employs during
the monitoring visits.
• The President and the General Manager met with the Attorney General and the Registrar of Companies on 6/2/2013 in
order to discuss urgent issues that relate to the Registrar.
• The President sent a letter to the Minister of Finance on
18/2/2013, expressing the Institute’s strong disagreement on
the Council of Ministers’ decision to close down the Tax Tribunal.
• During its meeting on 19/2/2013, the Council finalised the
Members’ Handbook and the Regulations relating to the practising of the profession, as well as approved the revised Disciplinary Regulations.
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• On 25/2/2013, the President and the General Manager
met with the Chairman and Vice Chairman of the Cyprus Commission of Securities and Exchange, to discuss various matters
arising from the Trust and Corporate Service Providers Law.
• On 5/3/2013, the President of the Institute sent congratulating letters to the President of the Republic, the new Ministers
and other government officials.
• On 11/3/2013 the General Manager and a delegation of
the ACCA practice review team met with the Public Oversight
Board to discuss matters that relate to the audit monitoring visits.
• The Council held an extraordinary meeting on 17/3/2013
to review the situation of the economy as it was heavily affected
by Eurogroup’s decision of the morning of 16/3/2013. A press
announcement was issued on the same day.
• On 21/3/2013 the General Manager met with a delegation
of the OECD in order to discuss issues arising from the Global
Forum of Exchange of Information for Tax Purposes.
• The President sent a letter to the Minister of Finance on
26/3/2013, seeking to receive clarification on the tax measures that were being discussed with Troika.
• A delegation of the Council with the General Manager was
interviewed by reviewers of Moneyval on 27/3/2013 at MOKAS
premises. Moneyval was extremely interested to record the procedures followed by ICPAC for the prevention and suppression
of money laundering activities.
• During the quarter, the General Manager attended various
meetings at the Ministry of Finance for anti-money laundering
issues and related issues.
Council’s Decisions
• The Council during its meeting on 19/2/2013 finalised the
Members’ Handbook and approved the Regulations for the
Practise of the Accounting Profession, as well as the Regulations for the Disciplinary proceedings. The new Regulations
increase the number of the practising certificates issued by the
Institute to three and accommodate the new Trust and Corporate Service Providers Law. A relevant circular was sent to all
members by the General Manager on 8/3/2013, with all new
documents attached.
• The Council, during an extraordinary meeting on 17/3/2013,
evaluate the situation of the economy, the profession and the
firms after the decision of the Eurogroup regarding the Cyprus
economy and banking sector. The Council issued a press release on the same day in order to express its views on the matter.
• The Council, responding to the request of the Small and
Medium Practice Firms Committee approved at its meeting on
19/3/2013 the provision of technical assistance to its members
for tax and vat matters. Hence, ICPAC has set up an agreement
with Mr Neofytos Neofytou for the provision of the technical
support to the members via email, without any charge to the
members. The agreement commenced on 1/4/2013.
• The President of the Institute signed together with the
Presidents of CCCI, CIPA and the Cyprus Bar Association a letter addressed to the President of the Republic on 28/3/2013,
whereby a proposition of 10+1 measures for immediate action
was made in order to maintain Cyprus as an international business centre.
Other important meetings and activities
• During the quarter, the President was hosted in a number
of tv and radio broadcasts, as well as with interviews in the local
and international press. The main subject matter was the economic crisis and the aftermath of the Eurogroup’s decisions.
• The General Manager was in close cooperation with officers
of Cyprus Commission of Securities and Exchange and the Cyprus Bar Association, regarding the recently passed legislation
of the Trust and Corporate Service Providers Law.
• During the quarter, ICPAC officials visited a number of
schools and colleges to give presentations about the accounting and audit profession.
• A lot of meetings and other work was done by the Institute
officials and committees, with respect to the financial crisis, especially after the decisions of the Eurogroup.
• A circular was sent to all members informing them of the
extension given on the deadline of the renewal of the members’
subscriptions and the practising certificates, ie to 31 May 2013.
• ICPAC cooperated very closely with the Cyprus Bar Association and CIPA for a number of issues of mutual interest.
Grant given
to the University
of Cyprus
On January, 21 2013 the President of the Institute, the General
Manger and representatives of the firms that kindly contributed
to the collection of the grant, visited the Rector of the University prof Constantinos Christofides and prof Andreas Haritou.
ICPAC supports the research activities of the Department of
Public and Business Administration of the University and this
year’s grant reached €17.000. The firms which generously
contributed to the grant were K. Treppides Ltd, Deloitte, Ernst
& Young, KPMG, PWC, Crowe Howarth, BDO, Consulco and
Baker Tilly.
The meeting was held in an excellent atmosphere and both parties reassured their good intensions for enhancement of the
existing cooperation and developing it even further. ICPAC supports University of Cyprus of Cyprus for many years now.
Council’s meeting with
His Beatitude the
Archbishop of Cyprus
Mr Chrysostomos B’
His Beatitude the Archbishop of Cyprus Mr Chryssostomos B’
invited the Council of the Institute for a meeting, followed by a
working lunch, at the Holy Archbishopric on 22/1/2013.
It was a very fruitful and pleasant meeting and both the Archbishop and the Council members had the opportunity to exchange their views on the prevailing economy conditions.
The Institute donated €5.000 to the Archbishopric for the support of the community grocery operated by the Archbishopric.
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Institute News
Letter sent to the President of the
Republic Mr Nicos Anastassiades:
Immediate actions needed to be taken
in order to maintain as an Cyprus an
international business centre
On 27 March 2013, our Institute took the initiative to summon
other important stakeholders of the economy, namely the Cyprus
Chamber of Commerce and Industry, the Cyprus Bar Association and CIPA, and jointly prepared a common proposal of 10+1
measures which was sent to the President of the Republic on
March 28. These 10+1 measures recognise immediate actions
to be taken in order to maintain Cyprus as an international business centre.
The letter sent included the following suggestions:
1) The President or Minister of Finance must speak or meet
with Russian counterparts and make a statement that the
Russian DTT is not at risk, hence the benefits of using Cyprus are still intact. A statement from Russian officials would
close up the issue, firmly. This is required to alleviate threats
that the Cyprus Double Tax Treaties with third countries and especially with Russia will become void, after the statement made
by Premier Medvedev and by European officials about Cyprus’
business model.
2) Seek the following: • Sign an Investment Protection Treaty with Russia - Even
an announcement that such a treaty is being discussed, with
a view to be agreed in the near future, will restore some
confidence.
• Cyprus to make unilateral statement (if legally possible)
that assets held by Cyprus companies, which belong to nonresidents, situated outside Cyprus are safe and excluded
from any future agreements with state creditors.
• Invoke and state all EU Directives and articles of Cyprus
constitution which safeguard on safeguarding private assets.
These are needed in order to provide comfort to the perceptions
that the assets kept under Cypriot companies are not at risk of
being confiscated in case of a Cyprus default, since the value
of such assets are of tens of billion euro in Russia and Ukraine.
3) A clear statement from the Minister of Finance and The
Commissioner of Income Tax must be issued that apart from
the agreed increase of Corporation Tax rate to 12,5% and
increase in the tax on interest income, NO other significant
tax changes are anticipated.
4) In order to combat the perception of the international investors that the Cyprus banking sector has lost its credibility and
manage to rescue the international business of the holding company structures in Cyprus, it is worthwhile to communicate
that such structures do not necessarily require onshore
banking institutions, should they wish to use alternative
8
banks. Such international structures could seek alternatives
in international banks residing in Cyprus or abroad for their
banking transactions, whilst they can keep doing their regular business from Cyprus as before. In addition, once the
restrictive measures are lifted, local banks that do not fall in
the resolution measures may well serve these international
structures as they did for many years and remain a trusted
business partner. Hence, CIPA and all other professionals
must convey the above message to all international clients
and associates. Thus the overall sector’s trust will be regained and enhanced.
5) There must be tangible compensation benefits to everyone who ‘lost’ money as a result of the restructuring of Laiki
bank and the bail in of Bank of Cyprus (BoC) in addition
to the shares issued in the respective banks, by means of
treating cash lost or capitalized as a direct investment in Cyprus and hence qualify for Permanent Residence and more
importantly for Citizenship criteria.
6) As potential closure of banks would cause major problems to
clients who rely on their Cyprus banks for execution of payments
and other obligations, the Central Bank of Cyprus should restore immediately the banking transaction ability of Cyprus
based banks. Capital restrictions should be lifted from all
banks (possibly with the exception of BoC and Laiki until
they are resolved), for Laiki and BoC new accounts to be
opened in parallel with the old blocked accounts with no restrictions on fresh money deposited in these new accounts
and, finally, payments of payrolls abroad, transactions in
transit and other emergency payments to be also exempted
from capital controls.
7) The Central Bank of Cyprus has to clarify that custody
accounts and money or titles kept there, remain outside the
scope of the resolution of Laiki and the bail in process of
BoC. In addition, The Central Bank and the Attorney General
have to clarify that back to back loans are going to be set
off, before any action is taken by the liquidator in the case of
Laiki and any recapitalization in BoC.
8) The Registrar of Companies and the Commissioner of
Income Tax need to expedite their processes and computerization plans in order to become as efficient as their counterparts in our competitor countries, so that they will be able to
respond timely for the increased requests from clients following
the restoration of the business activity in Cyprus. This is now
extremely crucial given the adverse publicity of Cyprus.
9) Since Cyprus reputation has been irreparably damaged and
thus it is not easy to use Cypriot companies for transactions, for
raising finance, for holding investments or for opening of bank
accounts in good banks, CIPA to work on reverting the negative publicity and appoint world class PR experts and begin
immediately an active campaign to restore confidence and
reputation of Cyprus.
10) Cyprus must offer other incentives for Cypriot companies to enhance its model, such as, tax holidays for new investments in Cyprus, accelerated capital allowances, lowering of
property transfer fees to boost property transactions , increase of
coefficients, etc.
before the House of Representatives for a long time without
any outcome. Therefore, this is the time to: • Amend the legislation to attract international pension
schemes (QROPS) and Islamic Finance Structures
• Amend the Companies Law to allow for merger with Non EU
companies
• Finalise and introduce the Cell companies legislation
• Finalise and introduce the Leasing legislation
• Allow for change of use of assets e.g. Hotels to be changed
into Flats, pay relevant taxes and allow this change.
10 + 1) Finally, new legislations should be enacted that will
improve the competitiveness of Cyprus. Such legislation is
Committees’ Activities
Accounting Standards Committee
During the first quarter of 2013 the Accounting Standards Committee has carried out the following actions:
The Committee continued its scheduled monthly meetings
as well as several sub-committee meetings in the intervening
periods. In accordance with the Committee’s action plan five
sub-committees are monitoring developments and dealing with
issues in the following areas:
• News from the IASB and developments in IFRSs;
• Developments in the Cyprus Companies Law, Cap.113;
• Reporting matters relevant for listed companies arising from
developments from the Cyprus Stock Exchange and Cyprus Securities and Exchange Commission;
• Developments in the EU Accounting Directive; and
• Financial reporting issues arising from the financial crisis.
During its meetings the Committee discussed the following
matters:
• Developments in the EU endorsement status of IFRSs. The
Committee is monitoring the endorsement of IFRSs in the EU
and has communicated the latest Endorsement Status Report
as issued by the European Financial Reporting Advisory Group
(EFRAG).
• Developments from the IASB, including newly issued standards, amendments to standards and exposure drafts.
• Accounting issues related to financial assets that have been
adversely affected by the financial crisis, focusing on valuation
and impairment matters.
• Recent changes in the Cyprus Companies Law and update
of the Cyprus Companies Law Disclosure Checklist.
The Committee also discussed the need by preparers of financial statements to consider the impact of the local economic environment, assess the implications on their financial statements
and provide adequate disclosures in their financial statements
explaining the possible impact of the related uncertainties on
their operations and assets and liabilities. The Committee prepared a Circular providing a generic illustrative disclosure that
can be considered in preparing the necessary disclosures.
During its meetings the Committee was also briefed on the following developments:
• European Securities and Market Authority (ESMA) report
regarding the treatment of forbearance practices in IFRS Financial Statements of Financial Institutions which was published in
December 2012.
• ESMA Report of European enforcers review of impairment
of goodwill and other intangible assets in IFRS financial state-
ments which was published in January 2013.
George C Kazamias
Chairman
Auditing Standards Committee
During the period 20 November 2012 to 12 March 2013 the International Auditing Standards (ISA) Committee performed the
following tasks:
1. The Committee is the process of reviewing the New Law for
the Establishment, the Activities and the Supervision of Funds
for Occupational Retirement Benefits Law of 2012, which was
issued on 28 December 2012 and is considering its implications
for the audits of Provident Funds.
2. The Committee is monitoring ongoing developments in auditing standards, legislation and pronouncements with an aim to
issue technical guidance, as required. During the period under
review the Committee has reviewed and delivered comments on
the proposed revised ISA720 “Auditor’s Responsibilities Relating to Other Information in Documents Containing or Accompanying Audited Financial Statements and the Auditor’s Report
thereon”.
3. The Committee is in the process of preparing illustrations
of audit engagement letters for audits of other entities than a
company, including those of Provident Funds, Branches, Partnerships and Sole Traders. In this process the Committee will
also update the current illustration of audit engagement letter
for Companies.
4. The Committee is in the process of issuing illustration audit
reports for Partnerships, ICIS and Public Companies.
5. The Committee is in contact with other professional bodies
with the aim of addressing audit relevant issues. In this respect
the Committee has received comments from its members and
then held a meeting with Association of Cyprus Commercial
Banks with an aim to revise the current specimen audit bank
confirmation letter and to find more efficient ways for the process to be performed.
George E Georgiou
Chairman
9
Institute News
CORPORATE GOVERNANCE, INTERNAL AUDIT AND RISK
MANAGEMENT COMMITTEE
During the first quarter of 2013, the Committee dealt with the
following matters:
• Continued working on the survey on Corporate Governance
of listed companies in Cyprus. A first draft of the analytical
results of the survey was received and presented to the Committee by our academic associate’s representatives on the 8th
of March. The Committee members will closely review the draft
and further analyse them during the next few weeks, with the
intention to release meaningful results to the members and others during the 2nd quarter of 2013.
• Continued working towards the organization of an event
that will cover Corporate Governance and its relation to the financial crisis. Met with the selected local speakers and exchanged ideas as well as discussed possible logistics. The timing of such an event is currently believed to take place during
the second quarter of 2013.
Haris Kakoullis
Chairman
Corporate Services Committee
Moving forward in the first two months of 2013, the Corporate
Services Committee has concentrated on working very closely
with the general manager of ICPAC on issues involving the provision of licences by the Association to companies as well as
individuals and on the necessary application procedure. The
Committee has continued to maintain strong ties with the Cyprus Securities and Exchange Commission, meeting frequently
to discuss matters of common interest and for the mutual exchange of ideas in connection to the regulation of the corporate
services industry.
A photograph from the seminar on VAT and the criminal issues of VAT evasion
Helen Hadjichristoudia
Chairwoman
Co-ordination committee Larnaca-Famagusta
During the period from 1 January 2013 to 31 March 2013 the
Larnaca – Famagusta Co-ordinating committee carried out the
following activities:
On 4 January 2013 some members of the committee visited a
children house in Larnaca and handed gift vouchers.
On 6 February 2013 the committee coordinated the VAT Seminar ‘Criminal Investigations, court – cases, the VAT Commissioner Powers, and Responsibilities of Taxed Persons based on
VAT Laws’ held in Palm Beach Hotel in Larnaca.
A photograph from the seminar on International Trusts
During the meeting of 7th February 2013, the vice – president
together with a member of ICPAC tax – committee briefed all
members about the recent tax changes. A dinner was held
after the meeting at a Tavern in Larnaca.
Paris Theophanous
Chairman
ECONOMIC CRIME AND FORENSIC ACCOUNTING (ECFA)
COMMITTEE
During the first quarter of 2013 the ECFA committee co-organized a seminars on Forensic Accounting (scheduled for March
2013) and Financial Statement Fraud (scheduled for April 2013).
In addition, the committee discussed relevant recently enacted
legislation on Political Party Financing and Fiduciary Services
Law as well as Money Laundering and MoneyVal reports.
10
A photograph from the seminar with regard to the introduction
on forensic accounting.
The committee spent extensive time discussing Whistleblowing
Legislations enacted in other countries as well as Tax Evasion
Issues. Implications as well as policies and procedures of tax
evasion will be further discussed in the next quarter with other
relevant committees.
ECFA published volume 3 issue 1 of the quarterly e-bulletin
which was sent to members registered in the ECFA – Special
Interest Group (ECFA–SIG).
At the same time a number of e-alerts were sent to ECFA-SIG
members during the quarter.
Maria Krambia-Kapardis
Chairperson
Education Committee
During the first quarter of 2013, the Committee held three
meetings.
The following seminars have been organized and presented
during this period.
1. VAT audit and the criminal issues of VAT evasion.
The purpose of the seminar was to educate the members of the
legal environment, the criminal investigations, the court cases,
the Commissioner of VAT power , the required actions from the
people dealing with VAT (Vatable legal entities and persons)
and professionals and also practical experiences with practical
examples to the professionals (accountants etc.). The seminars
were presented by Mr. George Georgiou – VAT office – Criminal
investigations, Mrs Anna Papantoniou – VAT office – Judicial
Investigations and Mr Christos Christodoulou , Director of CSC
Christodoulou Limited. The seminar was held on the 23th of
January 2013 in Nicosia, on the 28th of January 2013 in Limassol and on the 6th of February 2013 in Larnaca.
2. International Trusts.
The purpose of the seminar was to inform the participants regarding International Trusts – their developments, uses, types,
amendments legal and tax considerations. The seminars were
presented by Mr Peter G. Economides, Chairman, Totalserve
Management Ltd, Mrs Elena Argyropoulou, Lawyer, E. Economides & Partners LCC, Mrs Sophie Stylianou, Lawyer, E. Economides & Partners LCC and Mr Petros Rialas, Head of International Tax Planning Department, Totalserve Management Ltd.
The seminar was held on the 27th of February 2013 in Nicosia
and on the 28th of February 2013 in Limassol.
Limassol-Paphos coordinating committee
During the period from 1 January 2013 to 31 March 2013 the
Limassol-Paphos coordination committee has carried out the
following activities:
1. On the 28th of January the committee coordinated the
seminar “VAT audits, court cases”. The seminar was held at St.
Raphael Hotel in Limassol.
2. On the 28th of February the committee coordinated the
seminar “International Trusts”. The seminar was held at St. Raphael Hotel in Limassol.
3. On the 13th of March the committee organized a carnival
“get-together”. The event was held at “Da Vinci” Lounge bar.
4. On the 27th of March the committee coordinated the seminar “Recent changes and updates on the income tax and Vat
laws”. The seminar was held at St. Raphael Hotel in Limassol.
Demetris A. Sazeides
Chairman
PUBLIC SECTOR COMMITTEE
During the first quarter of 2013 the Public Sector Committee
held 3 meetings and carried out the following activities:
1. The committee has formed 4 sub-committees, in order to
address the objectives set through its strategic plan: promotion
of the code of public governance, promotion of uniformity in
handling several technical issues in the public and wider public
sector, professional development of ICPAC’s members in the
public and wider public sector, promotion of the ICPAC’s role
and increase its members from within the public and wider public sector.
2. The committee identified and recorded the key subjects for
training which are of utmost importance for ICPAC’s members
in the public and wider public sector, with an aim of providing
valuable assistance to public sector colleagues in the performance of their day to day duties and also to promote consistency, efficiency and effectiveness.
3. A delegation of the committee, together with the General
Manager of the ICPAC, met with Mrs. Sumita Shah (ICAEW Regulatory Policy Manager, Public Sector) and Mrs. Christiana
Diola (ICAEW’ s representative in Cyprus) and exchanged ideas
on issues regarding the Public Sector.
3. Introduction to Forensic Accounting.
The seminar was held to educate, to explain and to increase
the awareness of participants on Forensic Accounting and other
related issues. The seminar was presented by Mr.Rakis Christoforou, (BBA, CPA, ABV, CFF, CGMA, ACFE). The seminar was
held on the 28th of March 2013 in Nicosia.
Constantinos Galinis
Chairman
Several seminars are planned for the second quarter of 2013 in
Nicosia, Limassol and Larnaca, in accordance with the Action
Plan of the Educational Committee, with the view of continuing
to provide to the members of ICPAC relevant seminars for the
purposes of Continuous Professional Education (CPE) and to
keep them abreast with recent changes in national and international laws and regulations as well as changes in the profession.
The main activities of the Committee during this period were as
follows:
Akis D. Kolokotronis
Chairman
STOCK EXCHANGE AND CAPITAL MARKETS COMMITTEE
During the first quarter of 2013 the Stock Exchange and Capital
Markets Committee met three times.
(i) Update of the document ‘Continuous obligations of listed
entities in the CSE Regulated Markets’.
(ii) Studied Directive DI190-2007-04 of 2012 regarding information in annual report.
(iii) Studied the Law Regulating Companies Providing Administrative Services and other Related Matters of 2012.
(iv) Studied ESMA Public Statement re Treatment of Forbear
ance Practices in IFRS Financial Statements of Financial InACCOUNTANCY CYPRUS • VOLUME 110 • MARCH 2013
11
Institute News
TAXATION COMMITTEE
The main issues addressed by the Taxation Committee during
the first quarter of 2013 were the following:
The committee examined the practise followed by the authorities with regards to the recharging of certain expenses between
group companies and the parameters that must be taken into
consideration in classifying such recharges as either disbursements or management fees. A working group was formed to
further examine this issue and to come up with a detailed document to serve as the basis of discussion of this issue with the
VAT authorities.
1. All recently enacted tax laws were examined and where appropriate clarifications have been requested from the Tax Authorities. In liaison with the Education Committee relevant seminars are being organised.
(2) Extension of reverse charge on sale of scrap metals
The committee examined the proposal drafted by the VAT authorities for the extension of the reverse charge mechanism on
the above transactions and provided its comments.
2.We have studied and commented on the initial transfer pricing document that has been prepared by the Tax Authorities
that will be discussed shortly.
(3) Yacht scheme
The committee re-examined the attractiveness of the Cypriot
yacht scheme following the recent increase in the VAT rate. It
was agreed that the scheme needs to be revisited and amended in order to maintain its attractiveness. To this end it was
agreed that a meeting will be organised with the VAT authorities
to discuss the proposals of the committee with regards to the
changes that need to be made.
(4) Private jets
The subcommittee that was formed to develop a scheme making Cyprus an attractive jurisdiction for the importation of private
jets in the EU presented its preliminary recommendations. The
draft proposal was discussed and the subcommittee was authorised to proceed to finalise the proposal so that is can be
presented to the VAT authorities.
stitutions.
Katia Papanicolaou Charalambous
Chairwoman
3. The tax aspects of the CIPA initiative draft Simmons and
Simmons report on funds has been examined and commented
upon.
4.We have attended a meeting with representatives of the European Commission and the International Monetary Fund who
have come to Cyprus to technically assist on tax matters.
5. Members of our Committee have continued their involvement with the discussions for the Common Consolidated Corporate Tax Base (CCCTB) and the Financial Transactions Tax
(FTT).
6. Members of our Committee have continued their involvement with the negotiations of various DTTs.
7.We are preparing a report on potential electronic tax functions to be forwarded to the appropriate authorities.
8. Our ongoing list of issues for discussion with the Tax Authorities has been updated for our forthcoming meetings with
the Tax Authorities.
Panicos Kaouris
Chairman
VAT Committee
During the first quarter of 2013 our committee addressed the
following issues
(1) Recharging of expenses
(5) Meeting with Troika representatives
Our committee also attended a meeting with Troika representatives. The purpose of the meeting was to discuss the legal
framework and administrative practise in place for the whole
VAT system. That is from the filing of VAT returns, the payment
of the VAT due, issue of assessments and dispute revolution
processes. This meeting provided the opportunity to the committee to present is recommendations on the actions that need
to be taken in order to make the whole process more efficient.
It also provided the opportunity to express once again the need
for the introduction of a tribunal dealing with VAT issues and the
positive impact that the formation of such a body will have in the
dispute resolution area.
Chrysilios Pelekanos
Chairman
New Members
During the period January – March 2013 the following persons have been accepted as new
members of the Institute:
3596 3597 3598 3599
3600
3601
3602
3603
12
Glib Iefimov
Alexandros Alexandrou
Marios Michalides
Vasilis Panayi
Salomi Glafkou
Marios Stylianides
Aggela Charalambous
George Petrakis
ACCA
FCCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
3604
3605
3606
3607
3608
3609
3610
3611
3612
3613
3614
3615
Spyroula Yiangou
Petros Alexandrou
Zoe Demosthenous
Kyriakos Palamas
Lambros Andreou
Katerina Sepou
Alexandros Yeroudis
Stavroula Nicolaou
Paraskevas Nicolaides
Achilleas Neroupos
Marianna Neophytou
Costas Georgiou
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
FCCA
3616
3617
3618
3619
3620
3621
3622
3623
3624
3625
3626
3627
3628
3629
3630
3631
3632
3633
3634
3635
3636
3637
3638
3639
3640
3641
3642
3643
3644
3645
3646
3647
3648
3649
3650
3651
3652
3653
3654
3655
3656
Elena Katsikidou
Victor Zachariades
Maria Damianou
Kyriakos Georgiou
Melina Petrou
Maria Hadjiprodromou
Panayiotis Karantonis
Stella Georgiou
Cleopatra Andreou
Michalis Loizou
Ioannis Pitsillides
Andreas Costa
Christiana Metta
Anastasia Vantzi
Dmitry Khenkin
Mine Onbasi
Charalambos Karaoli
Constantinos Kitsios
Georgia Nicolaou
Natalia Rusina
Panayiota Georgiou
Kyriakos Zervos
Elena Demetriou
Theodora Ioannou
Ioannis Georgiou
Stavroulla Zinonos
Elena Constanti
Kalia Christofi
Constantinos Constantinou
Kyriaki Petridou
Christina Hiona
Marios Christodoulou
Michalis Kythreotis
Theophanis Argyrou
Tatiana Skokova
Antonis Tsikouris
Constantinos Montis
Charalambos Palaontas
Panayiotis Michael
Koulla Savva Athina Anastasiade
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACA
ACA
ACA
ACA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACA
ACA
ACA
ACA
ACA
ACA
ACA
ICAS
ACCA
ACCA
ACCA
3657
3658
3659
3660
3661
3662
3663
3664
Aggelos Christoforou
Anastasios Nicolaou
Gabriel Ioannou
Zinon Lambrou
Constantinos Pavlides
Marina Frixou
Elena Koursarou
Loizos Alexandrou
ACCA
ACA
ACA
ACA
ACA
ACA
ACA
ACA
Reregistration
1447 Nicholas Nicholaou
1659 Andriani Zeniou
1853 Ioanna Kelpi
ACA
ACCA
ACCA
Removed from Register
111
Kleanthis Atalianis
303
Costas Kirkos
1294 George Ioannou
1329 Marios Panayides
1402 Irena Georgiadou
1677 Emmanouel Pierides
1710 Maria Vovidou
1813 Nicolas Mantis
1879 Nicos Tsiolas
1942 Mark David Bownas
2277 Makis Demou
2307 Stavroula Xeni
2339 Theodoulos Papanicolas
2551 Georgina Kyprianou
2609 Xenia Patsalosavvi
2627 Eliana Constantinidou
2690 Iulia Mirela Lascau
2741 Pavlos Pattichis
2794 George Georgiou
3170 Linos Vouris
3396 Paraskevi Nicolaou
3502 Nayia Makri
ACA, ACCA
ACA
ACA
ACA
ACA
ACCA
CPA-USA
ACA
FCCA
ACA
ACCA
CPA-USA
FCA
ACCA
ACCA
ACCA
CA Romania
CIMA
CPA-USA
ACCA
ACCA
ACA
Passed Away
454
Varnavas Economou
ACCA
Upcoming activities
Subject
Type
Proposed dates
Building Effective Finance Functions
(in cooperation with ICAEW)
Presentation
Basic Provision of the Employment Law
and practical application
Seminar
The Nicosia Economic Congress
(in cooperation with IMH)
Congress
Annual General Meeting
Event
Place
10/4/2013
Nicosia
11/4/2013Limassol
14/5/2013
Nicosia
16/5/2013Limassol
22/5/2013
Nicosia
19/6/2013
Nicosia
13
GM’s corner: Think’n ahead!
This is no time for tears, but for a
creativity revolution!
Dear friends,
It has not been easy to prepare the
column for this issue. In fact I had
to change subject more than three
times due to the rapid developments
in the economy. The dawn of Saturday March 16 found most of us wondering . . .
These past few weeks have shaken the foundations of our country’s
economy. Apparently, today’s picture is not the
same as it was one month ago, nor will it be the
same in the month to follow.
By Kyriakos Iordanou,
General Manager of ICPAC
It is fair to admit though, that our economy indeed
had its problems, coupled by the needs of the two
big local banks for recapitalisation. However, the
blow from Eurogroup was fierce and, to my perception, rather unfair. I am afraid that the consequences form the crisis will result in circumstances
that we have never experienced nor encountered
before. Economic activity will inevitably be reduced,
the banking sector is seriously wounded, unemployment will most probably rise to unprecedented levels, households will struggle financially and
social cohesion would be hurt. At the same time,
we would have to adapt to the new conditions and
overall environment.
Anyway, it is spilt milk now and there is no point to
continue crying over it. Our focus should be centred on gathering our loose pieces and try to put
together the puzzle of the economy under the new
conditions and reality.
Cyprus has for many years been an international
business centre which produced by far the largest
proportion of GDP to the economy. Our business
model is based to a large extent on the provision
of corporate and financial services. We do not have
any heavy industry or heavy exports. ICPAC and
professional accountants were pioneers and leader
over the past years in developing Cyprus’ economy
and transforming it into a reputable financial centre
and an international business hub. It is my belief
that we can remain as such. Cyprus continues to
offer many advantages to international businesses,
despite the current situation. All the factors that
helped Cyprus excel as a business centre are still
there; attractive tax regime, double tax treaties, excellent infrastructure, competent and skilful profes14
sionals, convenient legal system, proximity to three
continents etc.
We need to capitalise on the long expertise and
knowledge built here and make a fresh start. At the
same time, this is a golden opportunity to discard
any unwanted weight and engage ourselves into
different norms. It is the time to exploit all our resources, competitive advantages and redesign our
business model, making it more robust and prosperous. It is also now more than ever necessary
to set national goals and set national strategies. In
a previous article of mine I had mentioned the necessity of setting National Strategy on Taxation and
Investment Promotion. We can now start designing clear strategies for the exploitation of carbohydrates and preparing for any other adjacent industry
(eg chemicals), for enhancing the shipping industry, for improving the tourist product, for renewable
sources of energy, for establishing Cyprus as an
educational and medical centre and many more.
We must engage in new economic activities that
generate income and wealth for the country.
In other words, we need to re assess out position
and what we were doing all these years and rethink
of the future. We have to embark on an innovation and creativity revolution that would turn things
around. There is no other way.
Things will not be the same. It is inevitable to adapt
to the changing circumstances. Things will not be
easy. However, we must stand strong in every way,
be innovative and committed to what we will be
doing. We, as financial experts and professionals,
to cautiously navigate our clients, organisations,
country with our expertise and knowledge through
the dire straits of the crisis! I am confident that we
can do it, despite the temporary, I hope, severe casualties in the banking sector.
Although the current horizon is gloomy, we have
to reengineer our model and properly plan for the
next day. This is our starting point. And it is very
important to have all the stakeholders of the country, that is, the government, parliament, employers,
unions, professionals and regular people aligned to
the same targets! We need to instil hope and we
need to surge ahead!
©2013 KPMG Limited, a Cyprus limited liability company
and member of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (”KPMG
International”), a Swiss entity. All rights reserved.
