Institute News

Transcription

Institute News

www.icpac.org.cy
No102MARCH2011
The Journal of the Institute
of Certified Public Accountants
of Cyprus
CONTENT NÔ. 102
30-03-2011 11.02
™ÂÏ›‰· 1
March 2011 - No. 102
ISSN 1450-2380
Editor
Ninos Hadjirousos, FCA
Deputy Editor
T. Anastasiades, B.Sc., M.A. (Econ.)
Editorial & Institute Offices
11 μyron Avenue, CY-1096 Nicosia
P.O.Box 24935
1355 Nicosia - Cyprus
Tel. 22870030
Telefax 22766360
E-mail: [email protected]
URL:http/www.icpac.org.cy
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.
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
necessarity endorsed by the Institute, its
Council or by the Editors
The Institute Council
President:
Vice President:
Secretary:
Treasurer:
* Nicos Syrimis, FCA
* Kyriakos Iordanou, FCCA, MBA, ACIM, CIA
* Theodoros Parperis, BSc (Econ), ACA
* Marios Skandalis, FCCA, FIFC, CFC, CFE
* Denotes member not in practice
Members
Michael Antoniades, BA(Hons), ACA
Panicos Charalambous, FCCA
Christis Christoforou, BA(Econ.), FCA, MBIM
Demetris Demetriou, FCCA
* Demetris Halios, BSc (Acc), CPA
George Kourris, BSc, FCA
* Christodoulos Papas, BA (Hons), MBA, FCCA
Panikos Tsiailis, FCCA
Contents
Institute News ............................................................................................................................................................
Professional Briefing .................................................. ...............................................................................................
Interview with H.E. the Ambassador of Hungary............. ...........................................................................................
Cyprus in the Challenging Eurozone Environment................... ..................................................................................
Europe 2020 - A new strategy for Europe.................... ..............................................................................................
Public debt, competitiveness and the banking system............ ...................................................................................
The European parliament pushes forward plans for financial transaction tax .............................................................
Corrective measures for the Cyprus Economy are needed ........................................................................................
Poverty has shifted from low to middle income countries ...........................................................................................
The financial system is the heart of the economy.......................................................................................................
ACCA Approved Employer - Professional Development Certificate Awarded to the
Internal Audit Service of the Republic of Cyprus ......................................................................................................
Standard for guidance on social responsibility ................................................................................................................
If the Cyprus Economy is going to sink a contributory factor will also be education............................................................
The Turnaround - A perspective on how Ireland transformed itself into one of the strongest economies
in the world, and then squandered the legacy ..........................................................................................................
The problem of exchange rates has again become topical................ .........................................................................
Consumer Price Index - CIP.......................................................................................................................................
Cyprus Presidency of the Council of the EU-2012 ....................................................................................................
Changes in the tax scene ...........................................................................................................................................
Double and triple pension payments and other distortions .........................................................................................
The role of State aid in tackling the Global Economic crisis........................................................................................
Management of diversity in work area ........................................................................................................................
Corruption in the accounting profession: Survey findings......... ..................................................................................
Corruption and the fight against it ..............................................................................................................................
Sustainability and the role of the accountant ..............................................................................................................
The road to convergence: some recent common proposals by the IASB and the FASB ...........................................
Getting to know negotiations ......................................................................................................................................
Risk elimination or risk mitigation? .............................................................................................................................
“Quis custodiet IPSOS custodes?” .............................................................................................................................
Lands office + transfer fees ........................................................................................................................................
The Excel Wizard .......................................................................................................................................................
Mission possible - tips and strategies to achieve a better work life balance ...............................................................
Electricity generation cost in isolated power systems.................................................................................................
EC Green Paper - Audit Policy: Lessons from the crisis ............................................................................................