15
Revised ICPAC Regulations for practising the accounting
profession as from 1/1/2013: New practising certificates
As from 1/1/2013, ICPAC has put in effect the revised Regulations for practising the accounting profession. The ultimate aim
behind this decision was to better depict the new developments
in the professional activities of the members as well as the new
legal obligations of the Institute, coupled with the achievement
of a better operating structure. It was also a direct response
to the legislation that governs the professional activities of the
members under the capacity of the Institute as a regulatory and
supervisory authority, ie:
(ii) a general or limited partnership or a limited liability company whose majority of general partners and directors are members of ICPAC, and
(iii) a subsidiary company, owned directly or indirectly, by any
of the above,
•
•
•
A member may hold either all three certificates, or the Practising Certificate only, or the Practising Certificate and one of
the to specialization certificates, according to the professional
activities performed.
The Auditors and Statutory Audits of Annual and
Consolidated Accounts Law (L.42(I)/2009)
Prevention and Suppression of Money Laundering
Activities Laws (L.188(I)/2007 and L.58(I)/2010)
Law Regulating Companies Providing Administrative
Services and Related Matters (L.196(I)/2012).
One of additions on the Regulations is the much clearer definition of the term “public practice” (Par.4, Regulation 1.201).
Hence, ICPAC now issues the following practising certificates
to individuals and firms as follows:
To individuals:
• Practising Certificate.
• Practising Certificate and Audit Qualification.
• Certificate for the Provision of Administrative
Services.
To firms:
• Practising Certificate.
• Auditing Certificate.
• Certificate for the Provision of Administrative
Services.
The main changes in a snapshot:
For an individual member to obtain a practising certificate, he/
she must apply first for a general Practising Certificate, which
forms the base certificate. The criteria for obtaining this certificate are set out in paragraph 6 of the Regulation 1.201. With
this certification, a member is entitled to provide all services described under “public practice”, with the exception of the provision of auditing services and administrative services. These two
services are covered by two different certificates, which are
now considered as specialization certificates.
The Practising Certificate and Audit Qualification refers to
the audit profession and the criteria for issuing this certificate
are listed in paragraph 9 of the Regulation. The audit profession is governed by the Auditors and Statutory Audits of Annual
and Consolidated Accounts Law (L.42(I)/2009).
The Certificate for the Provision of Administrative Services will be issued to members who shall provide such service
(paragraph 12 of the Regulation), and accommodates the Law
Regulating Companies Providing Administrative Services and
Related Matters (L.196(I)/2012). Under article 2 of the Law,
the following are “exempted persons”:
(i) a member of the Institute of Certified Public Accountants
of Cyprus (ICPAC)
16
which is regulated by the Board of ICPAC in its capacity as
Competent Authority in the framework of the Prevention and
Suppression of Money Laundering and Terrorist Financing Law.
Adherence to the Code of Ethics is a sine qua non constant
obligation of all ICPAC members.
As far as the firms are concerned, ICPAC issues again three
practising certificates which correspond to the individual’s certificates. There is no base certificate for firms, and each firm
may apply and obtain the three certificates in any combination. The new development for firms is the definition of the
“accounting firm”. This is a firm containing holders of practising
certificates which can be described as firm of “Certified Public
Accountants” only where:
(a) at least 50% of the partners (or directors in the case of
a company) are Members of the Institute who hold practising
certificate, and
(b) the partners and directors noted in sub-paragraph (a)
above control the majority of the voting rights under the firm’s
partnership agreements or articles of association.
ICPAC will issue a separate practising certificate to individuals
and firms for each activity.
Monitoring system
Members that are holders of practising certificates, of any category, are subject to a monitoring system for supervising their
compliance with these Regulations.
Keeping of Registers
The Institute will maintain separate registers for Members and
Firms per the category of the practising certificate. All such
registers will be available for public view on the website of the
Institute. In addition, as far as the following certificate holders
are concerned:
- Auditing Certificate: the register will be also kept at the Registrar of Companies, according to the provisions of the Companies Law.
- Certificate for the Provision of Administrative Services: the
register will be linked to the website of the Cyprus and Exchange Commission.
Fees
The Council of the Institute has decided to keep the fee for the
practising certificate to €350 for the year 2013, without imposing any additional charge for the two new certificates.
Technical support to members for Tax and VAT matters
The Council, responding to the request of the Small and Medium
Practice Firms Committee, has inaugurated a new service to its
members, for the provision of support for tax and vat matters.
This service will be offered free of charge and will be delivered
electronically by email to the dedicated email address [email protected].
ICPAC has come into agreement with Mr Neofytos Neofytou for
the provision of this service and has been put in effect as of April
1, 2013.
The provision of this service will be as follows:
1. Correspondence with Mr Neofytou will only be allowed in
writing via the above email address.
2. The queries need to be made as clearly and easy to understand as possible, in order to avoid possible misunderstandings.
3. It is mandatory that the members give their full name, ICPAC
registration number and email address in their query.
4. The responses will be delivered also via email within a short
but reasonable period.
5. Mr Neofytou would be happy to provide is opinion on tax and
vat questions; however he will not be giving rulings nor answer to
specialised tax structure questions.
6. Mr Neofytou will be providing his personal opinion and will
be binding ICPAC in any way.
7. Through this service, members will receive notifications for
possible changes or amendments in the tax legislations, information for new tax circulars and double tax treaties etc.
8. From time to time, tax bulletins will be communicated to all
members, which will comprise of the most common questions
and the corresponding answers.
An Outstanding Achievement for one of our members, Mr
Rakis Christoforou BBA,CPA, ABV, CFF, CGMA, ACFE
Mr Rakis Christoforou (ICPAC member), has recently obtained the Certified in Financial Forensics (CFF) Certification after passing a rigorous
exam in New York and meeting strict professional experience and education requirements.
The CFF Credential represents the highest professional standards and sets the CFF credential
holder apart from other forensic experts.
He is the first qualified Accountant in Cyprus to be holding this
title. From the 384.000 CPA’s worldwide, only CPA’s members
of AICPA (American Institute of Certified Public Accountants) are
allowed to take the exam, just 2,170 have passed the exam; from
those only 19 are International CFF holders (outside the US)
including Mr Christoforou.
Mr Christoforou is also an ABV (Accredited in Business Valuation) holder after passing a continuous 7-hour exhaustive exam
in New York and also meeting relevant education and experience
requirements. This places him as the 2nd International Credential CPA to be holding both the ABV and CFF Certifications.
The above achievements give Mr Christoforou the opportunity to
participate in International Conferences, and get informed about
the latest developments in the areas of Forensic Accounting and
Business Valuation by world experts.
Mr Christoforou will conduct a seminar on the above subjects on
behalf of The ICPAC and will also be the high profile speaker at
meetings of an International Group of Businesses based in Cyprus. Many of his articles were published in professional magazines, newspapers and websites.
AIA Student of the year award 2012
The Association of International Accountants
(AIA) has announced that Marios Christoforou, member of ICPAC, has been awarded
the AIA student of the Year award for 2012.
This is an honour for Marios, ICPAC and generally Cyprus. It is noted that the criteria of
the AIA Qualifications Committee are the
following: The AIA Student of the Year has
demonstrated excellent academic performance; good communication skills, practical skills and leadership ability. He has also
demonstrated a desire to pursue a career in accountancy. The
nominee stands out from his peers as a Student who has made
significant impact, taking into account any notable obstacles he
has had to overcome’’.
The AIA is a global body for professional Accountants founded
in 1928. The AIA has promoted the concept of `international accounting’ to create a global network of accountants in over 85
countries worldwide. It has always believed in opportunity, quality, diversity, accountability and transparency, and these principles are reflected in everything that they do. It is noted that for
a member of AIA to become member of ICPAC he or she should
have passed the required examinations on or after June 1991
and after having satisfied certain requirements about accounting professional experience.
Cyprus top worldwide for training chartered accountants
Students from Cyprus were among the highest
performing students in the latest ICAEW ACA exams.
Four of the five highest scorers in the 2012 Professional Stage
exams were students from Larnaca and Limassol, putting Cyprus right at the head of the league tables for high-flying trainees.
1303 students from around the world completed the Professional Stage in December 2012 and will now move on to the
Advanced Stage of ICAEW’s prestigious ACA (Associate Chartered Accountant) qualification.
Mark Spofforth, ICAEW President said: “This is a fantastic
result! Students in Cyprus continue to get the highest exam
scores globally, demonstrating both their calibre and determination as well as the excellence of the training available in the
country. As Cyprus looks to drive forwards its economic growth
– especially through international trade – it will be more important than ever to have a pool of highly-trained finance profes
17
sionals with internationally-recognised qualifications. These students represent the business and finance leaders of tomorrow,
and it is great news for the region that they have some of the
cream of the crop.”
Mark Protherough, ICAEW Executive Director - Learning & Professional Development, said: “ICAEW is a global leader of the
accountancy and finance profession so it’s little wonder students from across the world are opting to study with us. The
ACA qualification equips students with knowledge and guidance
based on the highest ethical and technical standards making
them an asset to any organisation. They should all be incredibly proud of what they’ve achieved so far. As they take on the
final stage of their ACA exams they are now well on their way
towards becoming ICAEW Chartered Accountants”.
2012 PROFESSIONAL STAGE ANNUAL INTERNATIONAL
ORDER OF MERIT
First Place and the Plender prize
Marina Vakana, Limassol (PricewaterhouseCoopers Limited)
Second Place and the Stephens prize
Andri Hadjiyerou, Larnaca (KPMG Limited)
Fourth Place and the Northcott prize
Christina Telemachou, Larnaca (PricewaterhouseCoopers
Limited)
Fifth Place and the Cassleton Elliott prize
Kyriaki Christoforou, Larnaca (KPMG Limited)
DECEMBER 2012 PROFESSIONAL STAGE SUBJECT INTERNATIONAL ORDERS OF MERIT
Financial Accounting
First Place and the Spicer and Pegler prize
Nikoletta Neofytou, Nicosia (PricewaterhouseCoopers Limited)
Audit and Assurance
First Place and the Watts prize
Christina Rotsidou, Nicosia (KPMG Limited)
IASB and IIRC formalise cooperation on work to develop
integrated corporate reporting Framework
The International Accounting Standards Board (IASB) and International Integrated Reporting Council (IIRC) have announced
an agreement that will see the two organisations deepen their
cooperation on the IIRC’s work to develop an integrated corporate reporting framework.
The Memorandum of Understanding, signed by IASB Board
Chairman Hans Hoogervorst, and IIRC Chief Executive Paul
Druckman, demonstrates the common interest of both organisations in improving the quality and consistency of global
corporate reporting to deliver value to investors and the wider
economy.
Joint effort needed to tackle disclosure problem
The International Accounting Standards Board (IASB) has released
highlights of a survey conducted
recently on financial information disclosures, ahead of its public discussion forum on Disclosures in Financial Reporting. Respondents to the
survey identified various factors that
contribute to the disclosure problem.
The IASB received 225 responses from
respondents across Africa, Asia, Europe
and North America. Around 50 per cent
of those responses came from preparers and approximately 20 per cent came
from users of financial statements.
Highlights of the survey include:
•over 80 per cent of respondents agreed
that improvements could be made to the
way financial information is disclosed.
Half of those respondents felt that such
improvements were required across all
parts of the annual report, and not just
the financial statements;
•most preparers of financial statements
identified the primary problem as disclosure
requirements being too extensive with
not enough being done to exclude immaterial information—which has been
referred to as disclosure overload;
•many users of financial statements felt
that preparers could do more to improve
the communication of relevant information within the financial statements,
rather than leaving
users to sift through large amounts of
data; and
•a range of views on the underlying
causes of the problem was identified.
Some respondents
felt that more could be done to improve
the way in which accounting standards
are set out.
Others expressed concerns that preparers, auditors and regulators are approaching financial
reporting as an exercise in compliance
rather than as a means of communication.
The European Commission’s proposal strengthens the EU
Anti-Money Laundering framework
FEE (Federation des Experts-comptables Europeens – Federation of European Accountants) welcomes the European Commission’s proposed Fourth
Anti-Money Laundering Directive. The
considerable improvements brought by
the Proposal should be supported. A
few simplifications, in particular regard18
ing the availability and access to Customer Due Diligence information for
professionals would further improve the
Proposal and would be welcomed. The
European accountancy profession will
continue contributing to the development of more effective instruments in
the fight against Money Laundering and
Terrorist Financing that is crucial for the
development of our economy.
The European Commission’s proposal
on the Fourth Anti-Money Laundering
Directive introduces considerable improvements in order to address a broader range of threats and criminal activi-
ties. FEE welcomes that the proposal addresses a number
of areas of existing concern, including the promotion of the
wider application of a risk based approach and the availability
of information on beneficial ownership. Useful clarifications
are provided regarding the reliance on third parties and within
groups while the introduced minimum standards on administrative sanctions are welcomed. Furthermore, the facilitation of increased co-operation between Financial Intelligence
Units (FIUs) has the potential to strengthen the defences
against financial crime.
FEE Paper on Auditor Independence Provisions
“A Comparison of European Commission Statutory Audit Directive - Recommendation on Statutory Auditor’s
Independence in the EU and the Independence Sections of the IESBA Code
of Ethics for Professional Accountants”:
In the Paper, FEE provides a summary of key differences between the EU
frameworks of Auditor Independence
provisions (in the 2006 Statutory Audit
Directive and the 2002 EC Recommen-
dation on Statutory Auditor’s Independence in the EU) and global independence standards of the Code of Ethics
of the International Ethics Standard
Board for Accountants (IESBA).
In respect to audits of Public Interest Entities (PIEs), the IESBA Code
includes stricter provisions for those
non-audit services that are incompatible
with the provision of audit services and
tackles other matters that may be con-
sidered for inclusion in future EU audit
legislation.
The outcome with the adoption and application of the principles and requirements of the IESBA Code of Ethics in
the EU would be that a more robust system would be in place.
On Independence requirements, FEE
has also issued a Policy Statement on
the Provision of Non-Audit Services to
Audit Clients that are PIEs in July 2012.
FEE Roundtable - How to improve the functioning of Audit
Committees further?, Brussels, Tuesday, 5 February 2013
In June 2012, FEE published a Discussion Paper on the functioning of Audit
Committees. This discussion paper was
intended to be a starting point to enhance thought-leadership on the future
evolution of Audit Committees within
Europe. To foster the debate, FEE has
organised a Conference on ‘How to
improve Audit Committees further?’ on
Tuesday, 5 February 2013 in Brussels.
This high level conference brought European decision makers and relevant
stakeholders including audit committee members, auditors, investors and
regulators together to discuss further
improvements of the functioning of audit committees. Stimulating closer cooperation throughout the audit engage-
ment, especially the exchange of high
quality information between audit committees and the external auditor, will be
of great benefit to the company and to
the external auditor. To this extent, and
considering that one or more members
of an audit committee are often trained
accountants, FEE is aiming at enlarging
and widening the debate.
IAASB Consults on Audit Quality Framework
The International Auditing and Assurance Standards Board (IAASB) has released for public comment a new Consultation Paper addressing audit quality.
A Framework for Audit Quality seeks
input from stakeholders internationally
who have an interest in continually enhancing audit quality, including regulators, audit committees, investors, and
audit firms.
Through the proposed framework, the
IAASB aims to raise awareness of the
key elements of audit quality, encourage stakeholders to explore ways to improve audit quality, and facilitate greater
dialogue between key stakeholders on
the topic.
IFAC SMP Poll Highlights Pervading Economic Uncertainty,
Cautious Optimism, and Key Issues Facing Accounting
Profession in 2013
The latest IFAC SMP Quick Poll, conducted in late 2012, showed that the
smallest accounting practices and
their clients are not immune to macroeconomic instability. With the continuing sovereign debt crisis, a double-dip
recession in the Eurozone, and rising
inflation in some regions, economic
uncertainty pervaded many of the responses to the poll of small- and medium-sized accounting practitioners
(SMPs). Despite these concerns, SMPs
remain cautiously optimistic, showing
their resilience and perseverance during
challenging times.
After keeping up with new regulations
and standards, three issues related to
the health of the economy—attracting
and retaining clients, pressure to lower
fees, and rising costs—topped the list
of challenges faced by SMPs. Similarly, respondents indicated that their
clients, small- and medium-sized entities (SMEs), are most challenged by
regulations followed by economic uncertainty. Respondents generally expect
little change in business performance in
the coming year; however, slightly more
SMPs (5 points more) indicated they expect business to improve in the coming
year compared to those who said the
same at the end of 2011. They expect
this growth primarily to be driven by revenue from new clients.
While respondents identified the reputation and credibility of the profession as a
top issue facing the profession in 2013,
they generally ranked public perception of the profession in their country/
jurisdiction as average to above average
and expect this perception to improve
by 2025.
19
Interview
INTERVIEW OF MR. PATRICK SCULLION,
AMBASSADOR OF IRELAND
To Ninos Hadjirousos,
Editor
and Tassos
Anastasiades,
Deputy Editor, Accountancy
Cyprus Journal
In an interview we had with Mr Patrick
Scullion, ambassador of Ireland, the country which presides the EU during the 1st
half of 2013, we have been informed, inter alia, that the Irish Presidency motto is
“For Stability, Jobs and Growth”. The Irish
Presidency is therefore about securing stability and ensuring that it leads to jobs and
growth. As Presidency it will play its part in
driving a pro-growth and pro-employment
agenda across Europe.
With regard to the promotion of the banking
Union Mr Scullion stated that the successful implementation of the Banking Union
measures should facilitate the breaking of
the link between the financial sector and
the Sovereign and part of that involves the
ESM being eventually allowed to carry out
direct recapitalization (hopefully also in relation to legacy debt), an issue critical for
Ireland that may have implications also for
Cyprus.
Responding to our question about the Irish
economy Mr Scullion informed us that the
adjustment in the Irish economy over recent years means that Ireland is now much
more competitive. Unit labour costs have
improved dramatically relative to the euro
area as a whole in the period since 2008
and it continues to cover lost ground. The
external sector is leading the recovery, with
exports of goods and services now well in
excess of pre-crisis levels, and among the
sectors performing particularly well are
pharmaceuticals, software, financial services, business services and the food industry.
With regard to the 12.5% corporate tax
rate we have been informed, inter alia, that
corporate tax rates have been one of the
principal elements of the favourable enterprise environment in Ireland for more than
three decades. Ireland’s 12.5% corporate
tax rate continues to underpin its Foreign
Direct Investment policy. It has fought hard
to protect it on the grounds of its continuing
importance to securing sustained growth in
Ireland and, ultimately, a resolution of its
current economic difficulties.
The Irish 12.5% corporation tax rate is a
20
general rate which applies to trading income and does not distinguish between
particular segments of Irish industry. A
25% Corporation tax rate applies to investment and non-trading income. Mr Scullion
stated that Ireland does not have the lowest corporation tax rate in the EU. At least
two other Member States have 10% rates.
(i.e. Cyprus, Bulgaria, Hungary) The Irish
Government remains 100 per cent committed to maintaining the 12.5 % Corporation
Tax Rate. Ireland has for the past 50 years
sought to have a competitive corporate tax
strategy to attract job rich foreign direct investment into Ireland.
Responding to our question about the extent to which IDA is a contributory factor
in attracting foreign investment Mr Scullion stated that Ireland’s inward investment
promotion agency, IDA (Industrial Development Agency) plays a crucial role in the attraction and development of foreign investment in Ireland. It was directly responsible
for the creation of 12,722 new jobs during
2012. IDA client companies added a total
of 6,570 new net jobs, the IDA’s third consecutive year of growth in net employment.
Job losses at IDA client companies were
the lowest for a decade.
The Interview with Mr Patrick
Scullion follows:
oils, chemical materials, medical and pharmaceutical products, and beverages while imports are mainly centred on
Fruit & vegetables and services.
Mr. Ambassador we would like to start our interview by
asking you to brief us about the economic and commercial relations between Ireland and Cyprus.
What are the main priorities of the Irish EU presidency?
Ireland enjoys good bilateral relations with Cyprus and established a resident Embassy in Nicosia in 2001. Ireland
has provided personnel to the United Nations Force in
Cyprus (UNFICYP) since its inception in 1964, with the
exception of a brief period in the 1970s.
Ireland and Cyprus are competitors in the fields of financial services and tourism and so the opportunity to develop
economic ties is somewhat limited. Nevertheless, the Irish
company Aer Rianta International is part of the Hermes
Airports group consortium which is responsible for the reconstruction, development and administration (to 2030) of
Larnaca and Paphos Airports.
Irish-based airline, Ryanair, established a service between
Brussels (Charleroi) and Larnaca in 2010 and in January
2012 announced that it had set up a regional hub at Paphos Airport serving fourteen new European destinations.
Based on the latest figures available, Cyprus is Ireland’s
76th largest merchandise trading partner with exports
mainly in miscellaneous manufactured articles, essential
The Irish Presidency motto is “For Stability, Jobs and
Growth”. Our Presidency is therefore about securing stability and ensuring that it leads to jobs and growth. As
Presidency we will play our part in driving a pro-growth and
pro-employment agenda across Europe.
Our core theme is to get the European Economy back on
track and our focus will
be on promoting economic growth, with a key focus on
youth unemployment; creating jobs; improving the EU’s
competitiveness; restoring stability with particular emphasis on a Banking Union and strengthening the Single
Market; improving economic governance through the European Semester and a stronger Economic and Monetary
Union; agreement (reached at the February European
Council) on the MFF, and developing the external trade
agenda, particularly the EU-US Trade relationship, which
is an important source of growth and jobs.
In the foreign policy sphere, a key objective for Ireland’s
presidency is to actively support the EU High Representative for Foreign and Security Policy and the European
External Action Service, as the Union seeks to play its part
21
Interview
in helping to address such challenges as the ongoing crisis
in Syria, tensions across the wider Middle East, the Iranian
nuclear dossier and instability in Africa. On the 40th anniversary of Ireland’s own accession, and on the eve of
Croatia joining the Union, we also hope to oversee further
progress towards EU membership for the countries of the
Western Balkans, Turkey and Iceland.
Building on the experience of chairing the Organization
for Security and Cooperation in Europe (OSCE) in 2012
and on our national experience of conflict resolution in the
Northern Ireland peace process, we will also contribute to
EU efforts in the area of conflict prevention and resolution.
Overall, our Programme sets out the real and tangible decisions we will push for as we chair negotiations across
nine different Council formations. Working together with
our fellow Member States, the EU institutions and other
stakeholders, the Irish Presidency will be that of a recovery
country driving recovery in Europe.
Could you specifically brief us about the promotion of
the banking Union?
Ensuring fiscal sustainability and breaking the link between
banks and sovereigns is a key part of President Van
Rumpoy’s vision of a genuine Economic and Monetary
Union. An essential element of this is the establishment
of a Banking Union. A healthy financial services sector is
the key to any economy. Through the provision of credit
and other supports, the banking sector is necessary to underpin economic recovery and confidence in Europe. So,
Banking Supervision and Banking Union is not just a process; it is about fixing the European banking system so
that money is available again for where it makes a difference to recovery – credit supply to employers and SMEs,
returned consumer confidence and investment in areas
like education, R&D etc.
The successful implementation of the Banking Union measures should facilitate the breaking of the link between the
financial sector and the Sovereign and part of that involves
the ESM being eventually allowed to carry out direct recapitalization (hopefully also in relation to legacy debt), an
issue critical for Ireland that may have implications also for
Cyprus.
The Single Supervisory Mechanism (SSM), the first element of the package of Banking Union measures, is an
important foundation to ensure confidence in supervision
across Europe. Our Presidency will build on the agreement
on SSM reached in December while the deadlines set by
the December European Council to maintain momentum in
the process – first stages in terms of bank recovery and resolution and bank deposit guarantees by June 2013
with a single resolution mechanism to follow later in
2014 – will help us as Presidency with
our work.
Could you brief us about the Irish economy?
22
The Irish economy is growing – by 1.4% in 2011 and by
a projected 0.9% for 2012. Aggregate tax revenue increased by 7.7% in 2012 while exports were in excess
of pre-crisis levels; total exports increased by over 5% in
2011 in nominal terms and by over 6% in the first three
quarters of 2012 compared to the same period in 2011.
Exports in the agri-food sector have grown by 28% in the
last three years.
The Government has been working hard to reposition
Ireland to return to the financial markets on successful
completion of the EU-IMF Programme and to be ready to
take advantage of improvements in global economic circumstances. Ireland continues to meet all of the targets
under the EU-IMF Joint Programme of Assistance and our
priorities are to restore economic growth and job creation.
On the budgetary front, Ireland has implemented over 80%
of a budgetary adjustment of €30 billion, or about 20% of
GDP, over the period 2008 – 2015. Ireland’s General Government Deficit has fallen from over 30% of GDP in 2010
to a likely figure of under 8% in 2012. Ireland’s deficit in
2012 was over €10bn lower than in 2011 and we are on
course to meet our 3% deficit target by 2015.
The adjustment in the Irish economy over recent years
means that Ireland is now much more competitive. Unit
labour costs have improved dramatically relative to the euro
area as a whole in the period since 2008 and we continue
to regain lost ground. As mentioned above, the external
sector is leading the recovery, with exports of goods and
services now well in excess of pre-crisis levels, and among
the sectors performing particularly well are pharmaceuticals, software, financial services, business services and
the food industry.
This shows that the improvement in competitiveness,
which has been evident in recent years, is standing to us.
This, I believe, demonstrates the inherent flexibility of the
Irish economy – prices and costs in Ireland have fallen significantly, and further improvements are in the pipeline.
The strong export performance also means that our balance of payments with the rest of the world moved into
surplus in 2010 for the first time in over a decade.
Obviously as a small open economy whose recovery is being driven by exports, Ireland will be affected by the uncertainty in the global economy. Exports account for over
100% of GDP compared to just 40% in the euro area and
we have the highest trade surplus as a percentage of GDP
in the EU. So we have a strong interest in the performance of our trading partners in Europe and across the
world.
The Government is focused on returning Ireland to a
sustainable, disciplined and innovation-driven model of
economic development. The focus must be on inclusive
growth which can produce jobs because, despite success in the external economy, domestic consumption
and growth remain sluggish and unemployment levels are
much too high. We are fully aware that we still have a long
way to to travel in our country’s journey back to prosperity
and full employment and are far from being complacent
about the challenges that lie ahead. But we know that we
are heading in the right direction as the economic climate
continues to improve.
It seems that the measures you have taken have been
successful. This is in view of the fact that, as expected,
Ireland will return to the bond market in 2013. Could
we have your comments?
The joint EU-IMF programme for Ireland worked to build
on bank rescue policies that had been implemented by
the government in the previous two and a half years and
on the 2010 National Recovery Plan; a new government
was formed in Ireland in March 2011 and it quickly set
about implementing the programme, though with some
fine-tuning that provided for better conditions overall. The
programme measures were wide-ranging and covered taxation policies that included widening the tax base; savings
in social protection expenditure through enhanced control,
structural control, an increase in the state pension age to
66 in 2014, to 67 in 2021 and to 68 in 2028; a reduction
in public service costs through a reduction in numbers and
reform of work practices as outlined in the “Croke Park”
Agreement; a reduction, on a progressive basis averaging
over 4%, of existing public service pensions; a 10% pay
reduction and reform of pension entitlements for new public service entrants; reductions in public capital investment;
the introduction of a Fiscal Responsibility Law and labour
market adjustments.
The Government is focused on emerging from the programme and returning to the markets. On the 8th of January, the National Treasury Management Agency’s (NTMA)
syndicated issuance of €2.5 billion of bonds at yields of
3.3%, maturing in 2017 was a very welcome and positive
development. This auction built on the successful issuances last year and the level of demand at the auction with
€7bn of orders for €2.5bn of issuance was particularly encouraging and was primarily from foreign investors.
This issuance has been facilitated by the international recognition of Ireland’s progress in returning our economy to
growth and the commitment from the European Heads of
State and Government to break the negative link between
the sovereign and the banks.
These factors, in tandem with our strong programme implementation are having a very positive impact on financial
markets’ perceptions of Ireland.”
How about your 12.5% corporate tax rate?
Ireland has a comprehensive taxation system in place covering income, capital and indirect taxation, which concentrates on lowering the tax burden on enterprise and employment to encourage economic activity.
The Irish tax regime is open and transparent and complies
fully with OECD guidelines and EU competition law; in
2011, Ireland signed the OECD / Council of Europe Con-
vention on Mutual Assistance in Tax Matters.
In addition, Ireland has signed 66 bilateral Double Taxation Agreements and 19 Tax Information Exchange Agreements, which ensures a system of full exchange of tax
information, and proper regulation of activities to the highest standards. Currently, Ireland’s expanding DTA network
covers approximately 80% of world trade. A number of
additional DTAs are currently under negotiation.
Ireland is a member of the Global Forum on Tax Transparency. In 2010, Ireland was one of the first countries to
volunteer to have its tax system peer-reviewed and a very
favourable report on Ireland was published in 2011 by the
Global Forum.
Corporate tax rates have been one of the principal elements of the favourable enterprise environment in Ireland
for more than three decades. Ireland’s 12.5% corporate
tax rate continues to underpin our Foreign Direct Investment policy. We have fought hard to protect it on the
grounds of its continuing importance to securing sustained
growth in Ireland and, ultimately, a resolution of our current
economic difficulties.
The Irish 12.5% corporation tax rate is a general rate
which applies to trading income and does not distinguish
between particular segments of Irish industry. A 25%
Corporation tax rate applies to investment and non-trading
income. It should be noted that Ireland does not have the
lowest corporation tax rate in the EU. At least two other
Member States have 10% rates. (i.e. Cyprus, Bulgaria,
Hungary)
The Irish Government remains 100 per cent committed to
maintaining the 12.5 % Corporation Tax Rate. Ireland has
for the past 50 years sought to have a competitive corporate tax strategy to attract job rich foreign direct investment into Ireland. Our policies in relation to tax cooperation
and international exchange of tax information have always
earned international respect and last year Ireland became
one of the first countries in the world to agree a new InterGovernmental Agreement with the United States in relation
to the US Foreign Account Tax Compliance Act, commonly
known as FATCA.
Ireland’s public debt in 2007 was a mere 25% of GDP
as compared to 120% in 2013. What has led to this
huge rise in the public debt?
The Irish financial crisis could be summarised in one word
“debt” – national debt and personal debt. The Government
committed itself to dealing with both national and personal
debt. Continuing to borrow large amounts to fund day to
day services became simply unsustainable. The reality was
that stable public finances were an essential prerequisite to
long term economic growth and job creation. We knew that
we would only be able to successfully access the markets
in the long term if the markets believed we had a credible
fiscal strategy and agreed that our debt was sustainable.
23
Interview
If we look back over the past 6 years, we have heard many
explanations of the origins of the financial crisis, a crisis
that hit Ireland like a tidal wave and led to a dramatic increase in public debt.
The Irish crisis had the same overall characteristics as the
global financial crisis. The accelerant of the crisis was a
sudden withdrawal of liquidity, which showed up far greater problems in terms of our banks’ balance sheet, primarily
that their liabilities significantly exceeded their assets.
In Ireland this fall in banks’ assets was due to the collapse of the property market – simply put, too many resources were devoted to our property sector. Irish banks
had borrowed Euros freely from other European markets
and made foolish lending decisions into a property bubble,
which in turn became a source of tax revenue for foolish
public spending commitments. When the global crisis hit in
2008, property prices collapsed, output shrank, unemployment sky-rocketed and government finances went sharply
into deficit. Confidence drained out of Irish banks leading
to taxpayer guarantees and then large bailouts.
In technical terms, the Government at the time (no longer
in power) introduced a broad guarantee in an attempt to
maintain depositor confidence. Regrettably, the losses on
the asset side of the banks’ balance sheets negated the
positive effects of this guarantee. The Government then
had to move into a series of rushed capital injections to
address the obvious asset shortfall. These continual capital injections further undermined confidence as the capital
holes grew ever larger.
The broad guarantee given by the Government had committed the State into whatever capital injections were necessary largely because the extensive burden being placed
on the sovereign from saving the financial system was creating doubt as to whether the sovereign could continue to
fund itself. This problem was then further accentuated as
the sovereign effectively had to become the counterparty
for all of the financial system’s borrowing as well as its
own increased borrowing to fund the automatic stabilisers,
such as increased social protection spending.
How serious is your unemployment problem?
Ireland’s high unemployment rate, which is in excess of
14%, is a major cause for concern. Jobs are at the heart of
our Presidency priorities with a particular spotlight on youth
joblessness which is at more than 25% in 13 EU Member
States including Ireland.
To what extent is the IDA a contributory factor in attracting foreign investments.
Competition for inward investment has never been stronger, but Ireland’s national determination to make the country one of the best places in the world to do business remains undiminished.
24
Ireland’s inward investment promotion agency, IDA, (Industrial Development Agency) plays a crucial role in the attraction and development of foreign investment in Ireland.
It was directly responsible for the creation of 12,722 new
jobs during 2012. IDA client companies added a total of
6,570 new net jobs, the IDA’s third consecutive year of
growth in net employment. Job losses at IDA client companies were the lowest for a decade.
In total there were 145 individual investments, with 66
(over 40%) from companies coming to Ireland for the first
time. The IDA client base in Ireland now employs 152,785
people, a level last recorded before the global financial crisis began in 2008. Among the biggest investments were
Apple, PayPal, Northern Trust, EA Games, Fidelity, SAP,
Amgen, Mylan, Cisco, Arvato, Allergan and Eli Lilly. A notable feature of 2012 was the wide range of green field
investments coming to Ireland, including Clearstream (part
of Deutsche Bourse), Hubspot, Dropbox, Nextag, Aspen
and Nuance.
HORIZON 2020 is the IDA’s Strategic blueprint for attracting FDI to Ireland. Two of the key aspects of strategy are
to drive company transformation to ensure higher levels
of job retention and to focus particularly on the growth in
employment intensive services, which leads to the speedy
creation of jobs. IDA Ireland has just completed the third
year of this five year strategy and the latest results put the
organisation ahead of target in meeting its goal of creating
62,000 direct jobs by 2014 from 640 new investments.
Over the course of the first three years (2010-2012) the
IDA secured 419 investments and delivered gross job
gains of over 36,000.
The work of the IDA in attracting foreign investment is obviously assisted by the significant improvement in Ireland’s
cost environment; Irish competitiveness has improved significantly from the peak in 2007/2008. Business costs
including energy, private rents, office rents, services, construction and labour have all become more competitive
(back to 2003 levels); prime office rents are down 52%,
unit labour costs down 12% and business services down
7%. Ireland is one of only three countries in the EU where
nominal labour costs have fallen. Competitiveness increases are driven by strong productivity growth and weak
prices.
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25
Economy
Banking Sector: The Economic Crisis as an
Opportunity to Design and Implement the
Right Strategy
By Marios M.
Skandalis
ICPAC Vice President
The prolonged economic recession in conjunction with the very low liquidity level of the
financial institutions exerts a lot of pressure
to their management. Acting under such
pressure and adopting easy solutions to this
situation could result in reckless actions and
wrong decisions, which could bring about
not desired results.
We have numerous examples of institutions
that after adopting a strict cost containment
policy, based on cutting operational costs
across the board, eventually hampered the
ability of those institutions to reflect on their
results the subsequent recovery and improvement of the economies in which they
operate..
It has become evident that these traditional
cost cutting techniques such as reduction
of staff across the board, discontinuation
of various operational segments and introduction of conservative dividend distribution policies in an attempt to strengthen
the financial institutions’ capitalization, are
proven not to be 100% effective in the 21st
century. This is because nowadays banking
institutions are facing the following amongst
other things:
1.
Dealing in complex products/services
which if not properly assessed prior to their
launch, they may expose the institution to a
number of risks.
2.Operating in various geographical segments with different banking philosophy, different regulatory frameworks and different
risk characteristics.
3.Channels of products/services distribution are more sophisticated and thus more
complex and prone to operational risks.
4.Gaps in establishing a homogeneous and
thus efficient procedural framework in all
geographical locations.
It has become evident that these traditional cost
cutting techniques... are proven not to be 100%
effective in the 21st century
The fact that the current economic environment offers financial institutions significant
attractive growth opportunities, with the
26
introduction of traditional cost reduction
schemes it will most probably hinder the
ability of the institutions to take advantage
of these growth opportunities. Moreover
managing the effects of an economic crisis
is a matter that affects the corporation as a
whole and not individual sectors of it.
For this reason in order to reach the desired
result and address rightly the effects of the
economic crisis, a well-balanced short and
medium term plan should be devised with
the short term plan based on basic cost cutting techniques. However special attention
should be paid to avoid adopting traditional
aggressive cost reduction policies but instead apply a well-balanced and planned
cost management program which is more
targeted on problematic areas rather than
applied across the board. Moreover the institutions should consider transferring part
of this short term benefit in the future by
creating specific reserves to be used for the
future expansion plans.
The medium to long term plan on the other
side should be devised and be based on a
strategic perspective rather than on a top
down policy direction without prior evaluation, analysis and a risk impact assessment
taking place. Such a strategic approach will
ensure the readiness of the financial institutions to be properly positioned and take full
advantage of the prospective economic recovery.
The medium to long term strategic plan
should consider the following amongst other
things:
1.Systems
The design of a revolutionary systems’ infrastructure, based on the latest technology
which will be ready to support and implement any strategic goal set by the Board,
should be at the top of the list of any long
term strategy.
Timely response and pro-activeness to
adapt to customer needs and new lifestyles,
is what will grant an institution a competitive
edge. Some examples of technological ad-
vances which will need to be considered and implemented by banking institutions in the years to come
should include the following:
• Mobile banking. With the significant development
of the usage of smartphones and tablets, mobile
banking technology is not an advanced banking service for the few anymore. The era of online banking
is nearing to its peak and mobile banking is currently
the channel with the highest growth potential.
• Cloud hosting. This is another technological advancement that could significantly reduce the infrastructure and systems maintenance for financial
institutions as well as the cost of internal human resources needed.
• Re-establishment of security needs, following the
shift from traditional electronic banking channels to
mobile banking ones. Obviously the focus of hackers
will not be the personal computers of clients but their
smartphones thus security aspects of these devices
should be upgraded and relevant solutions should be
offered by the financial institutions.
• Introduction of customer reward programs for usage of self-service channels and cost saving services
(e.g, electronic statements, electronic billings, etc.).
• Introduction of cost efficient means for communication with customers through the deployment of
multiple communication channels rather than the traditional ones used up to now (e.g. use of message
centres and sms communication channels).
...attention should be paid to avoid adopting
traditional aggressive cost reduction policies...
2.Organization Structures
An organization structure should not be static but its
composition and design should be directed by market
conditions and characteristics. Institutions that are
not ready to proceed to frequent and radical restructures to reflect the constantly changing market characteristics, will surely lose their competitive edge.
Financial institutions could further consider the following:
• Introduction of maximum frequency intervals for
analysing customer needs and market characteristics
and consider revising organization structures.
• Design of structures taking into consideration the
prospects of the market and not only its present characteristics
• Introduction of a policy providing for rotation of officers at all levels which will broaden their banking
knowledge and enhance mobility of human resources
within the institution.
3.Processes
The procedural framework of any banking institution
is the skeleton on which all operations are based and
depending on how efficient these processes are, this
will reflect on the overall operational performance of
the institution.
The on-going reengineering and restructuring of processes by fully exploiting the latest technological advances, is a key of ensuring an efficient operational
performance and also by setting the following principles:
• Ensuring standardization of the structural and
functional procedural framework in all geographical
operational segments.
• Ensuring that economies of scale are achieved
through a combination of processes to achieve lower
unit costs of producing financial services.
• Ensuring that economies of scope are achieved
by establishing a single delivery channel of various
financial products/services (e.g. banking and insurance products).
• Proactively ensuring that technology is fully utilized
and used in the most efficient manner, to ensure that
an effective management information system is in
place at all times.
• Proactively ensure adherence at all times, through
the procedural framework, to legal/regulatory frameworks as well as to the institution’s overall goals/direction/strategy.
• Proactively ensure elimination of inefficiencies created as a result of poor procedures currently in existence, through a continuous process of reengineering
and process optimization and through restructuring of
certain services/sectors.
• Proactively ensuring that all policies/processes in
force adequately address the risks involved by establishing a risk-based approach in all activities related to
the drafting of processes.
• Proactively ensuring that all policies/process in
force adequately address the basic principles of corporate governance by establishing an open and effective channel of communication with the Internal
Audit sector of the institution.
4.Customers, Products and Services
An effort should be made to differentiate in terms of
innovative products and services rendered which will
lead to an overall differentiation of the institution in
the local and global market.
Such considerations should include the following:
• Introduction of personalized and tailor made products/services to satisfy specific requirements of key
customer groups. This will make customers feel important.
• Engage customers from the stage of new products/services design so that to ensure that their demands and requirements are considered.
• Implement sophisticated CRM systems to enable
an integrated database of the institution’s client portfolio, thus enabling a better evaluation of the client
needs.
27
Economy
Breaking Down Barriers, Boosting Growth
By Georgios
Markopouliotis,
Head of the
Representation of the
European Commission
in Cyprus
Over the next two years, 90% of world demand will be generated outside the EU.
That’s why it is a key priority for the EU to
open up more market opportunities for European businesses by negotiating new Free
Trade Agreements with key countries.
Trade has always played a part in expanding
opportunities: From the Andean peoples who
used specialisation and exchange to support
large populations on a bare minimum of arable land to the free trade-based successes
of the United Kingdom in the nineteenth century and the United States in the twentieth.
The reason is simple.
• Trade provides access to goods and services that are needed by consumers and
companies.
• It enhances productivity by allowing specialisation and by increasing the level of competition.
• And it spurs demand by giving exporters
access to new customers.
The gains from trade, but also the adjustment
it requires, have grown larger over time.
There are very few products produced today
that do not incorporate either a component or
a service from another country. International
trade and investment are now at the heart of
the production process, as opposed to being
just the concern of a company’ sales department.
In this context, a country that cuts itself off
from trade is doing itself a disservice as its
efficiency would drop steeply:
• 15% of the value of the European Union’s
gross exports is made up of imports.
• Two-thirds of all our imports are raw materials and components.
• And even a country like Brazil – whose
exports are dominated by primary products –
has a 10% foreign content in its exports. A
figure that will only rise as Brazil moves up
the value chain on the back of its high-tech
and high-value-added companies.
The EU currently has 9 trade negotiations under way and several more trade and development negotiations (EPAs) on going.
If we were to complete all of them tomorrow,
we’d be adding to the EU economy 2.2% of
our GDP, or €275 billion; a figure equivalent
to the GDP of Denmark. In terms of jobs,
they could generate 2.2 million new jobs or
1% of the EU total workforce.
EU-US trade and investment negotiations: a ground breaking step
The European Union is committed to pursuing free trade. Only last month, the EU and
28
US announced the decision to take their
economic relationship to a higher level by
agreeing to launch negotiations for a comprehensive trade and investment agreement.
When negotiations are completed, this EUUS agreement would be the biggest bilateral
trade deal ever negotiated – and it could add
0.5% to the EU’s annual economic output.
The Transatlantic Trade and Investment
Partnership will aim to go beyond the classic approach of removing tariffs and opening markets on investment, services and
public procurement. In addition, it will focus
on aligning rules and technical product standards which currently form the most important barrier to transatlantic trade. Studies
show that the additional cost burden due to
such regulatory differences is equivalent to a
tariff of more than 10%, and even 20% for
some sectors, whereas classic tariffs are at
around 4%.
Negotiations will aim to achieve ambitious
outcomes in three broad areas: a) market access; b) regulatory issues and non-tariff barriers; and c) rules, principles, and new modes
of cooperation to address shared global trade
challenges and opportunities.
This decision is indeed a ground breaking
step. Trade relations between the EU and the
US are the backbone of the world economy.
Together, the European Union and the United States account for about half of the world
GDP (47%) and one third of global trade
flows. Each day goods and services of almost
€ 2 billion are traded bilaterally, contributing
to creating jobs and growth in our economies.
Economic ties between our economies are
deep and diverse, with aggregate investment
stocks in excess of € 2 trillion.
Latest estimates show that a comprehensive
and ambitious agreement between the EU
and the US could bring overall annual gains
of 0.5% increase in GDP for the EU and a
0.4% increase in GDP for the US by 2027.
This would be equivalent to €86 billion of
added annual income to the EU economy and
€65 billion of added annual income for the
US economy.
Policymakers need to understand the realities
of today’s world economy. We need trade to
boost growth and that trade must flow two
ways if want to make the most of it. Imports
and exports are not rivals. If Europe is to remain at the forefront of competitiveness, it
needs both.
29
Economy
Economic crisis and women
the European Parliament’s view
By Tasos Georgiou
Head of European
Parliament Office in
Cyprus
Women have been hit hard by the crisis: they
are more likely to work part-time, unemployment has increased and social services have
been cut. This year’s International Women’s
Day on 8 March was dedicated to how they
are weathering the economic crisis. Boosting
women’s participation in the job market will
be a key factor to any recovery, but how could
the EU help? The European Parliament’s
Committee on Women’s Rights and Gender
Equality approved on 19 February 2013 an
own-initiative report setting out what measures are needed.
The report points out that women already suffer from lower salaries and employment security compared to men, which makes them
more vulnerable to changes in the job market.
French MEP Elisabeth Morin-Chartier (EPP
Group), who was the rapporteur, stressed:
“When the economic crisis started, men were
hit first, but now women face a silent crisis
that makes their situation worse.”
Some 32% of women work part-time compared to 8% of men. Women, who traditionally have more responsibility for family issues,
have been hit by cuts in welfare. Many are
forced to leave work to care for children and
older relatives. Single mothers are particularly
vulnerable. On top of that, women earn on
average 17% less than men for equal work.
That is the EU average. In Cyprus this pay gap
is 21%.
French MEP Morin-Chartier (EPP group),
said: “Unfortunately, employment for men still
seems to take priority over that for women.
The crisis has hit women’s jobs hard and the
effects are likely to be lasting. Before the crisis women were already more likely than men
to be unemployed, to be working part-time,
have precarious jobs, suffer from low wages
or a lack of career progress. Today because
of the crisis, it has got even worse for them.
How the crisis is affecting women’s work is at
the heart of equality and employment policies.
We should stop the decline of women’s position in society.”
Improving the situation
The report adopted by the Committee on
Women’s Rights and Gender Equality identifies several measures to help women in
the job market. According to the report, the
EU should facilitate women’s entry in professional life through the European Social
Fund and other programmes. Member states
30
should encourage women to
start up their
own company,
companies
should
open
more crèches
and
gender
equality should
be integrated in the employment and economic policies of the EU and its member
states.
“Women’s Response to the Crisis” - International Women’s Day 2013
Every year the European Parliament celebrates International Women’s Day with an
event that brings together European and
national parliamentarians from parliamentary
committees for equal opportunities. Taking
into account the adverse effects of the economic crisis on women, the European Parliament decided that for this year, the event
should focus on the theme “Women’s response to the crisis”.
During the event three discussion panels were
foreseen, focusing on the following topics:
- Financial and economic crisis and its effects
on women: “wise women” - best practices
from women-professionals
- Overcoming the crisis - Experiences and
best practices from National Parliaments
- How can the EU support Member States in
strengthening women’s social and economic
rights during the crisis?
Members of the European and National Parliaments had the opportunity to share their
views about the effects of the crisis on gender
equality and the situation of women. Another
objective was to share best practices and
experiences from successful women professionals on how women can face the challenges during the crisis and also how to see the
opportunities in these challenges.
In Cyprus, the European Parliament Office,
the European Commission Representation,
the Ministry of Labour and Social Insurance,
the Press and Information Office (PIO) and
the Cyprus Association of Business and Professional Women have also celebrated the
International Women’s Day with an event focusing on equal pay for equal work between
men and women. The event took place at the
Mall of Cyprus on 9 March.
Issue and offer of financial instruments
to the Law, complex
to the investing public According
financial products must be offered
This article intends to provide clarification
of some aspects of a topic that currently attracts much interest, namely the issue and
public offer of financial instruments and the
competence and relevant powers of the Cyprus Securities and Exchange Commission
(CySEC).
By Mrs. Demetra
Kalogerou,
Chair of the Cyprus
Securities and
Exchange Commission
The Public Offer and Prospectus Law of
2005 provides for the publication of a prospectus for each new issue of securities by
a firm (referred to as the “Issuer”) and for
any offer to the public and/or admission
to trading on a regulated market. The said
Law, together with Regulation 809/2004 of
the European Commission, determine how
the prospectuses are to be drawn up and
specify the minimum information they must
contain. The CySEC is the supervisory authority with the responsibility to check and
make sure that each prospectus includes
all the information required in accordance
to the Law and EU regulation.
A prospectus must contain, for example,
adequate reference to the risk factors that
affect the issuer and the performance of
the securities issued and detailed explanation of the terms of the issue. Only after
a prospectus is approved by the CySEC,
does the Issuer have the right to proceed to
the next step which is the public offer of the
securities issued. All the prospectus that
are approved by the CySEC are available
on the relevant Issuer’s website and also on
the public registry the CySEC maintains on
its website (www.cysec.gov.cy) in order to
be easily accessible to anyone interested.
Investors are encouraged to carefully read
the relevant prospectus before they decide
to invest.
The act of offering or promoting financial instruments to investors constitutes provision
of investment services, an activity which is
regulated by the Investment Services and
Activities and Regulated Markets Laws of
2007 to 2012. In accordance with these
Laws, the entities authorised to provide investment services in Cyprus are the Cyprus
Investment Firms (CIF), investment firms of
other EU member states, banks and co-operative credit societies. These entities may
provide investment services in accordance
solely to investors capable of fully
understanding the underlying risks
with the specific provisions of the legislation in reference to them and only after being authorised by the competent supervisory authority. For example the CIF are to be
licensed by the CySEC and the commercial
banks by the Central Bank. The supervisory
authorities have the responsibility to ensure
that entities under their supervision apply
proper procedures in connection with the
provision of investment services based on
the said legislation. For example, according
to the Law, a person who provides investment services has an obligation to make an
“assessment of the suitability” of the financial products offered vis-à-vis each investor, as well as a “compatibility assessment”
of whether the investment options promoted are aligned with the special characteristics of each investor.
In addition, the legislation provides that financial products that are deemed complex
should not be offered to investors who are
not capable of understanding the underlying
risks. The methods of promotion of financial products used by financial institutions
is under debate both in Cyprus and at EU
level, in particular with regard to the conflict
of interest that arises when the promotion
of financial products is done by the Issuers
of these products. In addition to the matter of promotion, there is also the matter of
the suitability in the design of the financial
products to begin with, since at present this
area is not regulated at European level. As a
result, the supervisory authorities in Cyprus
do not have any legal power to intervene
in the design and characteristics (form and
nature) of a financial product. Supervisory
intervention in the design of financial products, and/or the potential granting of an
approval of financial products before they
are placed on the market, is currently being
discussed at the EU level. The objective of
the discussions is to develop a legislative
proposal that would allow for the ex-ante
detection of potential threats to investors
posed by unsuitable product designs.
31
Economy
Overcoming the present economic crisis
Our economy is in the whirlwind of the economic crisis. The robust character of the
Cyprus economy, its small size, its dynamism and its flexibility which were the firm
features in previous years did not prevent it
from facing today the dire need for help in
order to survive.
By Marios Tsiakkis
CCCI Secretary General
These developments led the real economy
to a terribly difficult position. At present Cyprus has a high unemployment of 14.7 per
cent, a fiscal deficit of the order of 4.5 –
5%, a public debt of the rank of 85% of the
GNP, a negative rate of growth, (for a second consecutive year), the closing down of
enterprises etc. But above all, the economy
is suffering from an intense sense of uncertainty dominating the market resulting
from the negative psychology created as a
result of the reluctance for reaching the
required decisions. At the same time state
cash is at a marginal point, since the state
is unable to cover its current obligations.
The firm promotion of Cyprus as International Business Centre must be a constant aim.
The only way to face all these dilemmas
is development. But development will not
come without a prior fiscal purge, recapitalisation of the banks and promotion of
deep cuts and reforms. For this reason, we
as CCCI, we believe that the Memorandum
32
with the Troica, despite its many one-sided
terms and distortions, is the only realistic
solution which can give us time to breathe
and proceed further.
By signing the Memorandum with the Troica, which must be done as soon as possible, there will be inflow of funds in Cyprus and we will be in a position to promote
measures of a developmental character,
which will contribute to our exit from the
crisis. The triptyque fiscal purge, recapitalisation of banks and development, must
be our roadmap for overcoming the current
deadlocks.
It is therefore most important to reach decisions now in order to restore the confidence of entrepreneurs as well as of the
consumers.
In the view of the CCCI, what appears to be
of primary priority, is to specify record and
set priorities on all the required institutional
and operational changes which must be implemented for modernizing the state in its
entirety. Changes which will aim at a more
effective operation of the state machinery,
at upgrading the auditing mechanisms and
the proper supervision of the various subsectors and above all the disengagement
of the state from political party interventions. What is most needed is to improve
the Competitiveness of the Cyprus Economy.
The question of the recapitalisation of the
banks must also be completed so that the
banking system may be in a position to fulfil its
role in the economy. Be in a position to offer
liquidity to the market, which is now non-existent but also to lower interest rates for loans
which at present are at the highest point in the
eurozone, and so help enterprises and households. This in its turn will facilitate the financing of licensed development projects which the
country needs. Through these projects new
job positions will be created and there will be
higher demand for a big range of products during the construction of these projects.
At the same time the licensing of all private
projects which are mature and ready to proceed to materialization (marinas, thematic
parks etc) must be completed as soon as possible. Similarly the State itself must also start
executing its own projects, for which there is
budgetary provision which in their turn will also
give a serious push to the market.
The robust character of the Cyprus economy... did
not prevent it from facing today the dire need for
help in order to survive.
The firm promotion of Cyprus as International
Business Centre must be a constant aim. The
Services sectors such as Shipping, Tourism,
Financial, Legal, Accounting and Auditing Services must be modernized and upgraded on a
constant basis so that they will always remain
competitive. Special support must be given for
the strengthening of the relevant department
of the Ministry of Finance which handles the
Agreements for the Avoidance of Double Taxation. The target must be to sign new agreements and at the same time to improve existing ones where we see the need for such
improvements.
Attracting new investments in projects connected with tourism, energy, education and
health must also be a permanent aim and must
be supported in all the necessary forms. Special attention of course must be given towards
the emerging sector of hydrocarbons; a positive development which if properly handled will
give a great boost to our economy.
1.Further
reduction of the
cost of electricity
with the abolition
of the Maximum
Demand.
2. Increase of the
amounts offered for
Research, Development and Innovation.
Special emphasis must
be given to applied research programmes.
3. No increase to the rent
for plots in the Industrial Areas
and Zones as well as all other state
plots used by enterprises.
4. The speediest possible refund of VAT to
the enterprises, which helps their liquidity in
the current difficult times.
5. Government Departments offering services to enterprises (e.g. Ports Authority, Customs, Health Services and others) must not
proceed to an increase of their fees for as long
as the economy is in a recession.
6. Announcement of a Grants’ Scheme for
the Technological Upgrading of industries.
7. Setting up of a Guarantee Organisation for
SMEs to provide guarantees for loans to enterprises. The Guarantee Organisation can also
provide partial subsidy of the interest on the
basis of the De Minimis rule.
8. Extension of the Tourist Hours of work for
shops all over the country.,
9. Provision of incentives for promoting investment in Renewable Sources of Energy,
Green Products and the saving of energy.
10.Tax Incentives for mergers of enterprises
in order to become more robust.
11.Re-invested profits should indefinitely be
excluded from taxation.
12.Introduction of Town Planning incentives
for supporting the construction sector.
We want to believe that the new government
will move on these lines in order to help the
economy recover from its present stalemate.
Through proper handlings, with determination
in our objectives and primarily by being effective, we believe that we will succeed.
Finally, we propose the provision of tax incentives and the introduction of measures
for reducing the various cost elements which
negatively affect the competitiveness of our
enterprises. Such measures may include:
33
Economy
Innovative Entrepreneurship:
Why Israel succeeds and Cyprus fails?
Theodore
Panayotou, *
Cyprus International
Institute of
Management
The twins of innovation and entrepreneurship, expressed in innovative enterprise are
the only tools that could sustainably get us
out of the economic recession and set us
on the road to recovery and growth. The
technological and business innovation is
the ultimate source of productivity growth
and competitiveness. Israel has a fraction
of the resources per capita we have and
fewer than almost any other country in the
world and yet it has managed to become
the start up nation of the world; it thrives
in the midst of economic crisis, while we
wander about aimlessly unable to pay even
people’s wages.
Israel with its technological sophistication
and business acumen has managed not
only to survive in an area surrounded by
enemies that threatened it’s very existence,
but also to become the envy of even the developed countries of Europe and America
. Israel has more companies listed on the
stock exchange of NASDAQ, the second
largest in the world. In per capita terms, Israel has more startups than any other country in the world and attracts 30 times more
venture capital than the whole of Europe.
The Israelis attribute their tremendous
technological, business and economic success to the lack of natural resources and
to the 300 million Arabs and Iranians that
threaten their very existence. But Cyprus is
facing similar threats to its national survival
but we do not see similar dedication and
effort to raise our international competitiveness through research, innovation and entrepreneurship.
Now that we both have discovered natural
gas, we celebrate wildly for our luck, while
the Israelis are worried that the discovery
might undermine what they have achieved
through hard work, research, innovation
and entrepreneurship. They fear that it
may lead them to new adventures. Could
it kill the incentive for continued progress
and distort the economy? Could it bring
easy riches, complacency and corruption,
as it happened with their Arab neighbors.
They are debating ways to handle this
double-edged sword in order to make it
more of a blessing than a curse. They are
34
not prepared to sacrifice even 10% of their
research, technology, innovation and entrepreneurship at the altar of the natural gas.
If anything, they plan to invest much of heir
gas revenues in redoubling their research
and technological innovation efforts.
Thus, in Israel necessity and adversity
gave birth to creativity and entrepreneurial
culture, but not so in Cyprus, despite the
proximity and similarities of the two countries. Why Israel did it while we did not.
The reasons are many but almost all have
to do with the different mentality and culture which has developed in the two nations
since gaining their statehood, basically the
past half century.
In Israel, an insatiable questioning of authority and an anti-hierarchical ethos dominates political and economic life. In Cyprus
the ‘deification’ of power and hierarchy
dominates all aspects of life. In Israel, a
man is defined by what he can do and how
well he does it. In Cyprus a man is defined
by title or position, and based on whom you
know rather than what you know. In Israel,
the teacher acquires appreciation for the
student and the manager for the employee.
In Cyprus, the opposite: the student owes
respect and allegiance to the teacher, the
employee to the manager, and the soldier
to the officer regardless of ability, competence and performance.
The Israelis from infancy are trained to
challenge the obvious, to ask many questions, and to debate and criticize everything, to think creatively and to innovate. In
Cyprus, children are trained to accept what
the grown ups (parents and teachers) say
and not to question it.
When I teach in Israel 80% of the students
ask questions; they challenge everything, I
say. In Cyprus, if you’re lucky 20% rarely
asks questions and hardly anyone challenges the teacher. Our centralized education system is investing in routine, extrinsic
incentives, standardization and conformity,
while in Israel it promotes diversity, intrinsic
motivation and spontaneous creativity and
imagination, just those skills required by
the connected and globalized international
economy .
In Israel, if you’re the manager your authority will be constantly challenged: why
should you be the manager of me and not
me the manager of you and, therefore,
you must be constantly proving by your
decisions and actions that you deserve the
position you hold. Even army officers are
being challenged by their soldiers. Blind
obedience is not required; actually it is
frowned upon.
In Cyprus the opposite happens. Many
of the officers of security forces and the
managers of the wider public sector and
even the private sector, have obtained
their position by political favor and connection or based on the number of years of
service and not through their own merit.
It is then not surprising that they impose
their authority by discipline rather than
earn it with their performance. Their subordinates know that the only way to climb
the ladder is to follow their example, buttering up their superiors and investing in
personal and party connections and not in
performance and creativity.
In contrast to the usual practice in Cyprus,
in Israel subordinates do not run to their
superiors to solve problems, but they assume the risk and the responsibility to invent imaginative solutions in real time and
on the go. Textbook answers are discouraged and imaginative solutions are sought.
Thus, most innovations are bottom-up, not
top-down.
In Israel, military service has become an
incubator of innovative companies (startups). Those who haven’t served in the
army have a hard time finding work in government and business because they are
considered to be “problematic” and immature, having lost the opportunity of technological training and operational experience
offered by the military service. In Cyprus,
the military service is considered a necessary evil and a waste of time since neither
technological training nor professional development of soldiers takes place, while
exemption from service can be achieved
with the right connections.
Another important factor in creating innovative enterprises in Israel is the willingness to take risks and an accepting attitude towards failure which entices failed
entrepreneurs to use their experience
and try again instead of stigmatizing and
marginalizing them. Without tolerating a
large number of failures it is impossible to
achieve real innovation.
But the failures should be “smart failures”. We must distinguish between a
well-planned experiment and a Russian
roulette. Risks undertaken intelligently and
not recklessly result in useful lessons even
if the enterprise fails.
Studies have shown that entrepreneurs
who failed in their previous company are
twice as likely to succeed the next time
around compared to those who are starting their first business, and almost the
same chance with those who succeeded
the first time. Whether they succeed or
fail, entrepreneurs make their contribution
to the economy. If they succeed, they create new valuable products and services; if
they fail, they keep the established entrepreneurs under constant pressure to innovate.
Unfortunately, in Cyprus failure is stigmatized and the unsuccessful businessman is
marginalized. The bankruptcy law is unforgiving and works proactively as a deterrent
against any attempt for innovation and entrepreneurship. When profit from success
is demonized and failure stigmatized, it is
not surprising that high-risk, high-return
innovative entrepreneurship is rare in Cyprus while in Israel it is commonplace and
produces miracles.
SHORT BIO
*Dr. Theodore Panayotou is Professor and Director of the Cyprus International Institute of Management (CIIM). He served
as Professor of Economics and the Environment at Harvard University and consultant to the UN and to governments in the
U.S., China, Russia, Brazil, Mexico and Cyprus. He has published and was recognized for his contribution to the Intergovernmental Committee on Climate Change won the Nobel Peace Prize in 2007.
35
Economy
The End of the Innocence
Time and money have finally run out for the government
but there is an even greater underlying problem in Cyprus
By Andrew Demetriou,
Director
Ioannides Demetriou L.L.C.
We stand today in the shadow of the worst
financial crisis that Cyprus has ever faced.
Our people are more dejected and more
pessimistic than they were after the 1974
invasion. Our politicians have demonstrated
a disappointing inability to rise to the challenge. The former President was refusing
to blame himself or his government for the
crisis, having forgotten how, not so long
ago, he and his Minister of Finance assured
us that the Cypriot economy was intrinsically sound and isolated from the crisis that
was taking hold in the rest of the eurozone.
The former President’s blaming of the
banks for the present crisis is not entirely
without foundation (though it is not the
whole truth either) but it has further undermined investor confidence in Cypriot banks
and, in turn, led to an unprecedented outflow of foreign and local deposits at the
worst possible time. At the same time it has
dealt a body blow to the most vibrant sector
of the Cypriot economy: Professional Services.
However, I truly believe that the most significant factor in bringing on the Cypriot
financial crisis is the social malaise that
has existed since independence in 1960.
It is the same social malaise that makes
students at local universities take to the
streets whenever an increase in the retirement age for civil servants is announced. It
is expressed in the modern Cypriot dream
of sending one’s children abroad to study
and then to use connections with those in
authority to secure employment for them in
the civil service or a semi-government organisation.
Sadly we are all guilty of perpetuating this
malaise, and none more so than the political
parties, which without exception, have historically made an art form of trading votes
for jobs. As if this were not bad enough,
successive governments have traditionally
given in to public sector wage and benefit
demands unrelated to productivity or value
gained for money spent. This has led to a
bloated and inefficient public service which
36
represents far more of the GNP than is acceptable or manageable. These are not just
my views but those of the majority of Cypriots and, now, of the Troika too.
The economy will eventually be revived but I
fear that we are about to witness economic,
social and cultural changes that will mark
and change our country and our people forever. The age of Cypriot innocence is over.
We shall witness a fragmentation of society
and a drastic reduction of the middle class
that has been the driver of economic success, and a nation in which the “haves and
have nots” are brought into a sharper focus.
The social effects of a contracting economy
are devastatingly soul-destroying on an individual and on a national level. Each shop
closed on a high street is a family without
employment or income. Each loan called by
a bank is a business closed and a family
plunged into unproductive debt.
The majority of our new university graduates are unemployed. The debts incurred
by their parents to educate their children
are outstanding without the prospect of
additional family income to reduce the financial burden that these represent to most
families.
The economy, which is vital to our social
wellbeing as a nation, must be the next
President’s first priority. Tax increases and
spending and benefit cuts are clearly shortterm fixes. The challenge lies in tackling the
larger issues. The public sector must serve
the public in an efficient and cost-effective
manner and it must stop being a vehicle for
the political parties.
This is a big “ask” since the new President
will undoubtedly go through a term of extreme unpopularity as a result of the financial crisis which he will inherit. But if he can
find it within himself and his party to rise to
the challenge and eradicate the malaise, he
will be doing the greatest possible service
to the country. 
37
Economy
The reactivation of the Cyprus Economy
By Tassos Anastasiades,
Economist, Deputy Editor,
Accountancy Cyprus
The winding up of Laiki Bank and the imposition of a levy up to 40% on deposits above
€100.000 at the Bank of Cyprus, the largest
lender on the Island, will adversely affect individuals and companies with serious economic,
political and social implications. It is for this
reason that in a recent publication The Economist Newspaper stated that banks in need of
capital should be recapitalized directly through
the EMS rather than burdening the government
with the debt.
the press and television recommending ways
to reduce private consumption. If people follow
this advice and consumption is reduced, unemployment will rise. The patriotic duty now, for
those who can afford it, is to spend as mush as
possible because this will lead to a higher employment and reduced unemployment. In this
respect it may be noted that the Government
should not yield to pressures from Troika to increase taxes and reduce expenditure because
this will deepen recession.
The situation in Cyprus is serious but not desperate. Therefore, what should be presented is
measures for the reactivation of the economy,
and optimistic suggestions and opinions for
the future, and not pessimistic messages, as
those which seem to be conveyed in an article
published in the Financial Times by professor
Christoforos Pissarides, the Nobel-prize winning economist, adviser to president Anastasiades. It is not possible to expect foreign investments and the arrival of new foreign companies
in a country where a sentiment of desperation
and depression prevails.
Ireland entered the stability mechanism but it
took measures, wage costs dropped and now
exports are rising to the point that the country
has returned to the financial markets and borrows at reasonable interest rates. It is now expected that shortly will get out of the stability
mechanism.
With regard to investment demand the Government should promote development projects,
where possible by using the method with which
the two airports were constructed. The Government should introduce tax incentives for investment and exports such as targeted accelerated
depreciation allawances. A tax amnesty for
capital imported and invested in certain sectors
is desirable. In parallel, privatizations of state
companies should be promoted.
After the Turkish invasion in 1974 most of the
industrial, agricultural and touristic infrastructure was occupied by the Turkish invading
forces. At that time I was working in the Ministry of Finance and as we strongly believed in
the future of Cyprus we took measures. We
introduced accelerated depreciation allowances
(100% from the first year) for housing and industrial buildings, and for plant and machinery.
We set up the institution of offshore companies
and offshore banks, initially taxed at zero percent rate and later at 4,25%. For the directors
and managers of the offshore companies, who
received their salaries in Cyprus, their tax rate
was 1/10th of the usual rates so that it was
an incentive for them to locate their companies
here. Earnings from the export of new locally
produced goods, except petroleum products,
were taxed at half the prevailing rates for a tenyear period.
The salaries in the public sector were reduced
and social and welfare expenditure increased.
At the same time, we tried to avoid the decrease
of private consumption which is the main motor
of development. It is important to note that private consumption expenditure in Cyprus is
around 70% of GNP. Therefore, it is inconceivable for articles and suggestions appearing in
38
Efforts should be made for reducing wage
costs, perhaps through higher productivity
gains and/or lower pay increases, so that our
industries will become more competitive to
offer goods and services, mainly for export, in
other words to copy Ireland. The services sector should be promoted because it is a sector
in which we have a comparative advantage.
It may be noted that the services sector does
not need an oversized banking sector to thrive.
The accountants, the lawyers and the business advisers should travel abroad not only
to convince their customers to stay in Cyprus
but also to convince new companies to register
here. Cyprus may have been forced to impose
a levy on bank deposits in the two big banks of
Cyprus above €100.000 but it has an excellent
human resource with qualified and experienced
accountants, lawyers, business consultants,
computer experts and a high caliber secretarial staff. It has a wide network of agreements
for the avoidance of double taxation. It is endowed also with excellent climate conditions
and a good geographical position. An expected
decline in real estate prices, as a result of additional properties put on the market by banks
due to non-performing loans may be the catalyst for new foreign investors in search of opportunities.
Finally, it should be emphasized that it must be
generally accepted that we are and will continue to remain in the Eurozone. And that, besides
the many economic, political and other advantages, which emanate from our presence in the
Eurozone, is a significant reason for attracting
a number of foreign companies and foreign
investments.
39
Economy
Austerity Measures
and Restructuring:
The lessons
we didn’t get
By Dr Iacovos
Aristidou
Ex-Minister of
Labour and Social
Insurance
Ex-Director
General, Planning
Bureau
During the last few years I have observed
with great satisfaction an increasing intervention by academicians in the dialogue
about the economy, something that was
missing during the first forty years of the
Republic until the establishment and maturing of university life. The only pitfall is the
lack of drawing lessons from the very rich
experience gained through very hard times
during the period after Independence.
Had certain concrete efforts undertaken
at times bore fruits, the present economic
crisis would have had only some retarding
effects on the economy and not its destruction.
The present article has been initiated by
Christoforos Pissarides’ very interesting recent speech with the above title, somehow
revised.
These efforts were part and parcel of the
Development Plans which aimed, not only
at securing the highest possible rate of
growth but promoting other basic goals:
securing sustainable development without
inflation through structural changes, more
equitable distribution of income and progress in all other sectors. Unfortunately this
targeted methodology for development,
which led to two economic miracles, the
exodus from under- development before
the invasion and the successful handling
of the tragic repercussions of the invasion,
was interrupted eventually and replaced by
ad hoc decisions, necessitated by party and
other expediencies.
I agree that the ‘real drama of the present
crisis rests with households because of the
plague of unemployment and the young
people who have not tasted yet their first
job’. If the crisis emanated from the malfunctioning of the labor market alone, then,
why underdeveloped countries, where labor
cost is minimal and labor hands are abundant, do not develop automatically?
If this theory applies to developed countries
only, perhaps the reason lies in the fact that
40
attention was one-sided, only on the issue
of the labor market. Labor input is responsible for the largest part of the cost of production of GDP. Various pieces of research
have concluded by now that ‘technical
change’ is becoming all the more important
input of production and, thus, of production
cost. The same can be said about the macroeconomic environment in which production is taking place. According to the theory
of automatic adjustment, the new conditions in the labor market in 1974 (40%
unemployment) should have induced the
economy to a speedy recovery and growth.
However, a disorderly adjustment to the
new conditions would have also meant disorderly conditions in the future. Instead,
the situation was faced through common
decisions of the social partners. Salaries
and wages were reduced up to 25% and
a Fund for Refugees was created where
the reductions were deposited except if the
employer did not dismiss employees.
Analogous arrangements were made for
other elements of cost of production.
The Emergency Plan provided other incentives and facilitated reactivation.
I am not sure whether the cause of all undesirable social phenomena is economic
stagnation. Unfortunately economic science alone cannot explain and cannot
solve such social problems, which can be
observed also at times of economic upswing. Perhaps the answer could be found
through a joint effort by economists, sociologists and political scientists. Despite the
Cyprus ‘economic miracles’, such phenomena did not disappear, as they did not in
other developed countries.
Other lessons we should have learned from
the experience of 1974 are the role of indebtedness of the State and the need to
create the necessary environment for sustainable growth. Indeed high indebtedness
does not allow continuous development. It
is not surprising that households ‘save for
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41
rainy days’. The prudent policy followed during the
1960’s on public finances was the first cushion on
which the reactivation efforts leaned on. The public
debt was only 6.7% of GDP in 1973.
It was first the State and later the private sector that
undertook to reactivate the bleeding economy in
1974. Personally I wouldn’t be so absolute on the
role of the two parties, i.e. ‘their cooperation from
a distance’. I support a mixed economic system in
which the private sector should be encouraged, assisted and facilitated for creative movements forward.
However, in those cases where the private sector is
unable or unwilling to expand, then, the State should
take the initiative. Also the State should keep under
its own supervision vital economic sectors for
safety purposes.
Perhaps the answer could be found through
a joint effort by economists, sociologists and
political scientists.
I have already referred to the great significance of
a healthy public financial position. With the State finances in a relatively good position, when the present crisis started in 2008, the Government could
have withstood the shrinkage of the economy and
the explosion of unemployment through the implementation of public investment projects and/or the
facilitation and encouragement of the private sector.
At that time it was also possible to execute infrastructural projects through the method of BOT. This
could have possibly averted the Cypriot banks from
investing in bonds and other papers abroad.
After 1990 a new situation prevailed in the international economy, not only because of the collapse of
communist regimes but, mainly, as a result of the
liberalization of international trade and foreign exchange. In addition to its natural resources, a country can now exploit any comparative advantage it
posses. Cyprus has exploited its geographic position
and natural beauties, its highly educated human capital and the high quality legal, accounting, banking
services and developed the sectors of international
business. With the establishment of universities and
research centers, Cyprus is now ready to develop
other primary, secondary and tertiary sectors with
technological and scientific depth.
For all these to happen we need much more than
simply ‘labor market flexibility’. Certainly, a country
needs ‘internal flexibility’ ‘in order to face quickly
and effectively new situations which are beyond its
control’ and certainly ‘the private sector needs quick
response by the State without bureaucracies’. In
parallel, however, the country needs the existence
of such mechanisms to promote technological advancement and enhancement of its competitiveness,
42
connected to the proper prices and incomes policy,
etc.
All the above should be promoted through tripartite
cooperation. The final aim is to promote sustained
growth together with equitable distribution of income. This was the aim of the policies followed in
Cyprus in the past. If Cyprus did not manage to avoid
the present crisis, the reasons must be found elsewhere and mainly in the loosening of the efforts for
sustainable growth and modernization of the economy after the successful reactivation of the economy
in the 1970’s and 1980’s. When the international
crisis appeared in 2008 Cyprus was not ‘highly indebted’ but with structural production weaknesses
and, therefore, with ‘low levels of competitiveness’.
The Government could not mitigate the situation as
gradually it had developed a public deficit itself.
But how did we reach this economic ‘impasse’ at
the beginning of the international economic crisis?
After the spectacular reactivation of the economy
following the invasion, a planned and coordinated
effort was initiated to consolidate and secure the
achievements, as well as to upgrade technologically
and restructure the economy so as to become more
and more modern and competitive. New economic
activities were spotted and encouraged, such as international business and banking/financial services,
in addition to the traditional sectors. Cyprus became
a real regional, economic, trade, shipping and offshore/financial centre. Unfortunately all other sectors were neglected. Agriculture was continuously
shrinking to the point to import ‘garlic from China
and lemons from Argentina’. Manufacturing industry, which was planned to become the main lever
for technological upgrading of the economy with the
creation of technological parks and the introduction of systems of flexible specialization and modern
technology, was abandoned to its destiny. Whereas
the actions undertaken in the 1980’s led to the establishment of universities, the connection of academic life with the real economy has been limited
up to now. A better utilization of the modern computerization methods could reduce cost and speed
up work in the public and the private sectors and the
development of a new sector of services on its own.
No doubt, the improvement of competitiveness of
the economy depends a lot on both the prices of
factors of production and their behavior and whatever else adds to the final cost, such as the cost
of public administration. The question is how should
the prices of factors of production, especially those
of labor input, be formed, according to the market
laws or with dialogue and agreement between interested parties? The free functioning of the economy
leads to economic cycles. An agreement on the evolution of the price of labor input based on productivity
would benefit all sides. It was towards this direction
that efforts were made since 1968/9 with
a view to develop and apply a prices and
incomes policy based on real facts and not
on the phase of the economic cycle. Despite progress made since then, good economic circumstances at times led to abandoning the efforts, as happened in many
other cases, for temporary benefits. In the
future we must try again to develop and
adopt a healthy prices and incomes policy.
Related to this is a close watch of the prices
of basic products and raw materials.
With regard to the other cost elements, I
will mention the administrative cost, which
at the end is born by both productive units
and households. During the last decades
we have ignored the very small size of our
country. A characteristic example is the
case with Municipalities. In the wider Nicosia area, which is not more than a small
neighborhood of London, about ten municipalities were established with separate services and organization structures. The only
common element of these municipalities
is that of the sewage system! In addition,
successive Governments resorted to the
enlargement of civil service.
Thus how we reached the point of bankruptcy. In addition and in view of the haircut of the debt and the situation in Greece,
Cypriot banks are in need of State support
to continue their function in the economy.
What do we do now? The examples of
England in the 1970’s and 1980’s, as well
as of Germany in the 2000’s indicate that
austerity measures lead to worsening situations. The fact that in both cases there was
later an economic revival is due to the fact
that both are mature economies and could
take advantage of the competitive conditions created by the measures. In the case
of Cyprus, however, in addition to austerity and other measures for the rationalization of the labor market and that of other
factors of production, there is a pressing
need to enlarge the productive basis of the
economy. In addition we cannot ignore the
banking dimension of the problem.
It is for these reasons that I have insisted
that the Memorandum be supplemented
by an Emergency Action Plan envisaging
also measures leading to growth. A small
amount could be added to the total loan for
development projects to be executed by the
Government or the private sector through
targeted loans by the banks. The period
of the loan could be adjusted to allow time
for the progammes and measures to bear
fruits. I don’t reject the idea for the creation
of a Council for Public Finance or a Council
for Economic Policy because I don’t reject
the scientific study of basic issues that confront the Country. All political parties should
establish their own advisory bodies consisting of people with the right experience
to help them produce the right policies.
Public finances are among the few macroeconomic issues that are debated by the
House of Representatives through the Annual Budget and supplementary appropriations. So far the institutional measures by
the ECB have not helped the establishment
of an effective financial union. Irrespective
of the present problems of the banking and
financial sector we must try to safeguard it
as a vital sector within Cyprus’s international activities. In addition we must see that
the sector serves adequately the financial
needs of the Country. It should be noted
that in 1974 a 4% of total bank deposits
was frozen to form the Priority Fund for the
financing of the private sector in areas set
out by the Emergency Plan and with Government guarantee for all those who lost
their properties in the occupied area.
What is missing since the 1990’s is a flexible strategic planning mechanism for the
whole economy, including public finance
and banking. This mechanism should encompass both production and equitable
distribution as well as the social, legal, institutional setup. This is the first requirement for social cohesion as it will induce
all to work hard for more progress. In such
a situation the celebrated system of flexicurity could be more easily applied. In the
Cyprus’s long experience in tripartite cooperation and social welfare all these could be
advanced through a continuous dialogue.
43
Economy
The benefits derived from the Cyprus Double Tax Treaty
network under the current economic circumstances
By Costas Markides
Board Member, International
Tax Services
KPMG Limited
The information surrounding the negotiation for a Memorandum Of Understanding
(MOU) between the Cyprus government
and the Troika, made even the most unsuspected Cypriot citizen, to realize the
extent of the well coordinated plot against
the already suffering credibility of Cyprus
as an international financial centre.
The effort to build a credible image for
Cyprus has commenced since the early
years following the Turkish invasion of
1974. This effort reached its peak before
the global financial crisis of 2008, and
has indeed been accredited in a number
of cases. Probably the most notable example is the inclusion of Cyprus in the
OECD’s white list of jurisdictions that have
substantially implemented the internationally agreed Tax standard. This was a seal
of approval that Cyprus fully conforms to
the OECD’s guidelines and that all transactions are effected in a transparent way
and clear from any unlawful and harmful
tax competition practices. It is worthy to
mention that the abovementioned list did
not include countries such as the Netherlands, Austria, Luxembourg, Switzerland
and Belgium, when first issued April 2nd
2009.
Building upon the credibility secured over
the years within the international tax scene,
Cyprus managed to conclude an enviable
Double Tax Treaty network (DTT) with the
most economically important countries
globally. It needs to be mentioned that
countries with zero or negligible corporate
tax rates (i.e Tax Havens) do not have a
double tax treaty network in place.
It is therefore clear that when referring
to Cyprus as a “Tax Haven” one can only
manifest malicious motives. The already
extensive and at the same time growing
double tax treaty network of Cyprus discredits any such rumors.
During the last two years Cyprus has concluded or renegotiated Double Tax Treaties with countries like Spain (2013), Estonia, Finland, Portugal, Ukraine, Poland
(2012) and Germany (2011). Estonia is
the first of the Baltic states that concludes
a treaty with Cyprus, while Latvia and Lithuania have agreed upon the relevant text
and the signature of the relevant treaties
will take place in the foreseeable future.
44
The signature of a DTT with Portugal can
be seen as the natural consequence for
the removal of Cyprus from the Portuguese “black list” in November 2011.
In February 2013, Cyprus has concluded a
treaty with Spain. This development is also
expected to contribute to the removal of
Cyprus from the Spanish “black list” and
strengthen the current negligible economic interaction between Spain and Cyprus.
With the exception of the Netherlands and
Luxembourg (for reasons of their own),
Cyprus has concluded treaties with all the
remaining member states of the European
Union.
In addition to the general provisions of
each treaty, the article on exchange of
information provisions is of immense importance. By agreeing to the exchange of
information the competent authorities of
Cyprus clearly express its commitment to
internationally acceptable tax standards.
The conclusion of treaties with information
exchange clauses is a fact that can speak
on its own, during our current referral to
the European Stability Mechanism when
such an application will be reviewed by the
respective Parliaments of the EU member
states. The commitment of Cyprus evidenced through the conclusion of Double
Tax Treaties can appease any concerns
wrongfully expressed by fellow member
states.
Further to enforcing the credibility of a
country, double tax treaties primarily aim
to form the entry point to new markets and
new business opportunities. As a result
they can greatly enhance and expedite
during such turbulent times the recovery
of the Cyprus economy-both in the short
term-and also set strong foundations to
resist similar situations in the long term.
The opportunity presented with the recent
discovery of vast oil and gas reserves in
our exclusive economic zone, must be
promoted as a tool for the renegotiation
of the current but outdated treaty with the
USA and the conclusion of new treaties
with the rapidly developing states in South
America and Africa.
In this manner, Cyprus can play the role of
the credible financial centre that will connect Europe with Asia and Africa.
45
Economy
The Aftermath from the Elections:
What Lies Ahead?
By George
Theocharides
Associate Professor of
Finance
Director of MSc in Finance
& Banking, CIIM
46
At last, after a prolonged campaign period, elections are over and the new Cypriot
government is taking over from March 1st.
Expectations are high, and there seems to
be a revived optimism among our citizens
that a new government, with fresh and innovative ideas, will help us resolve (sooner
than later), the numerous problems that our
country is facing. Psychology plays a big
role in shaping the future, and the first signs
are that this has improved, both inside the
country but also the way that foreign officials and investors are viewing Cyprus.
However, the massive problems are still
there and the new government has a very
difficult task to accomplish. First, there has
to be a final agreement and signing of the
memorandum, by the end of March the latest. The reason is that it would take some
time for the funds from Troika to arrive, and
we all know that on June 3rd we have €1.4
billion government bonds expiring that we
need to repay. Thus June 3rd can be considered our “fiscal cliff” and we need to make
sure by that time we have the funds available to honor our obligations, otherwise that
would imply default with all of its negative
consequences. Before arriving though to
the final agreement, a lot of work still needs
to be done. First, we might need to secure a
short-term loan, either from the Europeans
or a third party, to have enough funds for
our immediate needs before receiving the
money from Troika. The new government
also needs to prove to the other members
of Europe that we mean business by signing
the memorandum as well as taking all the
necessary steps to accomplish the reforms
and fiscal/banking adjustments under the
agreement. We also need to convince them
that they wrongly and unfairly accuse us as
a “tax heaven” or money-laundering location. Unfortunately, the prolonged delay in
agreeing with Troika led us to get caught in
the middle of an election campaign in Germany. The outcome was that the German
government and politicians were extremely
harsh on us in an effort to prove to their taxpayers that they are not using their money
for bailouts of “corrupted” countries.
Furthermore, we need to take measures
that will make our debt sustainable, so that
we stop this damaging discussion about
haircuts either on government debt holders, or on uninsured depositors in our bank-
ing system. First, a meaningful haircut on
government debt holders (that would substantially lower our debt level) is extremely
difficult to achieve given the fact that only
a small portion of our government debt is
owned by foreign private investors (less
than 21% of GDP). Given the fact that our
debt level in the near future could reach
levels above 140% of GDP, such a haircut
would not make a huge difference. Second,
a haircut on uninsured depositors (i.e. deposits above the level of €100,000 that are
guaranteed by our Central Bank) can easily
cause bank runs and a complete destruction of our financial and banking sector. Being a financial and service center (almost
50% of our GDP comes from such a sector) one can understand the outcome for
the entire economy. Thus, the new government needs to find alternative ways to make
the public debt sustainable, so as to avoid
privatizations of profitable state-owned enterprises that are strongly pushed upon us
by Troika. Over and above the much anticipated recapitalization of our local banks, the
government needs to include anti-austerity
measures that will promote growth and help
solve what seems to be our biggest problem – unemployment – by creating new
jobs. These measures could be incentives
for swift recovery of the crucial construction/land-development sector, the utilization of government land, the development of
technological parks, the creation of casinos,
and the drastic reduction of bureaucracy in
the civil service, among others. Obviously,
the prospects that lie ahead from the recent findings of natural gas in our Exclusive
Economic Zone is a reason to be optimistic
about the future of our country, but it will
take time to start benefiting and earning
revenues that would lower substantially our
public debt level.
Overall, although many obstacles lie ahead,
I am optimistic that with the right and carefully-thought moves we can actually get the
economy soon back on track. I would even
say that in the medium to long-run these
changes that are being brought on us by
Troika and the memorandum will make our
economy more resilient. By implementing
the provisions of the memorandum we can
emerge from the crisis as a much more solid and structured economy, with more fiscal
discipline, and a healthier banking sector.
47
Economy
Should Cyprus be grateful for
Euro Zone Financial Assistance?
Cyprus today is in desperate need of a bailout loan from the Euro Zone. So we should
be grateful if the Euro Zone finally decides
to lend us the necessary finance. But it is
worth noting how we got to this point. Membership in the Euro Zone has itself played
no small part. Of particular interest here are
those Euro Zone features (indicated below)
which have contributed to our present near
bankruptcy.
By Dr. Jim
Leontiades,
The Cyprus
International Institute
of Management
48
Greater Ease of Borrowing: Mentioning
“ease of borrowing” may sound strange in
our present situation but joining the Euro
Zone initially made borrowing much easier.
As members of a powerful European group,
member countries enjoyed much easier access to credit markets. Before becoming
a member the Greek government had to
pay over 20% interest for long term borrowing. Upon joining, this dropped within
a few years, close to 5%. Easier credit fueled excessive public expenditures such as
the infrastructure investment for the Athens
Olympics and expansion of already oversized
public sectors. Private companies as well as
private citizens joined governments in a borrowing spree. Credit fueled spending drove
public and private borrowing to new heights.
As countries ran into credit difficulties, the
cost of borrowing reversed itself, becoming
much higher.
Common Exchange Rate: Joining the Euro
Zone meant that individual member countries no longer had a national exchange rate.
The Euro exchange rate is a sort of average
between the exchange that the more the
more competitive countries like Germany
would command and those of the less competitive Southern European countries. The
more competitive countries therefore gain,
enjoying the trade benefits of a lower exchange rate than they would have had outside the common currency. The less competitive Southern European members, are
encumbered with a Euro exchange rate higher than warranted by their own competitiveness. Outside the Euro Zone their exchange
rate would be lower. The high exchange rate
of the Euro hurts their exports while at the
same time encouraging imports. For these
countries, the result has generally been a
negative trade balance, financed by more
borrowing.
No Exchange rate risk: A common currency
eliminates exchange rate risk between member countries. This risk and its associated
costs are eliminated for companies trading or investing between member countries.
Cross border trade and investment between
all Euro Zone countries expanded rapidly. That was the objective.
Lower risk on sovereign debt bonds: Joining the Euro Zone
appeared to make sovereign debt a thing of the past. Even
before the establishment of the Euro Zone, default on sovereign debt was almost unknown in Europe. A sovereign debt
default was then thought to be something reserved for less
developed countries. Greece had not had a debt default for
some 80 years (since 1932). The President of the European Central Bank in the early years, Jean- Claude Trichet,
declared himself to be against sovereign debt default by a
member country. The argument as to whether there should
be a debt default y Greece and, if so, by how much, raged
for months. Eventually, the hard line austerity school won
and Greek bonds suffered a default of over 70%. The assumption that members of the European currency union
would not default was shown to be mistaken. Volatility in the
sovereign debt of a number of European countries followed.
The features incorporated in the structure of the Euro Zone
were meant to encourage cross border trade and investment. They succeeded. Cypriot banks were not slow to take
advantage. They rushed to expand their international operations, particularly in Greece where they also enjoyed cultural
and ethnic links. In the credit fueled economy of the time,
their Greek operations boomed, apparently justifying even
further investment. Cypriot banks bought Greek bonds as
did many other European and international banks. For Cyprus, this was to prove a disaster.
Change in the Role of Central Banks: Prior to joining, each
country of the Euro Zone had a central bank which acted as
a lender of last resort. This meant that, If required, national
central banks could create credit, (so called “printing mon-
ey”) to support the price of their bonds by purchasing them
on the open market whenever their price threatened to fall
to unacceptable levels, as is practiced today in the UK,USA,
Japan and elsewhere.
After joining the Euro Zone, the national central banks of
member countries lost this power. The national central banks
of member countries were no longer able to create such
credit in support of their country’s sovereign debt. Sovereign debt became more vulnerable to speculators, the so
called “bond vigilantes”. Numerous downgrades by the international rating agencies followed. The weaker countries,
e.g., Spain and Italy, saw their borrowing costs rise dramatically. Weaker countries, e.g., Cyprus, were shut out of credit
markets altogether.
The power to create credit in this way was transferred to the
European Central Bank. The ECB has the power to support
national sovereign debt when and where it chooses. Mario
Draghi (“Super Mario”), the President of the ECB, used this
power to intervene strongly in credit markets to support the
bond prices of Spain and Italy.
So now that Cyprus is in its present situation, we should
be grateful to the Euro Zone and it’s Troika if they lend us
money (the bailout) which Cyprus so desperately needs to
prevent bankruptcy. However, although we ourselves have
certainly not been blameless, our membership in the Euro
Zone and the features noted above have also made a major
contribution to the situation we are now in. It brings to mind a
definition I once heard of a faithful wife: “ Someone who will
stand by you through all the troubles you would not have had
if you had not married her in the first place”.
49
Economy
Back to the pound,
what does it mean?
By Marios Mavrides
Member of the Parliament
Associate Professor of
Economics European
University Cyprus
50
The idea of Cyprus leaving the eurozone and
going back to the pound is gaining support
in Cyprus during the past few weeks. The
logic behind this is that the national currency will enable the government and the Central Bank to manipulate the economy with
more flexibility and get the economy moving
again. Using its national currency, Cyprus
will be able to activate fiscal and monetary
policy as well as the exchange rate policy
to boost domestic demand and achieve
economic growth. The government will be
able to apply an expansionary fiscal policy,
increasing government spending, lowering
taxes and creating more jobs. The Central
Bank will be able to apply a loose monetary policy by increasing money supply and
lowering interest rates in order to boost
consumption and investment. The Central
Bank may also use the exchange rate as
a tool for boosting domestic demand. A
devaluation of the domestic currency would
increase exports and reduce imports. That
will benefit domestic industries at the expense of higher prices. Devaluation has
used in many countries in the past and it
is being used today as well. It is a popular
method of a quick restart of the economy
and it is included in every IMF program
which was applied outside the Eurozone.
Devaluation is not necessarily a a bad thing
as some of the largest economies are using devaluation as a permanent economic
policy tool. Japan and china for example,
keep their currencies devalued so that they
keep their production machines running at
full capacity. Even though exiting the euro
is becoming more popular every day, someone must realize that it is not an easy way
out. First of all, exiting the euro may also
mean exiting the Eurozone as well. Even if
Cyprus wants to, many years will pass before Cyprus can enter the Eurozone again.
Apart from the political issue, returning to
the pound is risky and may result in more
pain for Cypriots, because the problems are
there, and they cannot be solved overnight.
Compared to the euro, the pound will apply
a shock therapy to the problems of Cyprus,
which is based on a huge devaluation of the
pound aiming to make the Cyprus economy
more cost competitive. However, a careful analysis of Cyprus will reveal that this
is very difficult to occur and very risky as
well. Cyprus depends heavily on imports
and it imports most of its raw materials as
well. Machinery and equipment, computers and home appliances, furniture and
automobiles will cost twice as much if we
return to the pound, lowering the standard
of living of Cypriots significantly. Petrol is
being used as an input in all households
and businesses as well (petrol accounts for
60% of the cost of production of electricity). So, on the one hand the economy will
become more competitive due to the devaluation of the pound, and on the other
hand, the higher prices and the higher cost
of domestic production, will cause a reduction of devaluation. Furthermore, exiting
the euro will cause a dramatic reduction in
wages of the public sector, as the government will have to keep its budget balanced,
unless the Central Bank prints fresh cash
and finance the deficits. Basically, if the
government and the central bank fall into
the trap of printing fresh money, then it may
enter a vicious circle of an endless printing
of money and inflation.
51
Economy
The Implementation
of Quality
Management
System ISO
9001:2008 in the
Cyprus Public Sector
By Maria Loizou –
Tsilimidou
Public Administration and
Personnel Officer
One of the most important issues that public
sector organizations around the world face
nowadays, is the need for reducing operating costs while at the same time improving
the quality of the services provided, since
the citizens’ demands are evidently not met
to the maximum extent, as weaknesses and
deviations are often observed in the various
stages of public sector processes. A public
sector organization can effectively address
this issue by developing and implementing a
Quality Management System (QMS).
The general objective of the QMS is the
maintenance and improvement of standards
of products or services offered by a private
or public sector organization in order to meet
the constantly changing customer demands.
It is noted that by implementing a QMS, it
is not the quality of the product or service
that is certified but the system governing the
processes of a service or the production of a
product which is expected to ensure compliance with the specifications of the product
or service. The philosophy behind a QMS is
that as long as the “production system” operates on the basis of the principles of quality, it will produce quality products / services,
based on minimum standards and criteria.
Therefore, the identification of the processes involved in the production of the good or
service and their strict application without
any exceptions is absolutely necessary.
A QMS can assist an organization in different ways:
• It provides proposals on organization matters and data that can be easily used within
the structures of any organization regardless
of its activities.
• It obliges the organization to follow some
specified requirements enabling it to avoid
the “rediscovery of the wheel.”
• It facilitates the identification of processes
52
and directs the organization to developing
measurement and evaluation methods.
• it commits the organization to continuous
improvement (better management of resources, standardization of processes, saving time, reducing operating costs, internal
controls, etc.)
Within the implementation of the project
titled: “Re-organization and improvement
of the administrative capacity of the Public
Administration and Personnel Department
(Ministry of Finance) and the Labour Department (Ministry of Labour and Social Insurance)” which is co-funded by the European Social Fund, the Public Administration
and Personnel Department (PAPD), has
recently commissioned to an external consultant to conduct a study, in which, among
other things, certain Government Departments ( the Town Planning and Housing
Department, the Lands and Surveys Departments, the District Administration Office (
only regarding the building permit process),
as well as the Citizen Service Centres) will
be prepared to implement QMS according to
ISO.
The QMS that will be developed and implemented in the above Departments by the
external Consultant will comply with the international standard ISO 9001:2008 which
focuses on the administrative and organizational aspects of a company / organization,
while still covers the complete satisfaction of
customers / citizens. In the context of this
standard, an organization is required to satisfy a number of requirements which, among
others, include:
- compliance with the legislation relevant to
the generated service
- determination and implementation of quality control regimen of the provided service
- determination of the employee titled “Qual-
ity Manager” who will be responsible for the management of the QMS
- continuous monitoring and data recording regarding the functioning of the system and the
level of satisfaction
The work required for the development and initial
implementation of a QMS in accordance with international standard ISO 9001:2008, is dealt with
according to the following steps:
• conduct of a diagnostic study
• designing of the QMS
• development of QMS documentation
• pilot Implementation of the QMS
• commencement of the implementation of the
QMS and target setting for its evaluation
• staff training
To obtain a certificate of compliance in accordance with the principles of the standard ISO
9001:2008, an inspection of the system by an accredited external body is required. The certification can be obtained either for all the activities of
the Organization or a subset of the areas of the
organization’s activities.
Upon completion of the above, the Organization
receives a Certificate of Quality ISO 9001:2008,
which is valid for three years. The organization
enters into an annual surveillance regime by the
certification body, until the point of recertification
which is after three years.
The PAPD as the Contracting Authority of the
above mentioned Contract, is expected to gain
valuable experience and knowledge regarding the
process of implementing the QMS in the selected Departments, which will be used afterwards
for the expansion of the system in other Departments/Services, in an effort of modernizing the
public service, improving the efficiency and effectiveness as well as the quality of services provided
to the citizens and the society as a whole.
53
Economy
PIMCO’s expected loss and its
accounting treatment
After the completion of PIMCO’s due diligence exercise on the credit portfolios of Cypriot banks and cooperative credit institutions,
there is still some uncertainty in relation to the
interpretation of the results of the exercise
and whether these should be incorporated in
the financial statements of the affected credit
institutions.
By Eleni
Neocleous,
KPMG Limited, Senior
Manager, Financial
Risk Management
By Nasia Savva,
KPMG Limited, Senior
Advisor II, Financial
Risk Management
The exercise assigned to PIMCO had as a
primary objective the assessment of the resilience of the Cyprus banking system by determining its capital needs under a base and
a stress scenario. The key driver of the capital
needs for each credit institution was the level
of expected losses that have been estimated
through a model for the next three years, having as starting point the 30th of June 2012. In
the context of Basel II, expected losses represent losses that a Bank might suffer over
a future horizon, arising either from the assumptions of a macroeconomic scenario and
its relevant projected cash flows or depicted
based on its past experience. For the calculation of the expected loss under the stress scenario, a number of unlikely, but not impossible
to materialize, assumptions were used. Such
assumptions were made on macroeconomic
indices such as the country’s unemployment
rate and GDP, as well as on other parameters
such as real estate values etc.
But should the estimated expected loss figure be adopted as a provision for impairment
on receivables in the financial statements as
per the International Financial Reporting Standards (IFRS) and the International Accounting
Standards (IAS)?
According to IAS 39 – ‘Financial Instruments:
Recognition and Measurement’, impairment
losses on financial assets should be recognised if, and only if, there is objective evidence of impairment as a result of an event
taking place after the initial recognition of the
asset. The Standard also states that losses
that are expected as a result of future events,
should not be recognised irrespective of how
likely it is to actually occur.
Since PIMCO’s results on expected losses
were derived through stress assumptions and
are based on future events, the accounting
standard currently in place does not allow
their incorporation in the financial statements.
54
However, in case that these exact adverse
conditions come to realise, the recognition of
part, or of all, or even of more than the initial
loss estimated, would be inevitable.
An additional issue that comes up from
PIMCO’s review is the accounting treatment
of past incurred losses. In Ireland’s case,
where Black Rock performed a similar exercise, one of the conclusions derived was that
in previous years, credit institutions failed to
adequately provide for loan impairments. As
a result the Irish banks were put under pressure so as to recognise the additional losses.
In case that the same applies for Cyprus, it is
probable that Cypriot banks will be required
to re-examine their provisioning methodology.
It should be noted that the issue of provisions
is currently being examined by the International Accounting Standards Board (IASB) and
there is the intention to change the current
model for calculating provisions. In particular,
the existing IAS 39 incurred loss model is to
be replaced by an expected loss model, under
which provisions will be calculated in a way
that it includes potential future losses that are
expected to occur over the life of a loan portfolio. The purpose of this change is to address
the pro-cyclical nature of the current model
of provisioning under which, the provisions
recognised during an economic downturn are
disproportionately higher than those recognised during times of economic growth when
lending activity is high, resulting in volatile
profitability. Under the new proposals this will
be addressed by spreading the level of provisions more evenly over the life of a given
portfolio. The revisions described above are
included in an exposure draft of IFRS 9. This
revised standard is expected to be issued in
2013 and to come into effect on 1st January
2015. With the issuance of the revised IFRS
9 it is anticipated that there will be a convergence between the concept of expected loss
as defined under Basel II and the concept of
provisioning as defined under the Accounting
Standards. 
Are deposits
in danger,
or is there
something else
hidden behind
this threat?
During the last months the question as
to whether deposits are in danger of being trimmed down is discussed over and
again.
Additionally this danger mostly bothers
small depositors, whose option of transferring their deposits elsewhere is rather
limited, and this in itself is able to spread
panic to a wider part of the population.
By Dr John
Violaris
Associate
Professor of
Economics
Frederick
University
The fact is that 5 years after this recession has hit most of the western world, we
have not yet set in force any plan to face
its side effects on our economy. What we
have done is that we have already applied
several tax measures plus reductions in
salaries and benefits, not so much to face
the recession’s side effects but mostly to
enable the previous government pay its
current expenses.
Probably because the elections were so
close by, plus because the previous government has proved so extremely inefficient and indecisive, no real measures
have been taken, nor any growth plans
have been placed in force.
posits or confiscating part of our natural
gas’ proceeds, will be unavoidable.
It is obvious that their intentions are to
weaken our bargaining power, to further
worsen our economy’s condition, so as to
force us accept losing part of our foreign
and local deposits, as well as part of our
natural gas’ sovereignty and thus become
more vulnerable both to their economic
plans as well as to their geopolitical ones.
We are certain that behind all this are the
expected profits from the hydrocarbons
exploitation as well as the intention of certain circles to impose on us the political
solution to our political problem, that suits
their purposes and pleases their friends.
We do hope that the new government will
be different, that is that it will be more
decisive, more determined and more efficient in bringing about results.
None of the opportunists plans can materialise unless we allow them to.
None of the opportunists plans can materialise
unless we allow them to.
This has given the opportunity to opportunists to exert pressure on us threatening us that no assistance will be given to
our banks or for covering our public debt,
unless we prove we are not laundering
any black money, and that if we don’t do
that the danger of trimming down our deACCOUNTANCY CYPRUS • VOLUME 110 • MARCH 2013
55
Economy
Privatisations – benefits and concerns
The possible privatisations of semi-governmental organisations are amongst the hot
topics which arose in the course of the negotiations with Troika on the Memorandum
of Understanding.
By Socrates C
Paschalis,
Director, Assurance
& Advisory Services,
PwC
In Europe, privatisations began in the United
Kingdom in the ’80s, followed by almost all
of Western Europe including Scandinavian
countries, where a more socialist model of
economic development prevails. Relevant
data shows that privatisations took place
in various sectors of the economy, such as
electricity, water supply, telecommunications, financial services and infrastructure
works.
The improved efficiency and productivity of
the organisations concerned, coupled with
increased profitability, are significant advantages of privatisation schemes. The private sector has greater flexibility and ability
to bring about substantial changes to the
modus operandi of businesses, resulting
in a more efficient use of human and other
resources. For example, private businesses
have always been better positioned to use
productivity-related staff evaluation methods. According to the findings of a study*
on a sample of more than 110 organisations, over 80% recorded increased efficiency after privatisation. Moreover, around
70% of these organisations increased their
profitability. The same study also identified
an increase in investments and a reduction
in borrowing by the said organisations after
privatisation, as a result of improved profitability.
Reduced political intervention in decision
making and management is another important advantage of privatisations. This
benefit is difficult to quantify, but it could
be argued that decisions taken based on
strictly technocratic and transparent criteria
are to the benefit of the organisation, the
staff and the economy in general.
Moreover, privatisations can generate substantial income for the State coffers. This is
of particular importance given the current
state of public finances in Cyprus. According to data released by the World Bank, during the period 1989-2009, revenues from
privatisations in EU countries (excluding the
former socialist states) fluctuated between
3% and 30% of GDP, with an average of
12%. It is worth noting that the correspond-
56
ing rates in Greece and Malta were 15%
and 19% respectively. In addition, the anticipated increase in profits leads to higher
tax revenues for the State.
Beyond the advantages however, we must
not ignore concerns and reservations over
the issue. Proper preparation is a necessary prerequisite in order to address any
challenges which privatisations may give
rise to. One important issue is the loss of
State control over businesses operating in
sectors of vital and strategic importance. In
those cases, the State can maintain control
of over 50% of the shares or, if its holding
is smaller, there are mechanisms that allow it to maintain a right of veto in strategic
decisions (“golden shares”). In a study* on
a sample of more than 110 businesses, approximately 60% had included such provisions and mechanisms in their Articles of
Association.
Terms of employment in the event of a privatisation scheme must be thoroughly analysed. In any case, however, ensuring better
terms of employment for the staff is easier
in an organisation with increased profitability.
Moreover, privatisations must always be
carried out in the context of a strict supervisory and regulatory framework so as
to prevent the abuse of a position of monopoly and fully safeguard the interests of
consumers.
As a conclusion, it should be noted that, if
carried out correctly, privatisations can bring
about significant benefits for businesses,
consumers, the State and the economy in
general. Challenges and concerns must be
identified and dealt with at an early stage
through appropriate measures. Experience
shows that success depends largely on the
level and depth of the preparatory work carried out ahead of any privatisation.
• Study by Bernardo Bortolotti and Valentina Milella, University of Turin
57
Economy
ECONOMIC BULLETIN
The Cyprus and International economy
By Bank of Cyprus,
Group Economic
Research Division
The GDP growth of the Cyprus economy for
the final quarter of 2012 was negative and
amounted to –3,1%, year-on-year. The negative
GDP growth rate for the Cypriot economy was
registered for the sixth consecutive quarter, as
the economy fell in recession as from the third
quarter of 2011. During the last quarter of 2012,
the secondary sector of the economy (construction, manufacturing), as well as the retail trade
sector, transport sector and the services sector
exhibited a negative performance. A positive
contribution was made by the Legal and Accounting Services sector.
GDP growth for the whole of 2012 is preliminary
estimated at –2,3%. Within the year, local and
regional economic indicators and prospects deteriorated rapidly. The major banks in the country suffered huge losses on their sizeable Greek
holdings (following the ‘haircut’ on Greek government bonds). Meanwhile, the inconclusive
election result in Greece in May 2012, cast a
heavier shadow over the gloomy euro area shortterm economic outlook, with fears intensifying in
relation to Greece’s possible exit from the eurozone. The June 17 new vote gave the New
Democracy Party a marginal lead and the right to
form a new coalition government.
The Cypriot government had lost market access
following successive credit rating downgrades
throughout 2011 and 2012, eventually to junk
status by the three main credit rating agencies.
Cypriot banks’ considerable losses incurred following the ‘haircut’ on Greek debt, coupled with
the continuously and briskly deteriorating fiscal
metrics of the Republic of Cyprus, rendered the
Cypriot government the fifth eurozone Member
State to formally request a financial bailout from
the European Union, in June 2012.
The fiscal balance based on the recent European Commission’s Winter 2013 Forecasts is
estimated to have reached by the end of 2012 a
deficit of –5,5% of GDP, compared to a deficit
of –6,3% of GDP for 2011. The European Commission comments that the government deficit
improved just slightly, despite the sizeable consolidation implemented in 2012.
The Public debt is expected to have reached
86,5% of GDP at the end of 2012 (European
Commission Winter 2013 Forecasts), from
71,1% of GDP at end-2011.
Over the period from January to December
2012 tourist arrivals reached 2.464.908 compared to 2.392.228 over the corresponding
2011 period, registering an increase of +3,0%.
Over the 11-month period of 2012 from January - November, tourist income is estimated
to have reached €1.886,1 million, compared
€1.707,7 million over the corresponding 2011
period, registering an increase of 10,4%. It
should be noted that over the period from
January – November 2012, per capita tourist
spending reached €767,4 compared to €733,9
over the corresponding 2011 period, registering
an increase by 4,6%.
The Harmonised Index of Consumer Prices
(HCPI) for the period January – December
2012, increased by 3,1%, year-on-year. For the
same 12-month period of 2012, the Consumer
Price Index (CPI) increased by 2,4% year-onyear.
Outlook
The risks prevailing for the Cyprus economy in
the short to medium term are numerous and tilted to the downside. The conclusion of a macroeconomic adjustment programme for the country
is expected to provide a necessary ingredient towards stabilizing the economy. As from the 24th
of February, Cyprus has a new President, who
was elected securing 57,5% of the vote in the
second round of the island’s presidential elections. The new President appears committed to
work hard in order to deal with the onerous economic issues tantalizing the country.
Registered unemployed persons at the end of
December 2012 rose to 41.625. Compared to
December 2011 there was a marked increase
of 8.730 persons, or 26,5%, which may be attributed mainly to the trade, construction, hotel and restaurant sectors, the manufacturing,
public administration sectors, as well as to the
However, projections of the economic outlook
for 2013 and 2014 point to a prolonged recession for the Cyprus economy, on the back of expected further declines in domestic demand and
investment activity. As the European Commission also points out, the effects of much-needed
fiscal consolidation (including measures affect-
The main economic indicators of the Cyprus
economy within 2012, are outlined below.
58
new entrants in the labour force (an increase of
674 unemployed persons). The average number of unemployed persons during 2012 rose
to 36.362, compared to 28.276 in 2011, an
increase by 28,6%. The unemployment rate is
expected to have reached 12,1% for the whole
of 2012, compared to 7,9% in 2011.
59
Economy
ing public sector wages, social outlays, increases in employee
contributions and indirect taxes), coupled with increasing unemployment, are to heavily weigh on household disposable
income.
Furthermore, on the back of banks’ deleveraging and the deceleration of credit growth, gross fixed capital formation is expected to decline further, thus sustaining the negative growth
rates of the construction activity over the medium term.
Fitch Ratings downgraded the Republic of Cyprus’ long-term
and local currency Issuer Default Ratings (IDRs) to ‘B’ from
‘BB-‘, on 25 January 2013. The Short-term IDR was affirmed
at ‘B’. The outlook on the Long-Term IDRs is Negative. Fitch
simultaneously affirmed the Country Ceiling for Cyprus at
‘AAA’. Fitch announced at the time that the downgrade of
Cyprus’s sovereign ratings partially reflected the agency’s
view that the size of the government support to the banking sector is likely to be higher than previous Fitch estimates.
Fitch also noted that negotiations between the Troika and the
authorities have been protracted, with lingering uncertainty
about the timing and details of an EU-IMF rescue programme.
A request for official aid by the Cypriot government was made
in June 2012. While agreement has been reached on the size
and type of the fiscal adjustment, disagreements remain on
the potential privatization of state owned enterprises and the
bank recapitalisation costs.
Moody’s Investors Service also downgraded on 10 January
2013 Cyprus’ government bond rating to Caa3 from B3, the
outlook on the rating being negative. This rating action con-
cluded the review for possible downgrade that was initiated on
16 November 2012. Cyprus’s short-term government bond
rating of ‘Not Prime’ was affirmed. As Moody’s reported, the
key driver of the downgrade was the anticipated rise in the
Cypriot government’s debt burden, driven principally by the
increased recapitalisation needs of its banking system, following distressed exchanges on Greek government debt and
rising delinquencies on loans to Greek and Cypriot obligators.
According to Moody’s the negative outlook assigned to the
rating reflected Moody’s view that the situation could significantly deteriorate over the next 12 to 18 months due to the
ongoing liquidity concerns, the uncertainty over the exact size
of the necessary bank recapitalisations and the uncertainty
about the upcoming finalisation and signing of a Memorandum of Understanding (MoU) with the Troika.
Standard & Poor’s (S&P) downgraded Cyprus’ long-term
sovereign ratings on 20 December 2012 by two notches to
‘CCC+’, the outlook being negative. The U.S. agency said
that the two-notch downgrade was due to a considerable and
rising risk that the country - one of the 17 European Union
countries that use the euro - may default. It also maintained
the negative outlook on the country, signaling that further
downgrades are possible. S&P reported that the downgrade
reflected the fact that the Cypriot government is running out
of money, while uncertainty remains over the terms of a bailout that the country is trying to negotiate with international
lenders and its euro partners.
Note: The above bulletin takes into consideration economic
data and facts valid as at the end of February 2013.
Main Economic Indicators
2009
2010
2011
20121
2013
G.D.P. (real growth - %)
Unemployment (%)
Harmonised Index of Consumer Prices - %
Fiscal balance (% GDP)
Public debt (% GDP))
Current Account Balance (% GDP)
ECB marginal lending facility (31 Dec.-%)
-1,9
5,5
0,2
-6,1
58,5
-10,7
1,75
+1,3
6,5
2,6
-5,3
61,3
-9,2
1,75
0,5
7,9
3,5
-6,3
71,1
-4,2
1,75
-2,3
12,1
3,1
-5,5
86,5
-6,0
1,75
-3,5
13,7
1,5
-4,5
-1,7
1,50
*ECB marginal lending facility
Sources of statistical data for Cyprus’ economy: International Monetary Fund, European Commission, Ministry of Finance,
Central Bank of Cyprus & Statistical Service.
60
World economy
The International Monetary Fund’s latest World Economic
Outlook Update (WEO Update - January 2013), reports that
the world economy grew at a rate of about 3,0% in the third
quarter of 2012, with economic conditions improving modestly, mainly aided by emerging market economies where activity
picked up. Global financial conditions improved further in the
fourth quarter of 2012, however indicators suggest that global
growth did not.
The IMF reports that policy actions have lowered acute crisis
risks in the euro area and the United States, but in the euro
area, the return to recovery, after a protracted contraction is
delayed. At the same time, policies have supported a modest
growth pickup in some emerging market economies, although
others continue to struggle with weak external demand and
domestic bottlenecks.
economy has grown by 3,2% in 2012, while it projects that
world GDP is to grow by 3,5% in 2013, and by 4,1% in 2014.
For the United States, GDP growth reached 2,3% in 2012,
while it is forecast to average 2% in 2013, rising above trend
in the second half of the year. For 2014, GDP growth for
the U.S. economy is projected at 3,0%. In the euro area,
progress in national adjustment and a strengthened EU-wide
policy response to the euro area crisis seem to have reduced
tail risks and improved financial conditions for sovereigns in
the periphery. Thus, while a GDP contraction of –0,4% is estimated to have been registered in 2012, activity is projected
to contract by –0,2% in 2013 and return in positive territory in
2014 (GDP growth of +1,0%).
In case crisis risks do not materialize and financial conditions
continue to improve, global growth may well be stronger than
projected, the IMF reports. However, it is stressed that downside risks remain significant, including renewed setbacks in
the euro area and risks of excessive near-term fiscal consolidation in the United States. The IMF estimates that the world
GDP (%)
Consumer
Price Index (%)1
2012
2013
Unemployment
(%)2
2012
2013
2012
2013
World Economy
USA
Euroarea
Germany
France Italy
Spain
United Kingdom
Russia
China
India
Greece
Cyprus
3,2
2,3
-0,4
0,9
0,2
-2,1
-1,4
-0,2
3,6
7,8
4,5
-6,4
-2,3
3,5
2,0
2,0 1,8 8,28,1
-0,2
2,3 1,6 11,211,5
0,6
2,2
1,9
5,2
5,3
0,3
1,9
1,0
10,1
10,5
-1,0
3,0
1,8
10,6
11,1
-1,5
2,4
2,4
24,9
25,1
1,0
2,7
1,9
8,1
8,1
3,7
5,1 6,6 6,06,0
8,2
3,0 3,0 4,14,1
5,9 10,29,6 - -4,4
1,0 -0,8 24,727,0
-3,5
3,1 1,5 12,113,7
1 Movements in consumer prices are shown as annual averages.
2 National definitions of unemployment may differ.
Sources: International Monetary Fund – World Economic Outlook Update, January 2013 and World Economic Outlook, October 2012, European Commission: European Economic Forecast Winter 2013.
Edited by Elena Triantafyllou
61
Auditing & Accounting
Control under IFRS 10
By George C
Kazamias
Assurance Services
Partner
PwC Cyprus
62
IFRS 10, ‘Consolidated financial statements’,
replaces all of the guidance on control and
consolidation in IAS 27, ‘Consolidated and
separate financial statements’, and SIC-12,
‘Consolidation – special purpose entities’.
IAS 27 defines control as: ‘. . .the power to
govern the financial and operating policies of
an entity so as to obtain benefits from its activities…’.
IFRS 10 defines control differently as: ‘…an
investor controls an investee when the investor is exposed or has rights, to variable returns
from its involvement with the investee and has
the ability to affect those returns through its
power over the investee…’ .
The definition of control under IFRS 10 is not
based solely on legal ownership. It encompasses three distinct principles, which if present identify the existence of control by an investor over an investee. These principles are:
• power over the investee;
• exposure, or rights, to variable returns from
its involvement with the investee; and
• the ability to use its power over the investee
to affect the amount of the investor’s returns.
In assessing control over an investee, these
three factors cannot be considered in isolation; all three must be present for an investor
to conclude whether it has control.
The main distinction between the old and new
definition of control is that, under IFRS 10,
there is a clear requirement to link power and
returns (that is, benefits) and an investor’s
ability to affect those returns.
Framework for assessment of control
IFRS 10 identifies the factors an investor
should consider during its assessment of control over an investee. These are:
• the investee’s purpose and design;
• the relevant activities of the investee, that
is, those activities that significantly affect the
investee’s return;
• how decisions about those relevant activities are made;
• whether the rights of the investor give it the
current ability to direct the relevant activities;
• whether the investor is exposed, or has
rights, to variable returns from its involvement
with the investee; and
• whether the investor has the ability to use
its power over the investee to affect the
amount of the investors returns.
De facto control: The investor’s
voting
De facto control describes the situation where
an entity owning less than 50% of the voting shares in another entity that is controlled
by voting rights is deemed to have control
when it has the practical ability to direct the
relevant activities. When an investor considers whether it has de facto control over an
investee it must consider all the relevant facts
and circumstances. IFRS 10 includes specific guidance on de facto control; however,
it still remains a highly judgemental area of
accounting.
Potential voting rights
An entity may own instruments that, if exercised or converted, give the entity voting power over the relevant activities of another entity;
these are termed ‘potential voting rights’. Potential voting rights are “rights to obtain voting
rights of an investee, such as those arising
from convertible instruments or options, including forward contracts”. Potential voting rights may take various forms, including
share warrants, share call options, forward
contracts, and debt or equity instruments that
are convertible into ordinary shares.
There are three specific points to take into
account when determining whether potential
voting rights should be considered when assessing power. These are noted below.
• Only potential voting rights that are substantive must be considered by an investor
in its assessment of control over an investee.
Substantive rights alone, or in combination
with other rights, may give the investor power
over the investee.
• The investor must also consider the purpose and design of the instrument that includes the potential voting rights and the purpose and design of any other involvement the
investor has with the investee.
• Finally the investor considers other voting
or decision rights it holds and whether those
rights give the investor other decision making
rights relating to the investee’s relevant activities.
Impact on IFRS preparers
All entities will need to consider the impact of
the new definition of control, as it may result
in some entities consolidating investments
that they previously did not, and deconsolidating entities that do not meet the control
definition under IFRS 10.
Effective date and EU endorsement
IFRS 10 as issued by the IASB is effective for
annual periods beginning on or after 1 January 2013, with earlier application permitted.
IFRS 10 was endorsed by the EU at the end
of December 2012 with an effective date for
annual periods beginning on or after 1 January 2014, with early adoption permitted.
Sharing auditors’ insights
By Charles
Bowman,
Chair of ICAEW’s
Audit and Assurance
Faculty and Partner,
PWC London
In the wake of the financial crisis, questions have been asked about the value of
audit. While there is little doubt that audit is essential for the efficient working of
capital markets, it became clear that auditors need to become better at demonstrating how they add value. Making more people aware of what auditors do and sharing
the knowledge, expertise and insights of
auditors are some ways of doing just that.
And this is exactly what we are trying to do
with a new series of reports by ICAEW’s
Audit and Assurance Faculty entitled Audit
Insights.
The first report in the series concentrates
on the retail sector. It is based on the
knowledge of audit experts with clients
in the sector and focuses on the issues
they have been highlighting to their retail
clients. In it, auditors warn against overreliance on like-for-like sales data in the
retail sector.
The Christmas retail sales figures of major retailers are always a much-anticipated
and hot topic in the media, with much emphasis being put on whether sales are up
or down compared with the same period
last year. They are often seen as a key indicator of how retail companies – and by
inference the wider economy – is faring.
But while like-for-like sales are one way of
measuring the health of retail companies,
this KPI is not always consistent. For a
start it is not directly linked to profits; extreme discounts, for example, can increase
sales but won’t necessarily increase profits. Therefore, it is important not to read
too much into these data.
...it became clear that auditors need to become
better at demonstrating how they add value.
Retailers apply judgment when they decide
which data are included in the like-for-like
calculations and how and why the decisions made is not always clear to the outside world. Greater transparency around
judgments made could benefit investors
and a standardised method for calculating like-for-like sales would create a far
more reliable tool for decision making –
both for the retailers themselves and for
their investors.
Among the other key issues highlighted by
the auditors in the report are the underdeveloped IT and data management systems in the sector. The retail sector lags
behind other sectors in this area and the
state of their systems makes it difficult to
get a proper understanding of profit drivers and manage working capital. Another
issue raised is the challenges posed by
the changing retail landscape in relation to
managing property portfolios. This is also
linked to the issue of data management,
as without proper data, it is difficult to assess and compare the value of store sales
with online sales, for example.
These are difficult times for retailers not
only in the UK but across Europe. However, by highlighting some of the main challenges faced by the sector – as flagged by
the auditors through their unique access
to information through their audit work –
we are hoping the report can contribute to
important debates within the sector, allow
a greater group of stakeholders to benefit
from the auditors’ knowledge and also increase the understanding about what auditors do.
The retail report will be followed by others
looking at different sectors quarterly during the course of 2013 and beyond. The
report can be accessed at www.icaew.
com/auditinsights.
63
Auditing & Accounting
IFRS has been transformational for international investors
what next?
By Dr Nigel
Sleigh-Johnson
FCA, Head of
ICAEW’s Financial
Reporting Faculty
Another year has passed without any commitment from the Securities and Exchange
Commission (SEC) regarding the adoption
of International Financial Reporting Standards (IFRS) in the United States. Eight
years ago the EU made the transition to
IFRS, with Cyprus having adopted international standards much earlier from 1981.
Many have been waiting to see whether the
US - the world’s largest capital market would follow suit.
A year and a half after the initial deadline
we still don’t know whether IFRS will become the financial language of the US. This
uncertainty has resulted in some countries,
Singapore for one, delaying completion of
convergence with international standards.
However, it’s important to remember how
much has been achieved.
Globalisation and the growth in cross-border
trade and capital-raising have contributed to
a clear need for a widely-accepted set of international accounting standards. Academic
research suggests the benefits of adopting
IFRS vary from country to country, depend-
64
ing on what standards they are moving from.
But the advantages identified include lower
accounting costs, increased comparability
for investors and cheaper capital. Everyone
speaking the same financial language will
also make global trade easier – good news
for countries like Cyprus which depend on
international trade connections.
Decade of convergence
The past decade has seen concerted efforts
by the International Accounting Standards
Board (the IASB, which sets IFRS) and
its US counterpart, the Financial Accounting Standards Board (the FASB, responsible for US Generally Accepted Accounting
Principles or ‘US GAAP’) to harmonise their
respective accounting rulebooks, encouraged in recent years by the G20 governments. This work has brought the two sets
of standards closer. However, momentum
has been lost as the two standard setters
struggle to agree on the best way to deal
with improvements needed in key areas,
such as financial instruments.
But setbacks during such an ambitious
project were always inevitable; creating a
global financial reporting language would be
no mean feat. The current challenges do not
mean that the IFRS project has failed - more
than two thirds of the G20 countries allow or
require IFRS for their listed companies. Very
few would have dared to hope such wide
adoption of IFRS was possible just a decade
ago. Nevertheless, it is a good time to reflect
on where we are, where we should be heading, and what this could mean for European
economies.
Time to move on
ICAEW believes it is time to end the focus on
converging IFRS with US GAAP and instead
put all efforts into making IFRS as high a quality set of accounting standards as possible.
Any further harmonisation between the two
sets of standards should only happen if it also
improves IFRS reporting. We therefore also
think the time is right for the IASB to go its
own way with regards to finalising some key
accounting standards in urgent need of improvement, such as impairment.
Everyone speaking the same financial language
will make global trade easier
All listed companies around the world should
be allowed to use IFRS. Governments should
let the market speak and allow companies
decide for themselves whether the benefits
of transition outweigh the costs. This would
bring benefits to international trade hubs like
Cyprus that, as part of the EU, already report
to IFRS. The increase in cross-border comparability would make international trade and
investment easier.
Hurdles ahead
However, to secure the continued success of
the IFRS project in its second and third decades, there are challenges to address.
The biggest challenge is to transform the
IASB into a truly global organisation, which
decentralises and shares its responsibilities
as far as possible, finding ways to demonstrate that it is a body that belongs to and is
responsive to its stakeholders. It must show
that it listens and learns as well as leads, without embedding inefficiencies. And to achieve
this, its funding must be established on a sustainable and secure basis.
on the possibility of uniform adoption of IFRS
worldwide, it is time to recognise that there
will be some differences in how IFRSs are
applied, at least for the time being. What is
important is ensuring financial reporting facilitates and underpins global trade and investment, rather than hindering it.
A final hurdle is the need to address the shortcomings that remain in the standards. The
current suite of IFRSs is good but not perfect.
The way company performance is presented
in the income statement needs attention. And
determined efforts are needed to grapple with
the problem of complexity.
These hurdles are formidable. There is much
for the IASB to deal with. But with the right
support from governments, regulators and
the IFRS community at large, a high quality,
widely-applied set of international accounting
standards remains a realistic proposition, and
one well worth striving for.
Another is enforcement. Regulators around
the world have to take a more active role, cooperating to deliver consistent enforcement.
However, whereas in the past the focus was
65
Business
The importance of the development of the Energy
Sector through the Cyprus Stock Exchange (CSE)
By Nondas Cl.
Metaxas
Director General- CEO
of CSE
66
As is already widely reported, the Republic
of Cyprus is currently in an ongoing authorisation procedure regarding the licensing of
the plots of the Exclusive Economic Zone
of the Republic, for the purpose of extracting hydrocarbons.
The efforts of the Cyprus Republic can yield
significant benefits to our country, through
the development – enhancement of the Energy Sector in Cyprus, via the CSE and the
securities market.
Taking into consideration examples of similar cases internationally, the Cyprus Stock
Exchange can play a vital role in this effort,
for the benefit of the economy and the Republic of Cyprus, in general.
Therefore, towards this direction, among
others, the following suggestions are proposed:
a)The State Company for Hydrocarbons
should be listed on the CSE. Respective arrangements constitute this practice internationally. Specifically, we refer to the example of Norway – with the company StatOil -,
which is indicative of the direction to be followed in the case of Cyprus. Through such
an arrangement and the distribution be part
of the share capital to investors (domestic
and international), it will possible for Cyprus to attract large institutional investors
and widen the offered investment products,
bringing multiple benefits for the Republic
of Cyprus.
The Cyprus National Hydrocarbons Company could emerge as the national institution
for the energy interests of the Republic, and
in this context it can establish an independent fund (sovereign fund) which will belong to the Republic of Cyprus, where the
State will have the ownership of the majority of the capital of Cyprus National Hydrocarbons Company. It is noted that in other
countries, based on our investigation, the
State still owns the majority of share capital of the equivalent Hydrocarbons Company, whereas the remaining share capital
is spread over in a number of international,
domestic institutions and private investors.
b)Within the forthcoming agreements
which are going to be formed between the
Republic and the drilling companies of hydrocarbons, which finally will be selected
for each plot of the Cyprus’ Exclusive Economic Zone (EEZ), the issue of securities in
the form of certificates representing shares
(Depository Receipts) and admission for
listing to the Cyprus Stock Exchange, could
be included in the contractual arrangements. With this option, a remarkable energy sector will be established within the CSE
market and new products will be offered to
the investment community (domestic and
international), which will be particularly attractive for investment in region of Cyprus.
Through the implementation of the above, it
will become possible for the energy sector
in Cyprus to have a prominent position in
the securities market, domestic and international and to receive special importance
for investment purposes. In this sector new
stock indices and related derivatives products could be created, such as Futures,
Options, ETF’s etc.
Similar arrangements were made in neighbouring Israel, where through the energy
sector, the companies involved in this sector were further developed. Also the energy
sector has contributed significantly to the
further development of the securities market in the country, attracting international
investors.
Furthermore, with the implementation of
the above recommendations, it will be possible to attract international investment
funds in Cyprus, specialising in the energy
sector.
This will add further value to Cyprus’ effort
to maintain and further develop as a regional financial centre.
The CSE is interconnected with European
and neighbouring securities markets and
has a very good infrastructure. The utilisation of the CSE in the energy sector as was
done in similar cases in other countries,
will bring direct benefits for the Cyprus
economy.
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Business
Opportunity through Enterprise
Commonwealth Theme for 2013
By Lella Hadjinestora
BscEcon FCA
RCS Honorary
Representative for Cyprus
People from around the Commonwealth join
together every year on the second Monday
in March to celebrate the links they share as
members of the modern Commonwealth. This
year Commonwealth Day is celebrated on
Monday 11th of March. The Commonwealth
unites a diverse and dynamic global community of over two billion people in 54 countries on
the basis of shared visions and values. Members share, inter-alia, similar systems of Law,
public administration and education. Cyprus is
a member of the Commonwealth since 1961.
Each year a Commonwealth Theme of global
significance is launched and celebrated on
Commonwealth Day and throughout the year.
The 2013 Commonwealth Theme is “Opportunity through Enterprise”. In the UK, Commonwealth Day is celebrated every year by a
multicultural Observance at Westminster Abbey in London. This Observance which is the
UK’s largest multi-faith celebration is organized by the Royal Commonwealth Society,
on behalf of the Council of Commonwealth
Societies. It is attended by The Queen in
her capacity as Head of the Commonwealth,
Heads of Government, High Commissioners,
other VIPs and more than 1000 Young People
representing the future of the Commonwealth.
The Royal Commonwealth Society(RCS) is
an international educational charity founded in
1868. Its mission is to support and promote
the modern Commonwealth, its culture and
core values. The RCS Young Commonwealth
Competitions encourage every year thousands
of young people to respond to global challenges through creative writing, and other
competitions.
The essay competition is the world’s oldest and largest schools’ writing contest and
this year it celebrates its 130th birthday. The
theme for the Essay competition, is the Commonwealth theme “Opportunity though Enterprise”. The focus is on economic innovation throughout the Commonwealth and the
shared commitment towards youth, social
and sustainable enterprise. This year’s Essay Competition is run by the RCS in partnership with Cambridge University Press.
Entrants to the Commonwealth Essay Competition are judged in two groups, junior (under
14 years, born after 1st May 1999) and senior
(14-18 years born between 2nd May 1994
and 1st May 1999).They can submit a poem,
letter, article, story, essay or a short play.
68
Commonwealth Day Celebration – Monday 11th March
2013 – 2.1 Billion People - 54 Countries
Competitions are open to individuals who are
nationals of, or are living in a Commonwealth
country. The last day for entries is 1st of May
2013. Please see www.thercs.org/youth/
competitions for full terms and conditions.
Enterprise education in schools builds transferable skills and attitudes in young people
including “can do” and “will do” attitudes. Supporting the development of enterprising skills,
attitudes and values and encouraging young
people to create and translate their ideas into
action with confidence and competence enables them to become job creators as well as
job seekers. It is suggested that cultivating
a competitive, innovative and enterprising
spirit in our young people today, can lead
to a more enterprising and a more successful Cyprus tomorrow.
I would like to share a personal observation
concerning the 2012 Young Commonwealth
Competitions. Of the thousands of entries,
awards were given to 1000 children www.thercs.org/youth/425. Over 30% of these awards
went to school children in Singapore. Could
this reflect an educational environment of
support and encouragement enabling school
children in Singapore to compete successfully in international competitions? Could the
impressive economic success of Singapore,
and its top economic and business rankings in
international comparisons be the result of an
educational system which fosters innovation &
enterprise?
Finally, I would like to congratulate the ten
young people from Cyprus schools who won
awards in the 2012 Competitions and their
teachers. The Schools are: Xenion High
School, Med High School, Pascal English
School, Pascal Greek School Limassol and
Heritage School. The names of all winners can
be found at www.thercs.org/youth/425 
Business
Why the new government should pay
attention to business
By Michalis Antoniou
Assistant Director General
Cyprus Employers and
Industrialists Federation
Mr. Nicos Anastasiades, the newly elected
President of the Republic, begins his term
amidst unfavourable economic conditions
and the pressing need to make bold decisions. With time in short supply, there is
no grace period for this administration. In
the next few weeks the government must
reach a loan agreement with Troika, bail
out the ailing banks (and the greater banking system) and prevent a government suspension of payments. We are happy to note
that these issues, so far, are being treated
as top priorities and dealt with the proper
sense of urgency.
However, the troubles of our economy will
not be over any time soon. Once we secure
the necessary liquidity we must take upon
the even greater tasks of reforming our
state, reigniting the economy and reducing
unemployment which is currently standing
at unprecedented levels. This is easier said
than done and there is no fail-safe recipe
for growth; if there was, everyone would be
doing it. How then should the new government proceed? What should its priorities
be? Where should efforts be focused and
whose advice should it heed?
Economic recovery will not come easily or
without sacrifice. The state apparatus on
70
which we had established our economy
and society over the past decades has
completed its cycle and can no longer serve
us. It has proven ineffective, inefficient and
wasteful. We must rethink, reinvent and reform.
When successful companies want to improve their products, they often turn to
their customers for feedback. Unless the
company satisfies the needs of its clients
and end users, it cannot generate revenue
and satisfy its shareholders. In a fast paced
global economy those who fail to adapt
accordingly are destined to fail. Similarly,
if the government is genuinely committed
to reducing unemployment and stimulating the economy then it should focus its
attention to those responsible for creating
growth and new jobs; businesses.
This is not to say that the opinions and
needs of other parts of society do not matter. On the contrary, we live in a pluralist
society that welcomes and embraces social
dialogue but unless the needs of businesses are met, the welfare system and quality of life we have grown accustomed to,
can not be maintained, let alone improved.
Unless business needs are met, supporting
any other group of society for a sustained
period of time will be a futile and impossible
exercise. Businesses are in a better position
than most to comment on the ills of growth-inhibiting bureaucracy because they have to fight
it every day. Businesses are in a better position
than most to know what makes investments
attractive because they are willing to take the
risk and invest their money, not speculate or
theorise about it. Businesses are in a better
position than most to identify legislative impediments and regulatory distortions because they
stumble upon them all the time.
Economic growth is not an abstract notion but
the end result of economic activity and business investment. Businesses, in aggregate,
have a better understanding of what it takes for
the economy to work not because they understand the market better but because they are
the market. Businesses are the ones drawing
the line between theory and practice, between
what works and what not. The Cyprus Employers & Industrialists Federation (OEB) has been
representing the greater part of the Cypriot
business community since 1960 and we have
a thing or two to say about how to return to
economic growth.
paralyse the economy on a whim. Taxpayers
have every right to demand that the civil service reforms in a manner that rewards merit,
initiative, ambition and hard work instead of
seniority, apathy, indifference and political allegiance. It is high time that taxpayers stand their
ground and declare that enough is enough.
The time has come to introduce a new paradigm in the public sector, in society and the
economy. We all want a welfare state that
supports those in need and serves its citizens
quickly and efficiently. We all want to end the
queues at the unemployment office and offer
our young a true prospect for a better and more
promising future. Most sustainable growth and
most new jobs will come through business activity, which is why the new government should
pay close attention to what businesses have
to say.
Most people will agree that it is time the Cypriot political system and economy were daringly reformed. Most will agree that we cannot
continue to throw money to an overgrown and
wasteful public sector. We crossed the Rubicon when we asked Troika for a loan and it is
my opinion that we have matured as a society
and we are ready to embrace change. Long
due structural reforms will happen, there is
no denying it. We may disagree or object to
this, and some privileged groups may object
more than others, but reform will happen. To
say that we can go on sustaining a civil service
and a state apparatus the way we used to for
decades is to say that the laws of economics
do not apply to Cyprus. We will be asked to
implement decades of reforms within a few
months and under pressure. Better late than
never I say.
Reform attempts in the past met the vehement
opposition from groups who felt that their vested interests were threatened. Sadly, the many
who have to gain from reforms remain a silent
majority while the few that undeservedly benefit from the status-quo protest the most. Taxpayers, citizens and businesses alike, have every reason and every right to demand reform.
Taxpayers have every right to demand that ludicrous allowances stop once and for all. Taxpayers have every right to demand that privileged and overindulged groups may no longer
71
Business
IBAN expands!
The International Bank Account Number
(IBAN), is an internationally agreed method
of identifying bank accounts across national
borders. It was originally created by the European Committee of Banking Standards
and later adopted as an international standard, under ISO. Until now, it has been implemented by all EU (and SEPA) countries,
as well as countries from the Middle East
and the Caribbean.
Marios
Nicolaou
Senior Officer
Association of
Cyprus Banks
Before the use of IBAN, both corporate and
retail customers often got confused with the
large number of identification variations of
the domestic bank accounts, as they comprised of different banking codes and routings. Furthermore, the traditional account
numbers did not contain any check digits,
which made it easier for simple transaction errors to go unnoticed. As there was
no way of validating routing information
before a payment was submitted, payment
delays and extra costs were frequent results
of routing errors for all banks involved (i.e.
sending, receiving and intermediary banks).
With the creation of the Single Euro Payments Area (SEPA), the IBAN became an
important tool for identifying cross-border
payments within the SEPA-zone. The IBAN
was intended to replace the domestic bank
account number, which in several cases
created confusion, mistakes and delays for
cross-border payments.
...IBAN became an important tool for identifying
cross-border payments within the SEPA-zone.
The main advantages of using IBAN for
banks, corporations and individuals are as
follows:
72
• it lowers transaction costs by supporting
a higher level of automation in the payment
process. It also reduces the cost of investigations, as it minimizes the risk of errors.
According to ISO, the IBAN may consist of
up to 34 alphanumeric characters, which
are structured as follows:
- two letters representing the home country
of the account holding bank
- two check digits (which allow sending
banks to perform validity checks of the account number during the entry of data)
- a maximum of 30 alphanumeric characters
identifying the bank and the domestic account number
Although IBAN aims at unifying electronic
payments, its final form may still vary from
country to country as it may include a different number of alphanumeric characters.
Norway has the shortest IBAN structure
with only 14 characters and Malta has the
longest with 31 characters. The Cypriot
banking community in co-operation with the
Central Bank, have decided to implement
28 characters for the Cypriot IBAN. Consequently, a typical IBAN of a Cypriot-based
bank account looks as follows:
CY 51 0030 0013 0000 0013 2102 4363
In March 2012, the European Parliament approved the “Regulation (EU) No.
260/2012 for establishing technical and
business requirements for Credit Transfers
and Direct Debits in euro”, otherwise known
as the “Regulation for the SEPA migration
end-date”.
• it simplifies cross border transactions by
assigning a unique account number format
for all participating countries. It also provides a uniform appearance of the account
number, thereby making it easier to identify
the country and the banking relationship of
the account holder.
Among other things, the Regulation requires
the exclusive use of IBAN instead of the
domestic account number, for the processing of any Credit Transfer or Direct Debit
payments within the SEPA zone. The “IBAN
only” requirement must be adopted by all
participating countries for both domestic
and cross-border payments, the latest by
the 1st of February 2014.
• it provides a level of assurance to the
trading partners that the account number
is real, and that it can be validated against
national payment directories.
According to the guidelines provided by
the European Commission and the European Central Bank, all stakeholders must
take active measures in order to ensure a
smooth and effective transition to IBAN.
Although IBAN aims at unifying electronic
payments, its final form may still vary from
country to country as it may include a different
number of alphanumeric characters.
These measures involve the following:
• Financial Institutions must ensure that their
customers are able to easily locate the IBAN
pertaining to their own account. This can be
achieved by displaying it on the monthly account
statements, or printing it on payment cards or
cheque books. Banks should also provide their
customers with easy-to-understand information
about the uses of IBAN, either through their internet banking channels, or by print flyers
• A national website dedicated to IBAN could be
constructed, containing a range of IBAN-related
information, as well as account number-to-IBAN
conversion facilities
This can be achieved by printing it on their invoices, stationary or any other documents exchanged
with their counter-parties
Having all the above in mind, the Association of
Cyprus Banks and its members have agreed to
create a special page in the Association’s website, which will give general information on IBAN,
as well as provide account conversion facilities for
users. In particular, the page will contain a portal
which will be linked to the websites of all SEPAparticipating financial institutions in Cyprus. With
a touch of a button, the said links will be connected to specific pages in the bank’s websites,
which will provide account number-to-IBAN conversion facilities for users. By using these services, senders of domestic electronic payments will
be able to easily identify the IBAN of their beneficiaries, without wasting time on communicating
with them, or their banks. Banks in Cyprus have
committed to implement the account conversion
pages in their websites, the latest by the end of
the year. The forecasted date of implementing
the page in the Associations’ website, will be the
31st of March 2013.
• Businesses and public administrations are expected to: review their invoicing and accounting
procedures, identify and adapt all systems operating on the basis of account numbers and bank
codes, and redefine their standardised processes
for cross-border payments, so as to include any
missing IBANs
• Businesses are also expected to disclose their
IBAN to their business partners and customers.
73
Business
A leader is one who knows the way,
goes the way, and shows the way
– communicating with impact
By Demetris
Stylianides
DipLC, CTM, CL,
FAIA, FCCA, CPA,
International
trainer
NLP
Many of the defining characteristics needed
for effective leadership -- like having a vision, integrity, commitment and flexibility –
are essential. Another quality, as essential
for success as the others, can be learned.
It is the ability to motivate employees to
help the leader realize ambitious goals. This
quality can be developed by observing the
behaviour of leaders who use these skills
to generate the needed employee commitment.
The power of the leader’s position alone
cannot guarantee enthusiasm and dedication from today’s workforce. Instead, employees must be convinced that the leader’s
objectives are achievable, understand that
meeting the goals will provide a personal
payoff and be inspired to make their own
contribution. To generate the needed support from everyone in the organization, the
leader has to put his leadership up to the
test: He must be visible, crystal clear about
his message and take every opportunity to
demonstrate, live and in person, his passion
for his goals. Unless he shows how deeply
he cares, few others will care and his plan
may be seen as another great idea that never took off.
Some leaders believe it is sufficient to
communicate their goals to the workforce
through the organization’s internal media:
employee publications, intranet, videoconferencing, etc. thinking that the more sophisticated the technology the better. Many
have become obsessed with blogging because it makes possible instant communications with large numbers of employees,
assuming they make the effort to log on.
All this is useful because it allows for repetition of the leader’s message, which is
essential for making an impact. But using
media is not a substitute for interacting with
employees face to face. Media cannot convey the intensity of feeling the leader has
for his plan nearly as well as human contact
does. The fact that the leader is there, that
he has left the comfort of the office to communicate with employees, gives the message importance.
74
I hear you loud and clear
The leader must make his case loudly,
clearly and consistently. He should take up
every opportunity to speak from the heart
in personal encounters with the employees.
Doing this lets the leader express his message with absolute clarity and address any
concerns the employees may have about
it. There is an additional payoff: The workforce’s views about other company issues
will come through unfiltered.
Personal interactions with the workforce
can take many different forms. The leader
can make presentations in front of large
groups. There can be smaller, more informal departmental meetings, where participants will feel free to ask questions or
present problems. When the leader appears
at these meetings it shows that he is approachable and welcomes interaction.
The leader also can conduct spontaneous walkabouts to fill in the time between
planned events, have lunch in the organization’s cafeteria, and drop in on the back
office, the factory floor or a remote office
where employees may never have seen the
leader and will be particularly impressed.
When a leader presents employee awards
at presentation ceremonies the awards become particularly special. Praise from an
employee’s direct supervisor is a strong
motivator; from the organization’s leader it
is even stronger. Effective leaders are gen-
erous with their praise whenever it is deserved.
Presenting with impact
Putting leadership on to the test does not come
naturally to some leaders, particularly those who
have led primarily by issuing directives. But presenting with impact is a skill easily learned. Once
learned, it becomes a habit and each presentation
becomes increasingly effective. In any meeting,
large or small, the effective leader captures the listeners’ attention immediately, holds it for the duration of the presentation, and creates the kind of
energy that generates action.
The leader should organize the message so it
is clear and compelling. Doing so his message
makes an impact to both the heart and head. He
tells stories that involve the audience and reveal
his humanity, which is important for establishing
trust. The stories paint pictures, with characters,
settings and action. The leader makes deliberate
use of wording, voice tonality, posture, movement
and timing. And his most powerful communications
tools are his eyes.
Steady, warm eye contact is a sign of credibility.
Failure to make eye contact can signal unease, defensiveness or perhaps lack of honesty. When talking with one person, the leader looks at the other’s
eyes, then moves away to avoid causing discomfort. With a large group, he makes everyone feel
included by making eye contact with one person
in the audience for as long as it takes to express a
thought, and then moves his eyes to someone else
in a different part of the room.
cause they do not read from a written text. They
understand that presentations that are read are
considered old news and, as such, undermine the
spontaneity that creates energy in the audience.
Doing a presentation without visuals can be particularly effective when the presentation is intended
to inspire the audience rather than convey information.
Effective leaders demonstrate their passion by putting their whole body into the presentation. They
support every statement with an appropriate gesture and make large body movements to stress
important points. They further emphasize these
points with pauses or by raising or lowering their
voice. Their choice of language demonstrates they
are real because they avoid jargon.
Though the presentation may appear spontaneous, it has been carefully rehearsed. Unnecessary
content has been left out. Questions that may be
asked have been identified and concise, persuasive answers have been prepared well in advance.
As noted earlier, though an initial presentation like
this may require serious rehearsing, the process
becomes easier as the leader seeks out opportunities to continue presenting. An expert speaker who
gets a deep sense of pleasure from presenting can
become encouraged to present his views about
significant issues on the annual general meeting of
When a leader is able to zero in with eye contact
toward one audience member, surrounding audience members benefit too; studies have shown
that all the audience members in the area around
the person being addressed feel they’re being
spoken to directly. Using the eyes this way makes
whatever anxiety the presenter has to go away because speaking one-to-one to an individual comes
naturally. In contrast, nervous speakers scan the
audience, never finding one focal point, which increases their anxiety because the brain has too
much information to process.
Using the eyes appropriately is the single most important factor for communicating effectively; it has
been shown in a study conducted at the University
of Santa Cruz California back in the 1970s. The
study evaluated the relative importance of 10 different presentation skills factors in presentations
made by participants in presentations
Don’t use the Podium
Leaders who are effective presenters do not use
a podium, a barrier that separates the leader from
the audience. They have no need for podiums beACCOUNTANCY CYPRUS • VOLUME 110 • MARCH 2013
75
Business
the company. This further helps strengthen
leadership positioning.
Knowing the Organization The “putting the leadership on test” process
must begin with honest assessments by the
leader of how the workforce perceives him
and how he in turn views the employees.
Mistaken impressions can destroy communication and, with that, the leader’s effectiveness.
A leader may misunderstand the workforce’s values, particularly if he is new. He
may have come from a company whose
employee’s value making lots of money but
his new culture emphasizes a concept like
“everything we do is for a good cause”
The workforce may not have a good understanding of the leader either. The leader
may have served for many years but has not
been very visible. Unknowingly, the leader
may be sending out opposing signals.
This is not a call for the leader to improve his
“image.” For honest, effective communication there must be authenticity.
Characteristics of Outstanding
leaders
Whatever your point of view at the end of
the day, outstanding leaders share the following characteristics:
1.Mission. Leaders know what their mission is and every employee should be able
to identify with the mission and strive to
achieve it.
76
2.Vision. A vision needs to be abstract
enough to encourage people to imagine it
but concrete enough for followers to see it,
understand it and be willing to fulfill it.
3.Goal. Goals should be specific and measurable if you want them to be achieved.
4.Competency. You must be seen by employees and the public as being an expert in
your field. As crises and challenges arise,
those at the top of the hierarchy have key
opportunities to demonstrate to others that
they are in fact, qualified to be leaders.
5.A strong team. A wise leader assembles
effective teams of experienced, qualified
and capable individuals who can supplement the leader’s skill set.
6.Communication skills. The leader must
easily and effectively convey his ideas to the
employees and shareholders of the company.
7.
Interpersonal skills. The leader must
seem approachable, likeable and confortable in their position.
8.Inspiration. The leader must be able to
inspire and motivate employees at all times.
9.Ambition. Employees need to be constantly aiming to improve the company and
achieve its goals. When the boss is seen as
someone who works to attain increasingly
higher goals, employees will be impressed
and will be more willing to copy that behaviour.
A true leader has the confidence to stand
alone, the courage to make tough decisions, and the compassion to listen to the
needs of others. He does not set out to be a
leader, but becomes one by the equality of
his actions and the integrity of his intent.
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36 Ayias Elenis Street, Office 404, P.O.Box 22639, CY 1523 Nicosia, Cyprus
Telephone: +357 22817503 Fax : +357 22817516
Website : www.cms-ss.com
Email : [email protected]
Business
Shipping industry in distress
A second wave calls for restructuring and consolidation
In the years before 2008, when the world
economy was buoyant, the entire shipping
industry experienced a period of doubledigit growth rates.
By Antonis Vidakis
CFA, CBA/Head of
Transaction Advisory
Services
While revenues for brokers and prices for
ships kept rinsing, the industry was regarded as comparatively safe for investors.
However, during the global recession, the
overvaluation of ships became apparent.
Some ship owners were not able to service their loans and meet credit obligation.
Banks agreed on a standstill approach, allowing them to postpone repayments and
interest on loans. Therefore, distressed
owners remained in the market, distorting
supply and demand and freight rates fell
below historic averages as no industry consolidation took place during the first downturn past 2008.
Freight and charter rates rose back to
historic average levels in 2010 and 2011.
Confidence returned and new ships were
ordered. This unexpected upturn did not
last: in the second half of 2011, freight and
charter rates fell again when the economic
outlook worsened. The second hit of the
crisis by mid 2011, has found the market
in an oversupply state due to the continuous new built delivery of ships ordered 2
years ago.
Freight and charter rates continue to get
a pressure and according to Clarkson’s,
since 2010 until September 2012, the average earnings per day for all Dry bulk ships
in all classes have been reduced by 81%,
for oil tankers by 65% and other tankers by
43%. Characteristically, the charter rates
for dry bulks above 100k tonnes capacity
(Capesize) have dropped in 2012 at 2,200
USD / day.
Some ship owners were not able to service their
loans and meet credit obligation.
However, freight and charter rates are not
expected to return to pre-crisis levels in the
near future and there is little financial flexibility left to manoeuvre the industry away
from shallow waters.
78
Banks have been left with unaltered national loans while ship values have fallen. The
loan-to-value ratio (LTV)-an industry standard covenant rule-increased, while banks
have been forced to reduce their exposure
(or increase equity) due to regulations such
as Basel III. Today’s notional loans are often larger than the ship’s value.
More observes are suggesting scrapping
as an effective action to calm the markets.
“Owners must scrap vessels, even those
under 20 Years”, DVB bank reports in its
market analysis.
Global container transport demand is expected to increase above 7% per year until
2016, while the container fleet is forecasted to grow by about the same rate (Drewery Container forecaster). Without extensive scrapping and delivery delays, supply
and demand will not return to equilibrium.
In contrast to the first crisis, the industry
is in a process of consolidation and bankruptcies will be observed. Participants in
financial distress have already been acquired and the lower availability of capital
suggests that this trend will accelerate. At
the same time, container liners in particular
have started to collaborate, and groups and
alliances have been formed.
For operators, owners, shipyards in all
segments (containers, ships, bulkers and
tankers) ship-financing banks, the next
few years will be shaped by two powerful
forces. First, banks have to reduce their
exposure to debt and their will not be another round of standstill agreements. Second, order books and the global economic
position suggest a poor outlook for freight
charter rates. Shipping companies have to
restructure their operations and financial liabilities as soon as possible. This might
be just sufficient to preserve shareholder’s
and debt-holder’s capital.
Ernst & Young, with more than 70 experts
in shipping in Greece and Cyprus, is in a
position to offer a full range of services and
support in the restructuring of the sector in
Cyprus, during this difficult period.
79
Business
Ethical principles
in business
By Demetris
Ergatoudes*
• Social responsibility
The term social responsibility means an
organization’s obligations to maximize its
long-term positive impacts and minimize its
negative impacts on society. It means the
obligations of the firm to use its resources
in ways that benefit society. The term is
sometimes used interchangeably with the
concept of ethics, but there is an important
distinction to make. Social responsibility is
an organizational concern, whereas ethics
are the concerns of individual manager or
decision makers.
• Ethics
Ethics can be defined as an individual’s
moral beliefs about what is right or wrong,
good or bad.
Something which is legal is not always ethical and
vice versa.
• Corporate social objectives
A socially responsible firm will honour its
responsibilities to its internal stakehold80
ers - i.e. persons who are directly involved
with the firm -, but will also accept the
need to act responsibly towards external
stakeholders- i.e. persons located outside
the firm. This means acting in a fair way
towards customers, financiers and suppliers – promptly paying bills, making quality products, dealing in an honest way and
being reliable. Socially responsible behaviour clearly requires obedience to the law
and payment of taxes, but it also means
operating in an ethical way, having concern for the environment and undertaking
charitable activities on behalf of the disadvantaged and to aid the cultural life of the
community.
There are six areas in which corporate social objectives may be found:
• The environment
This covers pollution control, preventing
or repairing damage to the environment
resulting from processing of natural resources.
• Energy
This covers conservation of energy and in-
creasing energy efficiency in business operations.
• Fair business practice
This concerns fairness in dealing with employees, suppliers and customers.
• Human resources
This means giving thought to the impact of organizational activities on the human resources
of an organization.
• Community involvement
Business organizations are involved in community, education, art and health-related projects.
• Products and services
Socially responsible firms make products –
or offer services – of quality in terms of user
safety, serviceability and durability. These
products and services provide customer satisfaction and are honestly advertised.
• Ethical issues
Something which is legal is not always ethical and vice versa. For instance, advertising
directed at children might be legal, but many
see it as unethical. The basic distinction to
make is that the law states whether or not
an action is allowed, whereas ethics is about
whether an action is right or wrong, acceptable or unacceptable.
The major areas of ethical concern are:
• advertising that relies on sex, violence and
stereotyping, or is directed at children
• large payments to company executives
• perks offered to top executives
• corporate donations to political parties
• political lobbying by companies
• corporate hospitability
• bullying in the workplace
• asset stripping
• misuse of proprietary information
• bribing
• misuse of company assets
• misleading advertising
Social responsibility is an organizational concern,
whereas ethics are the concerns of individual
manager or decision makers.
personal advantage
• use/misuse of company assets
• deception
• environmental issues
• avoiding discrimination
• bribing
• The benefits of codes of ethics
The benefits of codes of ethics are:
• they provide guidance to managers and employees so that they know what is expected of
them in terms of ethical behaviour
• they provide new employees with a framework within which to work
• they enhance the organization’s reputation
• they signal to suppliers and customers the
organization’s expectation of them
• they promote a culture of excellence by emphasizing the commitment to ethical behaviour.
Although it is debatable whether or not firms
ever act with no thought of self-interest and
although there is a strong case against businesses – as distinct form individuals – taking
on social responsibility, its is possible that a
business organization will act in an environmentally friendly manner for reasons of selfinterest.
*Demetris Ergatoudes is a retired (2006) Senior Manager of the Cyprus Popular Bank and
fellow to the Chartered Institute of Bankers,
London.
• Codes of ethics
Codes of ethics are guidelines to the moral
principles or values used by organizations to
steer conduct, both for the organization itself
and its employees, in all business activities, internal and external. They are likely to include
reference to:
• use of insider information by employees for
81
Business
Residency and Employment
of European Citizens
in Cyprus
The employment of European Citizens in
Cyprus is regulated by the Law No. 7(I) of
2007 “The right of Union Citizens and their
Family Members to move and reside freely
within the territory of the Republic of Cyprus ”.
By Niki Christofi
Tax Manager at Ernst
& Young Cyprus Ltd
Citizens of Member States of the European
Union (E.U), of the European Economic
Area (E.E.A), as well as of Switzerland, collectively referred to as (“Union Citizens”),
have the right to enter the Republic of Cyprus by simply showing a valid passport
or identity card, without having to register
upon arrival, and may stay in the territory of
the Republic for three months without any
formalities.
Their dependent family members who are
also Citizens of the Union have the same
right, provided that upon arrival in Cyprus
possess a valid passport or identity card.
This applies also for their dependent family
members who are nationals of 3rd countries, provided that they show a valid passport. Entry visa is not required for their dependent family members who are nationals
of 3rd countries, provided that the family
members hold a Residence Card from another Member State (as dependent family
members of the European Citizen Individual).
Citizens of the Union have the right to reside with their dependent family members
in the Republic of Cyprus for a period exceeding three (3) months, provided that
they are Employees or Self-Employed in
the Republic, or possess adequate sources
of funding for themselves and their family,
in order “not to burden the Public Social
Welfare system during their residence in
the Republic”.
82
In the event that Union Citizens’ residency
exceeds three (3) months, they are required
to apply to the Civil Registry and Migration
Department for a Registration Certificate
for themselves and for their dependent
family members who are also Citizens of
the Union (application MEU1), and for a
Residence Card for their dependent family
members who are Citizens of 3rd countries
(application MEU2).
In case of employed activity, in order to
obtain a Registration Certificate, Citizens
of the Union must submit the MEU1 form
accompanied by the following documents:
a)Valid passport or identity card and copy
of it.
b)Employment contract.
c)Two passport -size photographs.
d)Last payslip (if the employment has already commenced).
e)Certificate of registration with the Social
Insurance Department (or A1 form which
provides that the Individual will remain socially insured in his/her home country in accordance to the E.U directives).
f)Proof of Health Insurance.
In case of self-employed activity, the documents delow shall be submitted together
with the MEU1 form in order to obtain a
Registration Certificate:
a)Valid passport or identity card and copy
of it.
b)Two passport-size photographs.
c)Certificate of registration with the Social
Insurance Department as self-employed
person (or A1 form which provides that he/
she will be insured in his/her home country
in accordance to the E.U directives).
d)Proof of Health Insurance.
It is important to note that Citizens of the
Union who have legally resided in Cyprus
for a five-year period, have the right for a
Permanent Registration Certificate. The
same applies to their dependent family
members who are Citizens of the Union, as
well as to their family members who are Citizens of 3rd countries (Permanent Resident
Card is issued in this case), provided that
they have legally resided with the Individual
in the territory of the Republic of Cyprus
for a five-year period. It is noted that the
Permanent Residence Card of 3rd country
family members must be renewed every ten
(10) years.
83
Business
The protection of Intellectual Property of Software
protects companies and creates jobs
By Andrea Kallis,
Andreas Neocleous & Co LLC
BSA Representative in Cyprus
& Efrosini Monou,
Andreas Neocleous & Co LLC
BSA Representative in Cyprus
The protection of Intellectual Property (IP)
and Copyright, encourages the creative
individuals to continue to innovate and
develop solutions for complex problems.
Further, the legal transactions of computer
software, translate in tax revenues to the
Government, as well as more jobs in the
IT sector.
Cyprus has developed IP laws in 1919,
making it one of the first European countries to develop such laws. Nevertheless,
the 48% of software piracy in Cyprus is
relatively high in comparison to other European countries, with the commercial value
of this piracy estimated at €14 million according to the 2011 BSA Global Software
Piracy Study.
According to the Copyright Law no. 207 (I)
of 2012, the possession and/or use in the
business environment of unauthorized software, exposes the parties involved to civil
and possibly criminal liability. In the event
of conviction the criminal penalty imposed
is a fine which does not exceed €80,000
and/or 3 years imprisonment for the first
offence. Further, the copyright holder has
the right to demand payment of damages, which can reach up to three times
the purchase price of the license. Finally,
according to the Law, the Courts have the
authority, when encountering instances of
unauthorized software installations, to get
them seized by the Authorities as evidence,
or destroyed.
Beyond the legal risks, the companies
could also face serious technical risks,
such as malfunctioning of programs, loss of
information, spread of viruses and vulnerability to cyber-attacks. These outcomes
might cause significant disturbance to the
normal operations of the company, but also
translate in substantial costs.
So obviously the purchase and installation
of genuine software in the first place is the
most cost-effective solution for companies,
since the costs to follow are highly likely to
over exceed the initial cost of the software
licenses.
In light of the introduction of the Copyright
Law no. 207 (I) of 2012, and with the intent of educating and assisting corporate
users of computer software, the Business
84
Software Alliance (BSA)* has initiated the
awareness program “Software License
Compliance: It’s to your benefit!”. The
purpose of this awareness program is to
emphasize the importance of adhering to
the Intellectual Property Right laws when
it comes to the use of computer software
licensing within organizations.
The countries around the world use different means for creating awareness around
the use of genuine software, either with Police raids, or with educational activities. On
the education front, companies are encouraged to implement a system internally for
the proper management of their software,
which can help them realize what software
they have and where it’s running, providing them the needed transparency in order
to use it correctly and efficiently. Software
Asset Management (SAM), can help companies ensure license compliance, reduce
risk and increase IT savings. SAM can be
conducted internally by each organization
with some guidance, or by third parties specialized in the specific service.
As part of BSA’s recent awareness program, the notion of SAM is used in order
to assist companies in identifying what
software they currently have installed, and
what software they are entitled to. Further,
they are provided with the needed support
in order to identify the possible legalization
solution in case of any software license discrepancy, according to their organization’s
needs.
The respect towards the Intellectual Property of the creative individuals is vital in all
areas. Especially in an era where everything operates with computers, and some
software program, the use of genuine software, encourages innovation in the field of
IT. Innovation is of benefit to the economy,
to the businesses and to the development
of a country since it translates in more jobs,
tax revenues for the Government, while at
the same time provides more solutions for
the enhancement of our daily activities.
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RSM Stylianou is a member of the RSM network. Each member of the RSM network is an independent accounting and advisory firm each of which practices in its own right. The RSM network is not itself a separate legal entity of any description in any
jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other
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85
Business
The meanings of natural monopoly
and of the electricity sector restructuring
Dr. Andreas Poullikkas
Department of Mechanical
Engineering
American University
of Sharjah
The theory of natural monopoly
A natural monopoly is said to occur when
production technology causes long-run average total costs to decline as output expands. In such industries, the theory goes,
a single producer will eventually be able to
produce at a lower cost than any two other
producers, thereby creating a natural monopoly, as higher prices will result if more
that one producer supplies the market.
their development must be subject to some
public influence. The investor-owned power
companies won the official designation as
natural monopolies that they sought, thus
gaining the right to sell electricity in a noncompetitive market. In return for this privilege, they agreed to pass along the benefits of monopoly to consumers in the form
of reasonably priced electricity and good
service.
From the beginning, electric companies
were primarily local businesses serving local needs. At the same time that the movement for regulation was growing so was
the idea that geographic concentration
and other economic factors made electric
power service a natural monopoly, characterized by economies of scale and scope
and the need for large capital investments.
It was assumed that large investments in
equipment and duplication of facilities
would be a waste of financial and material
resources, and would lead to overall higher
costs for companies and therefore higher
prices to customers.
The reasons above have been put forward as justification for natural monopoly,
and one of the most popular is the idea
that electricity is a necessary. The condition of necessity is an attribute of natural
monopoly, however, this condition alone is
not sufficient to create a natural monopoly
because many other products and services
are vital. Not only are there other goods
and services that would require monopoly
power because they also are necessary
to the public, technological changes have
provided adequate substitutes for electric
utility services, increasing significantly the
cross-elasticity of demand. This is important as a true monopoly would typically tend
to produce a product that has a very low
cross-elasticity with other industries.
Monopoly was thought to be the “natural”
outcome of such a situation, with one company minimizing the waste of resources to
serve customers. As electric utilities began
to touch the lives of more and more people,
there was nearly universal recognition that
86
Always looking to cut costs, many large
industrial corporations, which use tremendous amounts of electricity, began com-
plaining about the differences in rates, as well
as having to buy electricity from their local monopoly utility. Instead, these large customers
wanted to shop for the cheapest power available. They also argued that new companies
should be allowed to generate and sell electricity, which would put competitive pressure
on the utilities to reduce their rates.
The immediate impact of this trend toward
negotiating prices with industrials was slight,
however, the longer term implications were
greater. As industrial consumers mounted de
facto deregulation, fewer retail customers remained to pay for historical costs incurred by
the utilities and to bear the risks related to future capital spending and operating decisions
of the utilities. As a result, non-industrial customers also had a greater incentive to search
for marketplace alternatives to utility regulation. As a result commercial consumers and
residential groups, began to apply tactics similar to the industrials, including increased political involvement.
What is restructuring of the electricity sector? It is convenient to think of the electricity industry as made up of four functions, such as,
electricity generation (the simple production of
electricity, (b) transmission (the movement of
electricity over high-voltage lines from the generators to power substations in cities, towns
and rural areas), (c) distribution (the movement of electricity over lower-voltage lines
from power substations to customers), and (d)
marketing (the sale of electricity to customers).
For example the generation of electricity is
not a natural monopoly. Generation is inherently competitive, and should be recognized
as such by market rules governing the industry. Any sizeable electricity market can support many individual power plants of efficient
scale. Entry can also be facilitated with rules
that encourage new investments while protecting consumer and environmental interests. The
operation of these power plants is coordinated
over the electricity grid by an independent system operator without requiring the control of a
single owner.
Most regions in the world are served by integrated electric utilities, each of which performs
all four functions, from generating electric
power to selling it. These utilities established
monopolies in transmission and distribution,
which were extended into generation and marketing. Restructuring means that one or more
segments of the current system will be open
to competition, typically generation and marketing. Restructuring typically encompasses
five fundamental elements (with some regulation retained from an independent regulator, at
least in the initial stages), such as:
• Electricity generation is opened to competition with free entry of new power plants and
private contracts
• Transmission and distribution remain in the
hands of the utilities and under regulatory control because they are viewed as natural monopolies
• Marketing to consumers is opened to competition
• Electricity prices are free to move
• A range of market instruments, including
long-tern contracts, spot sales and marketmaking activities, is allowed and encouraged.
Other key elements may include ensuring
sufficient generation capacity (and fuel supplies) and also the encouragement of private
market-making activity to hedge the risks
from price volatility. A mixture of market instruments for conducting electricity sales is
important in creating well-functioning markets. Long-term contracts distribute the risks
between buyers and sellers and enable planning. Spot sales allow a response to changing
market conditions. 
SHORT BIO
Dr. Andreas Poullikkas holds a B.Eng. degree in mechanical engineering, an M.Phil. degree in nuclear safety and turbomachinery, a Ph.D. degree in numerical analysis and a D.Sc. higher doctorate degree in energy policy and energy
systems optimization from Loughborough University of Technology, U.K. His present employment is with the Electricity
Authority of Cyprus where he holds the post of Assistant Manager of Research and Development; he is also, a Visiting
Professor at the American University of Sharjah. He is a member of various national and European committees related to
energy policy issues. He is the developer of various algorithms and software for the technical, economic and environmental analysis of power generation technologies, desalination technologies and renewable energy systems.
87
Business
Yes!
There are Business
opportunities in the Balkans
While the hampered economic climate
continues to hover and trouble most countries and industries throughout the euro
zone, keeping the business community
reserved and cautious of undertaking on
new investments, the Balkan region may
well be the next “land of opportunity”, as it
is continuously gaining ground on becoming a key and steady choice of the international business world.
By Christodoulos
Damianou,
Eurofast, Director
In the past, politically driven rationale and
the underdeveloped infrastructure had
often made doing business in the region
difficult with many challenges. Lack of
confidence by the regions citizens in their
political leadership also lead to an increasing number of people relocating to seek
opportunities in other parts of the world,
thus losing one of its most valuable resources, its people. Even trade between
the countries themselves had been limited
due to the tendency of being suspicious
of political integration and each country
would individually look out for its own by
We encourage businessman to seriously consider expanding abroad and exporting their products and services.
88
focusing on doing business with the major
trading countries across the globe.
The key to business growth seemed to
lie in the development of an investment
friendly environment, building of bilateral
relations between the countries and implementing both economic and institutional
reforms. Competitive advantages such as
the low cost of labor, cheaper raw materials, the significant potential for rapid
growth in their economies, prospects for
privatization of state enterprises, the low
level of domestic competition and offering
favorable tax incentives would do the job
for the Balkan countries to attract investor
interest.
Influenced by the effects of the global financial crisis and prolonged economic
stagnation, desire to attract foreign direct
investment and the successful growth and
development achieved in other countries,
certainly has put pressure on politicians
to revaluate the status quo and take that
long awaited courageous step toward directing efforts in working closer together
with all stakeholders to develop economic
policies that will be able to improve regional
cooperation. It was inevitable that changes in
doing business within the Balkan region were
forthcoming in an effort to place the region on
a more sustainable growth path and capitalize on the true potential and advantages the
region has to offer as a whole.
The region sharing similar regulatory frameworks and a common vision of integration with
the European Union had no need to pioneer
and invent the wheel in institutional and economical reform. After taking into consideration
their own unique characteristics, it was sufficient to initially adopt and start by introducing business reforms that have already been
successfully implemented in other places
throughout the world. Recent years, indeed
have taken on a positive outlook once it was
now understood that competitive economies
cannot survive if they remained isolated and
building interdependency with their neighbors
had become a necessity, thus encouraging investment and trading linkages across borders.
ing, energy, telecommunications, education,
transportation, information technology, manufacturing, construction, food and beverages,
catering and entertainment. Thousands of
students are now attending universities. The
geographical location alone has been certainly
one of the defining factors and countries in
the region such as Serbia, Bulgaria, Romania,
Albania, FYROM and Montenegro can boast
that in their “neighborhood” there are more
than 45 million consumers which constitute a
sizable market to entice any investor.
We encourage businessman to seriously consider expanding abroad and exporting their
products and services. Together, we can
evaluate the benefits businesses can gain by
grooving internationally. Being a reliable regional partner, who has itself developed and
grown organically throughout the years in this
region, we are in a perfect position to guide
our clients and associates in the markets we
are present in.
Starting off with improvements in their infrastructure in key areas as such transportation,
communications, education, institutional and
economic reforms across the board began to
pick up the pace aimed at making it easier
to start a business and operations, obtaining financing, trading across borders, paying
taxes, obtaining construction permits, registering property, protecting investors rights
and improving the efficiency of commercial dispute resolution. As a result this lead
to significant savings for both domestic and
foreign entrepreneurs by decreasing the average cost and time to start up a business, to
process construction permits, register property and resolve commercial disputes. Significant changes were made and implemented
to their business regulatory environment and
complexity of processes, thus improving their
overall ease of doing business and developing the ability of attracting new foreign direct
investment.
...the Balkan region may well be the next “land of
opportunity”...
Nowadays, the Balkans present an attraction for many entrepreneurs from around the
world after tangible results are evident as a
result of taking charge and adopting a number of institutional and economic reforms. Doing business in the region has become much
easier and some of the main industries where
significant growth and development has already been acknowledged are those of bankACCOUNTANCY CYPRUS • VOLUME 110 • MARCH 2013
89
Business
Project Management:
Methodologies and Implementation
By George
Agathangelou *
Introduction
(Part 1 of 4)
In this series of articles I briefly describe
what is involved in Project Management
contrasting project management with systems development (the technical aspects of
projects). At the center of project management are methodologies (comprehensive
frameworks for managing projects). At the
end of project management is implementation (the final step in project management
when a system becomes operational) and
we will consider a range of different project
implementation strategies.
The main objective is to describe the management tasks involved in an IT project:
1)Strategic thinking – the good ideas and
opportunities that the strategic thinking
might reveal
2)Turning ideas into a more formal strategy
3)Turning IS strategies into projects.
In essence each project is a set of plans to
90
invest in, and develop, a specific system for
a specific business purpose
Project management versus
systems development
Both terms are concerned with the process
by which project definitions are converted
into working systems but they are not synonymous.
Project management mostly refers to
management tasks. These are the activities and responsibilities that normally fall
to general managers, functional managers
users and specialist project managers in an
IT project. They include, for example, allocating extra resources, monitoring finances
and the time schedule.
System development mostly refers to
the technical tasks. These are the activities and responsibilities that normally fall to
technical specialists and IT professionals.
They include, for example, writing software,
assessing the computer capacity needed and designing the way different computers are to be networked
together.
will be the balance between, and the co-ordination of,
the different disciplines, and a senior general manager
or director will wave the magic wand.
Success and Failure
However they are defined, it is clear that project management and systems development are at the heart
of the successful deployment of IT within an organization. IT projects tend to be far more visible, inside
and outside organisations, than strategies and technologies. Disaster stories in newspapers do not generally say there were too few creative ideas or that the
strategy lacked cohesion. Frequently, project failures
are blamed on poor project management and systems
development.
A methodology is intended to be a tried and tested
blueprint for IT projects. It usually takes the form of
a large documentary manual and/or software which
detail the step-by-step activities involved in carrying
through IT projects. As well as the step-by-step activities, a methodology will normally also propose how
projects should be resourced, the decision taking
structured and performance measured. In short, they
are comprehensive how-to-do-it guides and checklists
for IT projects. Some methodologies are management
oriented, for project management; others have a technical orientation, for systems development.
Looking more widely, a range of different research
publications has revealed the following problems:
• A project, completed on time and within the budget,
was abandoned after completion because the system
was no longer required.
• An implemented system was rarely used because it
was not user friendly.
• There have been several allegations of ‘stiffing’, that
is, an IT supplier in effect holding the client organisation to ransom at a crucial stage of a project.
In all probability the headlines mask the fact that the
root cause of failure lies elsewhere, for example in a
resistance to change, a superficial strategy or the imposition of IT systems on top of poor business and
management processes. However, it must also be true
that poor management and systems development can
by themselves ruin a project, perhaps undermining a
well-prepared strategy or wasting good change management.
Methodologies aim to be comprehensive, and they have
been added to as time has gone by and more experience gained. They are therefore complex: the manuals
describing them usually run to several large volumes.
To describe a methodology in its entirety would go beyond the scope of this article, but in subsequent articles I will discuss the different methodologies. One is
a systems development methodology, SSADM (Structured Systems Analysis and Design Method); one is a
project management methodology, PRINCE (PRojects
IN Controlled Environments). These are just two examples of a wide range of methodologies available and
in use.
*George Agathangelou
Professional Services Director
BSc CIT, MSc CSN
MCTS, MCSA, CCSE, CITM, DCUCSS, RSA CCE
HP-ASE, HP-APS, HP-ASP, STS, VSP, VTSP
IBSAC Intelligent Business Solutions Ltd
Whichever way we look at it, it is clear that projects are
the bottlenecks of the IS value chain and have to be
managed with care and skill. Given the large corporate
expenditures on IS that are now common, (more than
50% of capital expenditure in the West is on IT related
projects; surveys of annual expenditures also show IT
taking up a significant percentage of revenue, differing
from industry to industry) project management can be
thought of as a core competence.
The competence in project management can be tacit
in the sense that it is hard to write it down or pinpoint
its constituent parts. It will certainly be a mixture of different skills, abilities, responsibilities and processes.
Sensitive people management, strategic awareness
and alignment, political skills, financial expertise, IT
professionalism, good project management practice,
advanced technical expertise and more will be part of
it, and all of these factors will work together in an integrated fashion. But probably no one will really know
what exactly the crucial ingredients are or if there are
any crucial ingredients. Most likely the piece of wizardry
91
Business
Family businesses
Managing culture and behaviour in the family business
In the eighties and nineties, family businesses were often viewed as boring, obsolete, old-fashioned and lacking in innovation. Since the financial crisis this is viewed
in a different light.
By Paris Chrysostomou
Senior Manager
Family Business Services
PwC Cyprus
Family managing and supervisory directors are well aware of the importance of
culture and behaviour for the continuity
of their business. Family businesses are
much more focussed on continuity and on
the long term, through responsible management practices and sensible financing
arrangements. They take account of the
needs of employees, they invest in durable
relationships with suppliers and customers,
and they are well connected to their local
communities. This is the advantage of responsible management that characterises
many family businesses.
Family values as a source of
strength
The values, beliefs and ambitions of the
families behind these businesses form the
driving force behind this culture of sustainability. That culture is a product of the
ongoing interaction between the family
and the firms they do business with. Consciously or subconsciously, explicitly or implicitly, family values are passed down from
generation to generation, and they become
embedded in the culture, values and man-
92
agement of the family business. While a
strong culture can act as an extra impulse
for family businesses, it can also be a brake
on both change and growth.
The importance of family governance
An awareness of these negative forces and
the flexibility to adapt the culture to changing circumstances are both crucial factors
in the family business’ ability to grow and
survive in the longer term. In particular,
the current environment of increasing expansion and globalisation could lead to the
need, for instance, for strategic alliances
or private equity finance. On top of all this,
the family business has the additional pressures of generational change as managers
look to hand over in the coming decades to
the next generation or, indeed, to external
management now that internal succession
is no longer taken as read. These developments further open up the previously closed
circle of family, ownership and management, and this increases the need for good
governance, both internal and external.
The increasing need for focus on
family and core values
A PwC survey among 1,600 family businesses in 35 countries underscores the
need for boards to reassess family governnance and to put management through cul-
ture and behaviour high on their agendas:
• More than a quarter of the family businesses
surveyed will be handing over the management
reins within five years. Only 53% of these expect management to remain within the family.
The growing number of nonfamily managers
results in a growing gap between buesiness
management and the (family) owners.
• The vast majority of conflicts within family
companies are value driven. Conflicts relate
mainly to the performance of family members
who are active within the business, non-involvement of the family, decision-making as to
who can and can not work in the family business, and the role of inlaws.
sion and resolution of conflicts, such as shareholder agreements, family councils, external
mediation, a family charter or management
evaluation processes.
The dynamics and lifecyles of the
family business
The family business dynamics is described by
the three circle model listed below:
Family
Business
Ownership
• At the same time, only one third of the family
businesses have set up procedures for discusEach of the three elements – business, family and ownership – have their own stages of development within the lifecycle
of the family business and are described in the three-dimensional development model from Gersick et al.
Gersick, Kelin E., John A. Davis, Marion McCollom Hampton en
Ivan Lansberg, Generation to Generation. Life Cycles of the Family Business. Harvard Business School Press, 1997.
Business: A family business
begins as a start-up, gradually expands its activities,
increases the professionalism within the organisation, and ultimately reaches
maturity.
Family: The business from the very outset is a business
the younger family adults also work in, with the various
generations working together and eventually handing on
down the generations.
Ownership: The ownership aspects of family companies
develop at their own pace as the shareholdings disperse
across the generations and branches of the family.
Source: PwC Family Business Survey 2010/12
93
Business
Flexitime as a working time schedule:
How to increase productivity of the workforce by better
reorganisation of working time
“The majority (72%) of global businesses report that increased productivity is
a direct result of flexible working practices. In almost all cases (68%) firms
declare that flexible working has led to
staff generating increased revenue”
(Regus, Flexibility Drives Productivity, February 2012).
By Irene Antoniou*
Flexibility of working arrangements is an
important component of the European
Employment Strategy because it allows organisations to set financial measures (more
efficient use of workplace facilities, reduction of employment cost) as well as social
measures (increase of employee engage-
ment, support of employee work-life balance). This also allows organisations to be
more responsive to the unexpected market
demands and changes. As a result, flexible
working arrangements have caused a serious concern of today’s managers worldwide.
Defining flexible working as “a type of working arrangement which gives some degree
of flexibility on how long, where and when
the employees work” (http://www.cipd.
co.uk, August 2012), this includes a range
of diverse practices such as (Factsheet,
August 2012, http://www.cipd.co.uk):
PracticesDescription
Part-time working
employers are contracted to work anything less than full-time hours
Term-time working
a worker remains on a permanent contract but can take paid/unpaid leave during school
holidays
Job-sharing
a form of part-time working where two (or occasionally more) people share the
responsibility for a job between them
Flexitime
allows employees to choose, within certain set limits, when to begin and end work
Compressed hours/ weeks
reallocation of work into fewer and longer blocks during the week (this doesn’t necessarily
involve a reduction in total hours or any extension in individual choice over which hours are
worked)
Annual hours
the period within which full-time employees must work is defined over a whole year
Working from home
workers regularly spend time working from home
Teleworking
this permits employees to work all or part of their working week at a location remote from
the employer’s workplace
Career breaks
career breaks, or sabbaticals, are extended periods of leave – normally unpaid – of up to
five years or more
51% of employees report that part-time working is the most commonly
provided flexible working arrangement in their organisations. The next
most commonly provided flexible working practices are flexitime (31%),
working from home and mobile working (24% for both) and career breaks
or sabbaticals (22%).
Source: CIPD, Survey Report, May 2012
94
Beware! Although the evolution of flexible working has
been evolved with the changes in employment legislation that supports employees (e.g. the right to request
flexible working hours); the question is how a flexible
working arrangement might enhance productivity and
boost financial benefits, and whether there are barriers
to apply flexible working in workplaces.
How does this work? Flexitime helps employees
be able to choose their time of arrival to and departure from work within the limits set by their employer. Working hours might be spread according
to the imposed restriction of core working hours
which are the periods when employees must be
at work (09:00-17:30) as it is shown in Table 1.
Table 1. Example of flexitime arrangements
“Flexible working time arrangements are in operation The question is whether staff and employers conin almost half (48%) of workplaces with 10 or more sider flexitime to be beneficial for the same reasons.
employees in Europe”.
According to HR managers, the introducSource: http://www.deloitte.com/
tion of flexitime arrangements cause highEuropean research, June 2006
er job satisfaction (61% of HR managers).
Despite the existing negative feeling about ‘flexibila- Other positive outcomes of flexitime:
sation’ which is tied with the labour market insecurity
• Greater capacity to adapt to varying
in Cyprus (Social and Employment Situation in Cyprus
(August 2012, p. 21), http://www.europarl.europa.eu), workloads (54%),
the main focus of the current paper is on the positive • Reduced absenteeism (27%),
impacts of flexitime on employees and employers in the • Reduced paid overtime (22%)
light of the required measures of the Troika (July 2012)
when the delegates looked at imposing strict conditions Source: European research, June 2006,
aiming at the capital requirements of the country’s pub- http://www.deloitte.com/
lic and banking sector assessment (Cyprus).
“77% of managers across Western European countries believe that flexible working increases employee
productivity by 46%”.
Source: http://www.microsoft.com/
February 2012
The main emphasis in the current paper excludes considerations of employees’ requests for flexible working
due to their personal reasons such as taking care of
their relatives, maternity or paternity leaves, but focuses on flexitime which is initiated by managers when
they want to ensure that the needs of both employees
and their business will be accommodated by making
amendments to the working time.
According to Aristotle, “it is well to be up before daybreak, for such habits contribute to health, wealth, and
wisdom”, however we need to keep in mind that the
ability to vary the start and end of daily working time
might help managers to increase productivity of their
employees. How? This might be achieved by adapting
the working time to individual needs due to their physiological rhythms. Thus, working with staggered start
and finish times might be highly beneficial both for organisations and individuals.
Type
StartFinish
1st type
08:00
16:30
2nd type
08:30
17:00
3rd type
09:00
17:30 Standard schedule
4th type
09:30
18:00
What are the benefits of flexitime for employers?
• It has a positive impact on staff retention (e.g.
enhanced employee motivation, employee engagement)
• It might help to attract and retain skillful staff
• It helps to increase commitment and productivity
since flexitime allows employees to work when they
are at their best (some employees prefer working
early in the morning, other later in the afternoon due
to their physiological rhythms)
• It helps to reduce employment cost (e.g. lack of
intentional absenteeism and tardiness)
• It helps to enhance public image (e.g. the manager who cares about employees)
• It might have a positive effect on customer service
due to extended hours of work (e.g. in case when
organisation has international clients and there are
slight differences in time zones)
What are the benefits of flexitime for employees?
• It helps to match the personal and working needs
due to the increased diversity of life styles, consequently it helps to achieve better work-life balance
• It helps to stay healthy by allowing more time for
exercising when required (reduction of stress)
• It helps to be more productive (due to adaptation
to individual physiological rhythms, so-called biological clock).
However, managers might face difficulties when
adopting flexitime in their companies: so-called barriers to introduction of flexitime might come into play.
However, to be INFORMED is to be FOREARMED!
95
Business
Examples of barriers to flexitime might be
found in the following paper (CIPD, Survey
report, May 2012):
• Line managers’ ability to effectively manage flexible workers
• The nature of the work
• The role of trade unions
• Existing organisational culture (when
organisational culture does not provide a
sufficient support, e.g. lack of support for
sharing practices could restrict success of
flexibility)
Thus, flexitime should be very carefully
planned and designed in order to ensure
that the preferences, the needs of employees and their work duties as well as customer needs are taken into account.
It is most likely that a combination of barriers might be found
in organisations
What should be done by managers before applying flexitime?
• The task of a manager is to introduce
flexitime working arrangement that will allow employees to adjust their start and finish times but still provide adequate cover of
their working duties and service delivery
• To ensure continuity of work and service
delivery (e.g. adequate HR planning in respect to the existing workload)
• To ensure that the equal access to flexitime is provided to all employees
• To be sure that equality exists in terms of
performance assessment, promotion and
training activities
• To review regularly flexitime arrangements of employees
• To maintain communication with employees regarding the required work outputs or
96
the possible difficulties which appear
• To maintain interaction among employees in order to help them feel coordinated
by working in mutually respectful organisational culture (e.g. regular updates of the
working results)
Some organisations actively respond to the
current economic crisis by cutting salaries
and employee numbers. However, there is
an instrument that when applied correctly,
might help to reduce a pay bill by maximising WIN-WIN satisfaction of both parties
(managers - employees). Reorganisation
of working time (flexitime) is likely to lead
to a number of positive outcomes such as
increased productivity and customer satisfaction, employee engagement, loyalty, and
as a result better revenue growth. Above all
of these, flexitime might minimise damage
to the reputation of the organisation in the
market due to enhanced corporate social
responsibility.
Irene Antoniou*
B.Sc., M.Sc. in Social Psychology
M.Sc. in Management in Organisations
PhD candidate in Social Sciences
Commitment to Excellence
In Business Awards 2012
Globaltraining was voted as the best organization in the
“Services” category in Cyprus, in the “In Business Awards” of
the year.
This latest recognition at the 2012 “In Business Awards” highlights the success and overall contribution
of the organization – and is a testament to the trust which both the public and employers place in the
quality of the educational services of Globaltraining.
CYPRUS
46 Makedonitissas Ave.,
P.O. Box 24005, 1700 Nicosia
Tel: +357- 22841500
Fax: +357- 22357484
[email protected]
92 Ayias Phylaxeos Str.,
P.O.Box 51604, 3507 Limassol
Tel: +357- 25381180
Fax: +357- 25386982
[email protected]
52, Famagousta Avenue,
6019 Larnaca - Dhekelia Road
Tel: +357 - 24747500
Fax: +357 - 24652213
[email protected]
GREECE
265 Mesogeion Ave.,
Neo Psichiko, 15451 Athens
Tel: 30210 - 6722868
Fax: 30210 - 6729629
[email protected]
ROMANIA
31A Economu Cezarescu Str.,
Sector 6, 060754 Bucharest
Tel: 4031- 4253663
Fax: 4031- 4253662
[email protected]
www.globaltraining.org
Internal Audit
The future of Internal Audit is now
On behalf of EY, Forbes Insights conducted
a global survey about the evolving role of internal audit. The report, the future of internal
audit is now, details findings from the 795
Chief Audit Executives (CAEs) and C-suite
executives who responded. 80% acknowledged that their internal audit function has
room for improvement, with 70% feeling that
improvements should be undertaken within
the next 24 months.
Dr. Aristodemos
Yiannakas,
Senior Manager,
Ernst & Young Cyprus Ltd
98
75% of respondents believe that strong risk
management has a positive impact on their
long-term earnings performance and an
equal number agree that their internal audit function has a positive impact on overall
risk management. The report supports EY’s
point-of-view that internal audit functions can
turn risks into results and suggests four steps
leading internal audit functions need to take
to realise strategic alignment, increase its
relevance to the business and help the company achieve a risk maturity that accelerates
stronger financial performance. They are:
• Using the organisation’s overarching business strategy to identify the risks that matter
most and set the tone for an internal audit
strategy;
• Developing an internal audit-specific strategy with a three- to five-year time horizon
that focuses on stakeholder expectations,
coordinated risk functions and drives internal
audit initiatives;
• Employing critical enablers throughout the
internal audit life cycle, such as an organisational structure that aligns to the business
and fits the organisation’s culture, and an appropriate talent management program that
ensures internal audit has the right people
with the right skill in the right positions;
• Running internal audit like a business by
employing data analytics to drive enterprise
efficiencies and results and by designing a
value charter and scorecard that define how
value to the organisation is measure and
whether internal audit is achieving its goals.
The key priorities of both CAEs and stakeholders have clearly shifted from compliance
and financial controls to risk coverage and
business relevance. When asked about the
future of their internal audit function — where
they most need to make improvements —
respondents indicated the following top five
priorities:
1.Improving the risk assessment process;
2.Enhancing the ability to monitor emerging
risks;
3.Becoming more relevant to achieving the
organisation’s business objectives;
4.
Reducing overall internal audit function
costs without compromising risk coverage;
5.Identifying opportunities for cost savings in
our business.
The survey results further suggest that internal audit will continue to focus on a mix
of business and information technology reviews, with an increased emphasis on strategic and operational risks. Internal audit risk
assessments, regulatory requirements and
enterprise risk assessments will remain the
top three drivers of the audit plan.
No longer an annual process, the audit plan
must be refreshed regularly (e.g., quarterly)
and with triggering events. Leading functions
are developing a “3 + 9” plan — a threemonth frozen window and nine-month fluid
plan. However, 40% of CAEs surveyed still
rely on an annual refresh process. Internal
audit must develop an audit plan that focuses
on organisational strategic imperatives and
key business risks identified during the risk
assessment, including an appropriate blend
of:
• Advisory and assurance reviews. The key is
finding the right balance between assurance
and advisory when developing the internal
audit strategy. Inputs to this balance include
Audit Committee and Management expectations on the one side and company or business initiatives on the other.
• Thematic audits. In the survey, nearly onefifth of respondents indicated that they would
like to see improvements to internal audit
reporting by putting issues into perspective
relevant to the risk and identifying trends.
Thematic audits are one way of doing this.
Themes should be tailored to the sector, organisational structure, business life cycle and
strategy.
• Issue-based audits. These audits can be
planned in advance, aligned to the business strategy or ad hoc based on business
requests or unexpected events that occur
throughout the year. Internal audit would also
be wise to build time into the audit plan for
potential ad hoc issues.
With the right internal audit-focused strategy
in place, internal audit can add value to the
business by becoming strategic advisors,
identifying efficiencies across the enterprise,
supporting key business initiatives and quantifying internal audit’s return on investment.
Ernst & Young’s global internal audit survey
results confirm that the future of internal audit is now. Internal audit functions need to act
now to remain relevant to the business or run
the risk of being left behind.
Thinking
ahead of
tomorrow
Fiduciary and Trust
Family Office
Wealth Management
Asset Management
Funds
Advisory
Investments
Listings
There are no typical clients for us.
From young enterprises to global corporations, from high net worth persons
to their families and consultants.
We learn what you want to do and we help you create the value that you aspire
to achieve. And we are on your side, all the way.
GROUP ONE
Oneworld ltd
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One Plus Capital ltd (licensed by CySEC)
One Plus Ventures ltd
Head Office: 75 Prodromou Avenue
Oneworld House, PO Box 25207
Nicosia 1307, Cyprus
T +357 22496000 F +357 22493000
ACCOUNTANCY www.onegroup.net
CYPRUS • VOLUME 110 • MARCH 2013 99
Fraud
Corruption in Cyprus:
Perceptions and suggestions
By Maria KrambiaKapardis *
The effects of corruption have been outlined
by many authors as to have devastating impact on the economic and political development where there is no respect for the justice system, property rights or banking and
credit. At the same time corruption reduces
the efficiency of both private and public organizations; affects the daily lives of common citizens; affects democracy; creates
an inefficient government system; hinders
economic growth; increases business
costs. The social impact cannot be ignored.
It has been noted by some authors that “the
higher the levels of perceived corruption in
a society, the more citizens see it as justified” (Dong et al. 2011). Cognisant of the
socio-economic not to mention the political
impact on the economy and the passion for
zero tolerance for corruption, Transparency
Cyprus has been actively involved in identifying anti-corruption measures and raising
awareness as well as building capacities on
the topic.
Transparency International Cyprus (TI-Cyprus) is a National Chapter in formation of
Transparency International. It was formally
established in January 2011 and its aim and
vision is one of combating corruption. More
specifically, TI-Cyprus is a non-profit philanthropic NGO, politically non-partisan and
does not investigate cases of corruption.
However, it does receive complains which it
forwards to the relevant regulatory authorities for investigation. Due to the TI- Cyprus
Board’s hard work Transparency International accredited the local body to use the
full name of the international organisation
in March 2013 i.e. Transparency Cyprus is
renamed Transparency International Cyprus
(TI- Cyprus) .
TI-Cyprus’s mission is to contribute to the
strengthening of civil society and to improve
the quality of public and private sector governance in Cyprus by promoting transparency, integrity and accountability. Some of its
main priorities include raising awareness of
the damaging impact of corruption, as well
as empowering and encouraging citizens to
participate in the fight against corruption.
One of the actions of Transparency Interna-
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tional is the preparation of an annual Corruption Perception Index (CPI) which aims
to measure the discrete level of corruption
in 176 countries. In the last 3 years, Cyprus
has had, on average, a stable position in
the CPI rankings (i.e. countries ranked as
1 have low corruption perception). Countries perceived to have the lowest perception of corruption in 2012 were: Denmark,
Finland, New Zealand, Sweden, Singapore,
Switzerland, Australia and Norway. Globally, in 2010, Cyprus was ranked 28th, in
2011 it was ranked 30th and in 2012, 29th.
In the EU region, Cyprus was ranked 15th.
Greece was ranked 94th on the global rank
and 30th on the EU regional rank.
TI-Cyprus in its efforts to find detail information on corruption perception issues in the
Republic of Cyprus has been carrying out for
the last three years an annual survey. Three
research questions addressed in this paper
include: (a) which actions/types of behaviour are perceived as corrupt, (b) what are
the causes of corruption and (c) identifying
the perceived level of corruption in various
decision-making bodies.
The 2013 survey, administered SeptemberDecember of 2012, covered 953 respondents in all major towns of Cyprus. All the
age groups were represented in the study,
18-30 year olds (39%), 31-40 (21%), 4150 year olds (19%), 51-60 (13%) and 61+
(8%). The vast majority (61%) are university
graduates, depicting the highly educated
level of Cypriots. Women comprised 49% of
the respondents. As far as the place of employment, 50% worked in the private sector, 26% in the public and semi government
sector and the rest were not working.
In responding to the first research question,
TI- Cyprus has found that the following actions/behaviours are considered by most respondents as corrupt acts: (a) giving money
or other consideration for an academic qualification (90%); (b) giving money or other
consideration for obtaining a driver’s licence
(90%); (c) giving money or other consideration for reduction in taxes (89%); (d) giving money or other consideration to receive
a building permit (86%). As illustrated in
Figure 1 below, the extensive corruption awareness activities organised by TI- Cyprus since its
inception (including the two public discussions
held in 2012 under the auspices of the Cyprus
EU presidency) have proven useful in raising
awareness and building capacities on the issue
of corruption. For the first time in the history of
Cypriot elections, politicians were making election promises on anti-corruption measures and
even disclosed their personal and family assets,
voluntarily. A goal reached by TI-Cyprus sooner
than expected.
Figure 1: Acts perceived to be corrupt
The respondents believe the main causes for corruption
in Cyprus are: (a) the lack of willingness by politicians to
fight corruption (88%), the lack of real punishment (87%)
and the lack of meritocracy (87%). The issue of meritocracy and zero tolerance of corruption by the Cypriots
will need to be promoted further through educating the
younger generation. TI-Cyprus in the new academic year
will launch an education campaign starting from children of
primary school age. It is worth mentioning that the meritocratic principle was established in Sweden in 1719 and
from 1809 it received Constitutional protection. If we want
to achieve the corruption levels of Sweden we ought to
follow their examples not those of countries in the lower
pendulum of the CPI.
The third research question covered in this article, is the
category of people/professions perceived as the most corrupt. The respondents stated that politicians rank the highest (96%), followed by the public servants responsible
for public procurement (94%), local authorities (93%) and
officials at regional and local level (93%) as well as the
Police (93%). In line with the findings of the two previous surveys by TI-Cyprus, the respondents continue to
perceive that politicians are the category of people who
abuse their position and power for personal gain the most
out of all the categories of people listed in the question.
Given this perception expressed by the respondents and
in an effort to encourage politicians to act upon corruption,
TI-Cyprus has submitted to the newly elected government
their suggestions on anti-corruption measures to be taken
(please see http://www.transparencycyprus.org for the
full publication).
The rrecommendations to the newly- elected government
include: (a) that a National Anti-Corruption Strategic Plan
be drawn up; (b) an Independent Commission Against
Corruption ought to be formed; and (c) an Anti-Corruption
Commissioner be appointed. More specifically the proposal
: (a) makes 10 suggestions to improve electoral accountability through political strategies and policies; (b) suggests
the enactment of a Whistleblowing Protection Legislation
as well as other institutional and law enforcement measures; (c) makes six suggestions in improving public administration; and, finally, (d) it makes a number of recommendations for an efficient and effective state-owned and
state-controlled entities and suggests anti-corruption preventative measures to be taken should privatisation take
place.
TI-Cyprus is based on the principles of Transparency,
Accountability, Integrity, Solidarity, Courage, Justice and
Democracy. Membership to the organisation is free and
the Board is looking for volunteers to help out in the aim
of combating corruption, raising awareness and building
capacities.
Reference:
Dong, B., Dulleck, U. and Torgler, B. (2011) Conditional
Corruption, Journal of Economic Psychology 33(3), 609627.
* Maria Krambia- Kapardis (PhD, M.Bus, B.Ec., FCA, ACFE) Associate Professor of Accounting, Cyprus University of Technology, Chair of the ECFA –ICPAC Committee and Chair of the
Board of TI- Cyprus.
101
Fraud
FORENSIC
ACCOUNTING:
Using Computer Forensics
to Uncover Financial Fraud
By Rakis
Christoforou
BBA, CPA, ABV, CFF,
CGMA, ACFE
The Evolution of Computer Forensics
Since the World Wide Web (www) revolution
in 1991, significant growth has taken place
in the use of computers, internet, e-mail,
and recently cell Phones for committing Financial Fraud and other criminal activities.
Because of this new development, forensic
accountants in their struggle to uncover financial fraud are now looking not only for
evidence in the form of paper work but also
electronic evidence, commonly known as eevidence. Computer Forensics evolved during the last two decades as the main tool for
the discovery of electronic stored information that could be used in the court.
Defining Computer Forensics
Computer forensics is the application of
computer investigation techniques to gather
e-evidence suitable for presentation in a
court of law. The goal of computer forensics
is to perform a structured investigation while
maintaining a documented chain of evidence
(also know as chain of custody) to find out
exactly what happened on a computer and/
or other electronic devices and who was
responsible for them. The Internet history,
web-based email, lost or deleted files are
examples of data the fraud investigator can
utilize as evidence in his engagement.
There are some unique aspects relating to
computer forensic investigations compared
to investigations looking for evidence in the
form of paper works.
Paper Work VS Electronic Evidence
Until when paper only discovery was used
Forensic Accountants and Lawyers asked
for and received truckloads of paper documents, sometimes brought in from distant
places. Their strategy involved finding evidential matter in the form of paper work that
would help them prove a matter of fact.
Strategies did not change much since then
but the nature of evidence in the form of eevidence did. E-evidence in our days may fill
supertankers if it were to be printed. This
is so because now much more transactions
102
are computerized than before. Moreover,
people nowadays use computers and other
electronic devices at work for personal purposes as well, and therefore much more information is stored electronically.
Living and Working in a Recorded World
In our digital world people, including fraudsters, leave digital footprints of their activities from which their actions and intentions
can be revealed. Digital evidence comes in
many forms, including the hard drives found
in personal computers, external drives, telephones, smart phones, personal data assistants, surveillance cameras and telephone
voice mail systems.
Consider only some of the ways that data
originates and is recorded:
• A manager e-mails his colleagues instructions on how to contact new customers; a server stores the e-mail in the manager’s and recipients’ mailboxes.
• The same manager forwards a funny email to a select friends and business colleagues. Again servers store the e-mail in
multiple locations in the organization.
• A member of the Information technology department comes to the office late at
night, copies a proprietary program code to
a USB device, puts it in his pocket and goes
home. Management did not detect it but the
computer registry recorded it.
• An assistant schedules a lunch meeting
on her manager’s calendar. Three devices
record this meeting: The e-mail server; the
manager’s personal data assistant (PDA)
such as a BlackBerry, iPhone/iPad or some
other device and the manager’s home computer when he launches Web access from
his home.
• A manager charges lunch and other personal expenses on the corporate credit card.
Several systems record this transaction: the
merchant’s systems, the issuing bank’s systems, the acquiring bank’s systems, and the
payment processor’s systems.
• An assistant comes to his office early in
the morning before his manager, deletes a
personal file, prints an important confiden-
tial document from his computer, makes copies
of this document and faxes or scans it from his
office to a competitor of the company. What he
does not know is that the machines he used have
storage mechanisms and that his actions could be
revealed.
• The business day dawns, and each swipe of a
parking pass and building access card creates a
record in a security database.
• Logs are now kept every time an employee
locks into a system, visits particular websites and
logs off early to go home. Thus the employer
knows how many ours the employee worked efficiently for the company.
The amount of information left in each of the
above devices often proved to be the basic reason that sufficient relevant evidence was collected
and financial fraudsters and other criminals were
caught and found guilty in a number of known
cases. In some cases fraudsters thought they
have destroyed their digital trails by deleting the
relevant files, but this did not prove to be the case.
Deleting a file is not so easy
Modern computer forensic software can find or retrieve evidence much sooner than in the “old days”
where the process could take many days. Deleting files from hard drives is not so easy; deleting
is in fact a misnomer. Choosing the delete option erases the file’s reference from the directory,
but it does not erase the file until it is overwritten
entirely.
Furthermore, businesses have disaster – recovery
systems that perform automatic backups. Therefore, even if a particular file was never saved or it
was deleted shortly after it was created, it might
still be retained on multiple backup media. Most
files usually contain metadata, additional data
about original data, that can provide the investigator with important relevant information.
The Creation of Metadata
When files and messages are saved, modified or
sent, computer software automatically creates artifacts or metadata. Normally this information cannot be changed. Most times metadata includes
information about the date the document was created, who created the data, when it was modified
etc. This may prove to be an important e-evidence
to be used in court because metadata can be as
revealing as a fingerprint.
When Enron declared bankruptcy in December
2001, much of the investigation relied on computer files and their metadata as evidence. A specialized team of Forensic Accountants, Computer
Forensic experts and Lawyers began to search
through hundreds of Enron employee computers
and were able to find important e-evidence that
was used in court.
Aspects to Consider when Dealing
with Electronic Evidence
E-evidence tends to be more complete, can prove
intent and is hard to deny. At the same time there
are some aspects that must be taken into consideration when dealing with a computer investigation.
- Computer Forensic investigations may prove to
be very costly because specialized skills and software may be needed in order to properly retrieve
relevant information without changing or damaging it,
- It is an area that is constantly evolving. Recently programmers began to design anti-forensic
tools to make it hard to retrieve information during
an investigation,
-We are now experiencing a shifting from desktop computers to handheld devices (e.g. cell
phones) and additional technical knowledge is
needed to retrieve information from these devices,
- The Achilles heel of e-evidence is that lawyers
and judges involved in a case may not always understand the accounting and technical details of
the case, and as a result, not appreciate the relevance of e-evidence without the help of a forensic
accountant and/or a computer forensic expert.
Conclusion
As evidence is increasingly electronic in nature,
the importance of using computer forensic techniques to uncover evidential matter in a financial
fraud investigation cannot be understated. Electronic evidence (e-evidence) is trace evidence,
which is an extremely fragile and often high-value
form of evidence that tends to be undetectable to
the human eye. Just like other forms of trace evidence, e-evidence must be collected, preserved
and handled with care by professionals who know
how to collect evidence and prepare it for judicial
cases. If evidence is destroyed or modified then
the case could be lost in court.
Note:
Mr Rakis Christoforou is the first Cypriot to be holding the CFF (Certified in Financial Forensics) and ABV (Accredited in
Business Valuation) Certifications. He is a member of both the AICPA (American Institute of Certified Public Accountants
– Forensic & Valuation Services section) and ACFE (Association of Certified Fraud Examiners). He is also a member of
ICPAC and ICPAC’s ECFA (Economic Crime & Forensic Accounting) Committee holding the position of Vice-Chairperson.
103
Fraud
Accusations about money laundering
By Tasos Yiasemides
Principal at
KPMG Limited
104
The Republic of Cyprus has been lately accused by international media as well as by
foreign politicians about money laundering
issues and unclear procedures. Moreover,
there is discussion about the existence of
a tax haven providing refuge to frugal Russians.
It is understood that the specific categories
are redirected in such a way so that Cyprus
is undermined as a financial services centre.
Competitive centres consider our difficult financial position as a first class opportunity
to affect the country, envying the foreign
deposits in the Cypriot banking system and
the investments that are carried out through
Cyprus.
The Cyprus tax regime has been approved
by competent European bodies during the
country’s accession in the European Union
and no comparison can be carried out with
tax havens.
Cyprus, due to the double taxation agreements that it has signed with other countries, is used by many international groups
during their restructurings, since the Cypriot
holding company regime is widely known.
Similar regimes exist in Malta, Luxembourg
and the Netherlands.
It is noted that Cyprus is fully compliant
with the European directives regarding the
procedures of money laundering prevention
and this is mentioned in the Moneyval report.
Moreover, the banking sector in Cyprus is
under the supervision of the Central Bank of
Cyprus and of the European Central Bank.
Strict control procedures are followed for
capital transfers and when accounts are
opened.
The Cypriot Parliament has voted unanimously all the legislations which were asked
by Troika and which concern money laundering. One of the most important is the
one that regulates the supervisory frame
for companies which provide administrative
services to investors with international activities.
Despite the fact that the legal framework is
considered sufficient there is always space
for improvement. The European Commission has suggested two legislative propositions for the enhancement of the current
rules regarding the elimination of the legalization of income from illegal activities and
capital transfer. According to the announcement the strictest communal legislation is
necessary because the threats connected
to money laundering are constantly evolving, something which requires regular rule
updating.
It is pointed out that certain cases, worldwide, have seen the light of publicity and
concern serious cases of money laundering. In these cases it seems that well-known
banks have played their part.
Cyprus has managed to attract foreign investments due to its tax framework, the
high quality of services which are provided
by the Cypriot professionals and the trust of
foreign investors.
A change in the current business environment might create insecurity among investors, thus shrinking the services sector. In
this case chained reductions would arise
in the country’s GDP, since the services
sector is an important percentage and the
possibility of the loan’s repayment would be
under doubt.
As a state we are ready to accept any review regarding the accusations about
money laundering. It is understood that the
procedures must continue with fast rhythms
so that the final loan agreement is signed in
March. However, such a review would be
better to be carried out by an institution of
the European Union and the International
Monetary Fund, so that the credibility of the
financial institution is not further affected.
It is required that the country’s constitution
and the European legislations, more especially when we refer to personal data, are
respected by everybody.
It is also required that, as a first step, the
services sector is ensured and as a second
step its enhancement with the update of the
tax legislations, the provision of motives, the
enhancement of the Cyprus Securities and
Exchange Commission, the promotion of
the Merchant Shipping and the precipitation
of all the procedures which concern the creation and operation of businesses in Cyprus
is achieved.
IT’s
all about
105
Fraud
The Cyprus EU
bailout and the
money laundering
Spanner in the works
By Costas Apostolides,
Economist*
The issue of money laundering in Cyprus
was raised by the finance ministers of Germany, Austria, the Netherlands and Finland
in recent weeks, plus articles in the German
press, built up into a crescendo over the past
week, just at the time that Russia implemented the agreement with Cyprus and took
the island off their black list. It is an important issue that some state could derail the
Cyprus EU bail out efforts, but research undertaken has shown that money laundering
occurs everywhere, with the most eye catching cases being the 2008 spat between Euro
giant Germany and ant sized Liechtenstein,
the British HSBC the largest bank in Europe,
and the Vatican laundering embarrassment.
Serious as the problem is, one cannot but
laugh when watching Jon Stewart’s Daily
Show (1.9.2013) entitled “Disgraced Financial Institution” and subtitled “Bank Wankers” with reference to HSBC’s acknowledgment of their money laundering activities.
The Minister of Finance speaking on the radio stated that Monday’s Eurogroup Meeting was difficult and the money laundering
issues were brought up, including the idea
that there would be an inspection. But he
stated that the inspection is the work of
the International monetary fund, which has
looked at the issue during a September mission, found that the legal framework was
in place, and made recommendations for
improvements which were immediately adopted by the Government. He added that
the Memorandum for assistance for Cyprus
will include a section on money laundering
which will set out measures that Cyprus
must examine on the issue and that this will
be monitored. He gave no indication that this
would derail the Cyprus bailout, and if any
issues do arise the strategy is for this should
continue to be the role of IMF.
If you live in a glasshouse you do not throw stones.
It is clear to me that former Minister Shiarly
was doing a good job and taking great responsibility for his actions under difficult
circumstances. In effect Shiarly and Central
Bank Governor Demetriades had taken the
106
reins of Government in their hands during
the period of a lame duck presidency.
My view however is that money laundering
is a worldwide problem that takes place in
all countries, and it is difficult to identify and
to control in practice. But before proceeding
to show how widespread money laundering
is it is important to show the ulterior motives
of Germany and the other countries in raising the issue because there are more profound reasons for emphasizing the issue at
this time.
The conservative economics of the northern
block of Eurozone states has a long term
strategy which shows up the ulterior motives
which are as follows:
1.Taxes in the EU should be brought into
line, upwards to be closer to their own levels.
This includes VAT, where some harmonization is in place through the mandatory minimum level, but more importantly corporation
and personal income tax. They are afraid
that lower taxes in Luxembourg, Ireland and
Cyprus attract northern companies and act
as sources of tax evasion. The British Channel Islands and Gibraltar are not in the EU
but are competing centres.
2.There should be closer EU co-operation
on tax evasion.
3.They intend to squeeze the countries
requesting financial assistance in order to
get their objectives and to reduce legal loop
holes to tax evasion.
4.They classify tax evasion, whether legal
or illegal as money laundering.
5.They illegally use legislation for countering terrorism and the financial resources of
terrorist organizations, as well as associated
laws on gathering information on terrorism, to get data on tax evasion. It should be
noted that the articles on money laundering
in Cyprus in the German press were based
on German intelligence reports (EuropeanVoice.Com 24.1.13).This poses a challenge
to individual freedoms and a free society,
fundamental principles of European society.
The aim of the northern block is to force all
EU states to come into line with their own
www.pwc.com.cy
Tax Facts &
Figures
2013 - Cyprus
The tax system in
Cyprus
Please scan with your
smartphone to find the
electronic version of the
publication.
All of us in PwC are here to offer you our knowledge and expertise and
to support you in achieving your personal and corporate tax goals. The
specialised solutions we offer to you are adjusted to your own needs and
will support you in structuring your tax operations in an efficient way.
The guide is available free of charge at the reception areas of the PwC
offices all over Cyprus. You may also find the guide in electronic form
on our website.
© 2013 PricewaterhouseCoopers Ltd. All rights reserved
107
policies, something Luxemburg, Ireland, Cyprus and Malta have resisted to date. They
are now using the economic crisis in Ireland
and the South to push forward their policies,
through implicit and explicit blackmail (concede or no bailout), and by pushing money
laundering issues which opens up the spectre of dealings with organized crime, terrorist
affiliates , rogue states and other undesirable
holders of funds. While tax evasion is now
considered a crime irrespective of whether it
is actually legal or not.
The reason that I believe Cyprus should
open up a European wide debate is that the
problem of money laundering is a worldwide
issue, and Caribbean and Pacific tax havens
apart, money laundering is mainly focused
in the world’s major financial centres. The
following examples illustrate the problem:
The Vatican has been cut off from credit card
transactions important for its tourism earnings because of “lingering questions about
the Vatican’s involvement in a 2010 money
laundering case” that is being investigated
by the Italian monetary authorities (Catholic
World News 8.1.2013).
HSBC, the biggest bank in Europe, conceded that it was involved in money laundering
through its New York operations and agreed
to $1.9billion to the New York regulators, to
settle a probe involving Mexican and Columbian drug barons and prostitution earnings.
No criminal actions were pursued against
the staff or officials of the bank though $200
trillion were involved in transactions (TrustLaw-Reuters). Since it is a British bank and
its worldwide network was used, it seems
odd that there are no news reports of investigations by the British or European authorities (The Daily Show is recommended on
YouTube).
In December the German police raided
Deutsche Bank and held leading officials
within a probe involving alleged tax fraud,
and money laundering that is considered to
have been undertaken through the EU carbon emissions trading system. Deutsche
bank was also investigated in a US money
laundering probe (Bloomberg 23.1.2013)
and is seeking $557 mln on a defaulted
loan linked to money laundering indirectly
associated with the disgraced Chinese communist leader BO Xilia (www.wantchinatimes 9.1.2013). Furthermore Standard and
Chartered, Barclays, Credit Suisse, Lloyds
and ING have been investigated in relation
to money laundering from Iran, Cuba and
108
North Korea.
In Malta there is a case fit for a Hollywood
thriller where a former diplomat from Kazakhstan has been tried in his homeland for
two murders of bankers, and the Austrian
authorities are investigating his involvement
in money laundering in his new place of residence on the island.
One of the most upsetting cases, however,
is that of the 2008 German-Liechtenstein
Affair, where the German intelligence acquired for over €4.2 mln data from a computer technician with the names of Germans
avoiding taxes in Liechtenstein (Wikipedia
quoting Suddeneutsche Zeitung). The Germans then pressured the small country to
cooperate with them. But this raises issues
of data protection law, cooperating with a
data thief, and the illegal use of intelligence
services for investigations for private actions.
With respect to Cyprus it is clear that the
country is trying to cope with the frequent
changes in money laundering and taxation
law, and the situation is improving all the
time. The legal environment here is actually
stronger than in Germany and surprisingly
Luxemburg. But with thousands of companies registered in Cyprus and the Registry
of companies in unsuitable buildings, understaffed and still behind in digital records
and access to information, we have to invest more in building up the capabilities of
the Registrar. At the same time the private
sector has to wake up and organize itself so
as to get more information on applications
for company formation before they proceed.
They have an obligation to investigate their
clients before creating new companies
The lesson from all this is the old proverb “If
you live in a glasshouse you do not throw
stones”.
*Costas Apostolides is Chairman of EMS Economic management Ltd ([email protected]).
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109
IT
The Excel Wizard
Question: What is the best approach to
extract data in Excel from another software like an ERP package?
By Stratos
Panayides,
BA(Econ),
ACA – Training
Consultant at
AKTINA
Wizard: The reporting capabilities of Excel are widely used by accountants in
feasibility studies and result evaluations.
When analyzing historical data, they usually import data already prepared in their
ERP/accounting software and then manipulate it, mainly using the Sorting, Filtering and PivotTable related commands.
This is good enough for static reports, but
is not the ideal practice as next time they
have to prepare the same report (say, for
the following month), they will have to repeat the procedure.
The best approach is to connect Excel
directly to the tables behind the ERP
(Microsoft SQL Server, Oracle, Access
etc). By doing this, they are creating a
dynamic model, meaning that next month
they need to have the updated data, all
they have to do is click on the Analyze –
Data – Refresh button. They then get an
instant update of the data, without having
to redesign the model!
In the case of a PivotTable you use the
command Insert PivotTable – Use an external data source and normally you will
be asked to enter the password in order
to obtain access to the database.The procedure may need the help of an IT Pro
initially, but once set up, it is a piece of
cake to implement.
Question: Can we draw data from multiple tables in PivotTable?
Wizard: The best approach is to use the
PowerPivot functionality available in the
Office Professional Plus and Office 365
Professional Plus editions of Excel 2013.
It is an add-in you first have to load from
File Options - Add-Ins - Manage - COM
Add-ins – Go...
You click on the Add this data to the Data
Model option and then you will be able
to integrate data from multiple tables, effectively building a relational data source
inside Excel.
110
111
Real Estate
Permanent Residency & Home Buying
There is so much information flying around,
some of which is incorrect, we hereby attempt to provide a comprehensive information on the subject:
By Antonis
Loizou
F.R.I.C.S.
Antonis Loizou
& Associates
Ltd – Real Estate
Valuers & Estate
Agents
112
• A person from a non E.U. country can ask
(not as of right) to obtain a permanent visa to
stay in Cyprus if he acquires a house (apartment/house) of a cost of at least €300.000.
• Out of the amount of €300.000 he must
prove that he has already paid the €200.000
(on application) and the rest from local (loan)
funds or from abroad. The first €200.000
must come from abroad (as well as any loan
repayment).
• This permanent residency visa may be
withdrawn if the visa holder does not visit
Cyprus for a period of 2 consequential years
(he may visit Cyprus even for 1 day). Also
the visa will be withdrawn if the applicant/visa
holder becomes a permanent resident of another country (not his own).
• The visa holder, who has dependents (e.g.
wife, under age children) who are covered by
the visa, they must also visit Cyprus once every 2 years.
• In the event of the visa holder selling the
property, the visa will be withdrawn. Periodic
checks will be undertaken towards this direction.
• All documents submitted to the immigration department must be original and any
copies must be so certified. The documents
can be translated in Greek or English, must
be done by the Ministry of Exterior of the
country of origin or the Cypriot embassy in his
country or the embassy of the foreign person
in Cyprus.
• Applications may be undertaken by the applicant himself or his representative duly certified.
• Applications once approved bear a fee of
€119.17 cents.
• The applicant’s annual income must be
not less than €30.000 plus €5.000 p.a. for
each dependent who is covered by the visa.
The ability to prove the income must come
either from the income tax authorities of the
country of origin, banks, where the applicant
has money, contracts of rentals, share certificates etc.
• The €300.000 residence buying does not
include VAT and/or transfer fees.
• The purchase of €300.000 does not refer
to a single unit but to a number of units totaling €300.000, or a house of say €150.000
and other real estate such as garage, store,
shop of total €150.000 – Information from
the Immigration Department – Totally wrong
since 3rd country nationals may not buy anything else other than a single residence.
• People who have real estate and meet the
above criteria can apply now for the visa even
if they bought the real estate some time ago.
• The visa applicant must deposit at least
€30.000 in a local Cypriot bank for a period
of at least 3 years. Any interest earned can
be collected by the depositor but in no case
its euro value will be less than €30.000 during this 3 year period.
• Dependents mean wife and children under
18 years old. Children with a higher age must
apply separately and must comply with all the
said requirements. The applications will be
examined within the family circumstances in
mind however.
• A visa holder cannot work in Cyprus other
than through an offshore status. He is allowed however to become a shareholder of
a Cypriot Co which operates in Cyprus, provided he does not work (with or without pay).
• Visa holders may not as of right travel to
other E.U. countries without a visa from the
country to be visited.
These details are very important with the increasing interest for the Cypriot permanent
visa coming from various countries, but with
particular interest from Chinese. According
to information received, 600 Chinese have
acquired property in Cyprus over the last 3
months and the application number is increasing. Care is needed however especially
for the Chinese who, we understand, use
“Visa Offices” in their own country from which
they are charged ±€25.000/visa if the application is successful, plus €5.000 legal fee,
plus 5%-10% sales commission etc. This is
a con job to say the least, since the use of a
local lawyer to submit an application will not
cost more than €2.500, let alone the rest
In addition, prospective new comers to Cyprus should carry out some basic due diligence with respect to titles, mortgages and
the correct value. We understand that more
or less an apartment/house independently
of size, quality etc is duly sold at €300.000
to Chinese – a question raised by the Pafos
Lands Office recently. This means that some
unaware buyers have been had because the
uniformity of value is not normal.
We will provide more information once we
come to know and point out the misinformation which might be given by various services including, regrettably, the immigration
department.
113
Real Estate
Disrespect to Real Estate Agents
The laws, regulations and /or practices
governing the day-to-day work of a real estate agent in Cyprus are causing numerous
problems both to them and their clients.
The authorities must be pressured to make
amendments to create a more favourable
working environment.
What are the problems being created by
the current situation?
By George
Mouskides
General Manager,
FOX Smart Estate
Agency
Licensed Estate Agent
BBA, US CPA
It would not be an exaggeration to say that
uncertainty shadows over real estate transactions.
To begin with, most real estate agents only
get verbal instructions from property owners to sell or rent a property. This practice,
being of a vague nature, many times creates friction between owners and agents.
Signed
We believe that the Cypriot Council of Real
Estate Agents should demand that all licensed agents use a written listing form to
be signed by all owners.
This should ease problems between agents
and owners and will also sideline unlicensed
agents as they will not be able to use such
a document.
It would also be beneficial if all buyers and
tenants are obliged to sign a property viewing form.
Friction
Under the current system many buyers employ the tactic of negotiating with a number
of real estate agents for the same property,
causing numerous problems. It is not unusual, for a number of agents, to be showing the same property to the same potential
buyer. The question arising when a property has been sold is, in so many words,
‘who is entitled to the commission if a viewing to the buyer has been performed by 3
different agents’?
The agent who first showed the buyer the
property, the second agent who showed
him the property on a second occasion,
or the third agent who was present when
the deal was reached and the paperwork
signed?
Not clear I’m afraid.
114
Commission
We believe the commission should be in
the pocket of the agent who first informed
the client of the availability of the property.
A serious issue develops if the interested
buyer fails to inform the second and third
agent that the property had been viewed
with another agent before.
Employing the same ethics that require an
agent to inform a prospective client of the
physical and legal status of a property, buyers should also be obliged to inform owners
and real estate agents that there is a particular agent who had showed the property
before.
There should be crystal-clear regulations
determining who is entitled to the commission, which we believe should be the first
agent. If a buyer intentionally fails to mention the existence of a first agent he should
be forced to pay the commission and also
face any other legal measures.
The rights and obligations of the buyer
should be explicitly stated on the viewing
form signed. It would be a blessing if such
practices are employed as they would also
lead to more professionalism.
Multiple Listing System
An idea that can bring about great efficiency, professionalism and at the same
time get rid of all illegal agents is the following. A website should be created listing
most properties on the market, common to
all licensed real estate agents. Any agent
could then list his properties on the website
and all other agents with interested buyers/
tenants could co-operate with the listing
agent to conclude any transaction on the
particular property.
If such a system is put into place then
people wanting to sell would only need to
approach one agent and be sure their property would be exposed to all agents using
the website.
There are a number of other suggestions to
help upgrade the work of real estate agents
and wash away friction between them or
between agents and clients.
The ideas are in front of us. What is needed
is the will by the appropriate authorities to
enforce them.
The Journal of the Institute
of Certified Public Accountants
of Cyprus

AccountancyCyprus

Transcription

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