Sustainable management of Cyprus offshore natural gas potential............................................................................
Protecting the future...................................................................................................................................................
The Development of Accounting in Cyprus ................................................................................................................
Change in Russian business environment corporate social responsibility ..................................................................
Good news for property buyers - rent to buy ..............................................................................................................
Economic Bulletin .......................................................................................................................................................
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COUNCIL’S ACTIVITIES
During the first quarter of 2011 the Council met four times
and considered matters of interest to the ICPAC (™∂§∫)
and to the profession at large. Other issues dealt with
were, among others, the following:
On 8 and 10 February 2011 Ms Lina Lemessiou, Senior
Officer of the Institute, attended the European Commission
Conference on Financial Reporting and Auditing - a time
for change? in Brussels.
On 18 February 2011 Ms Lina Lemessiou attended the
European Federation of Accountants Auditing Working
Party meeting in Brussels.
On 1st March 2011 the President of the Institute, Mr. Nicos
Syrimis, and the General Manager Mr. Theodoros
Philippou, participated in the annual dinner of the Institute
of Chartered Accountants in England and Wales in
London. While in London they had meetings with
Officials of the ICAEW concerning matters of mutual
interest and cooperation.
On 2 March 2011 the President of the Institute and the
General Manager had a meeting with Officials of the
ACCA regarding matters of mutual interest and
cooperation.
On 16 March 2011 the General Manager attended the
European Federation of Accountants Council meeting in
Brussels.
COMMITTEES’ ACTIVITIES
ECONOMIC CRIME AND FORENSIC
ACCOUNTING (ECFA) COMMITTEE
During the first quarter of 2011, the ECFA committee had
carried out a survey on the perception of corruption of
Accountants, the findings of which are reported in the
current issue of Accountancy Cyprus. In addition the
committee’s subdirectory address
was set up and
gradually articles relating to economic crime and forensic
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accounting will be upload for ICPAC members to access.
Furthermore, a meeting was held with the Education
Committee of ICPAC to decide possible collaboration on
future seminars regarding economic crime to be coorganized in 2011 with the education committee.
Maria Krambia-Kapardis
Chairwoman
CORPORATE GOVERNANCE, INTERNAL AUDIT
AND RISK MANAGEMENT COMMITTEE
During the FIRST quarter of 2010 the Corporate
Governance, Internal Audit and Risk Management
committee has, within the scope of its terms of reference,
commenced the implementation of its action plan and has
dealt with the following:
ñ Started working on the development of a survey on
Corporate Governance. The survey will be sent to the
listed companies in Cyprus. Its results will be sent to all
members. It is also envisaged that the results be presented
during a press conference, within the activities planned for
the celebration of ICPAC’s 50th anniversary.
ñ The committee started work on a white paper
describing the role, duties and responsibilities of the
following departments within an organisation:
- Risk Management
- Internal Audit
- Organisation and Methods
The white document will be circulated to all members of
ICPAC and will help clarify the boundaries and the
interaction of these three functions within and
organisation.
ñ The committee, in collaboration with the European
Union Affairs committee, has designed a seminar on
“Auditing EU Funded Projects”. The seminar, in
coordination with the Education Committee, is planned for
May 2011.
Panicos Papamichael
Chairman
ACCOUNTANCY CYPRUS ñ VOLUME 102 ñ MARCH 2011
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COORDINATION COMMITTEE LARNACA FAMAGUSTA
During the period from 1 January 2011 to 31 March 2011
the Larnaca - Famagusta Coordinating Committee carried
out the following activities:
1. A Christmas Dinner - Dance in co-operation with the
staff of the District Department of Inland Revenue in
Larnaca has taken place in Palm Beach Hotel in Larnaca
on 21 January 2011 and it was successful. Mr George
Syrimis, the President of ICPAC participated at the event
as guest of honour.
2. On 19 January 2011 the Chairwoman of the Committee
has made a speech to the students of St George Lyceum
with a subject Accounting and Finance and the importance
of accounting profession.
3. On 18 March 2011 the Committee organised a lunch to
Paralimni with the staff of the Inland Revenue at
Paralimni. Our guest at the lunch will be Mr George
Poufos.
Panayiota Vagianou
Chairwoman
STOCK EXCHANGE AND CAPITAL MARKETS
COMMITTEE
During the first quarter of 2011, the Committee met twice.
Added to these meetings, were other meetings between
various sub-committees’ members.
The main activities of the Committee during the period
above were as follows:
1. Held a meeting with the Chairman of the Cyprus Stock
Exchange and discussed current issues of interest and
concern and possible solutions.
2. Reviewed and submitted comments on Consultation
Paper 2011-01 of the Cyprus Securities and Exchange
Commission regarding the proposed Bill on Companies
offering administration (and trustee) services .
Commission regarding the proposed legislation for
UCITS.
Commission regarding the proposed amendment of
Directive Dπ144-2007-01 for the Authorisation and
Operating Conditions of CIFs (MiFID).
5. Reviewed and submitted comments on the provision of
expert independent opinion for public takeover bids for the
acquisition of securities of listed companies (Public
Takeover Bids Law - Directive TB4/2007). Two meetings
were held between ICPAC General Manager and the
Committee Chairman with the Chairman and Vicechairwoman of the Cyprus Securities and Exchange
Commission during which the various approaches were
discussed and views were exchanged.
6. Carried out maintenance and updated the Committee’s
material on the Institute’s website.
Demetris Taxitaris
Chairman
INFORMATION TECHNOLOGY AND BUSINESS
CONSULTING COMMITTEE
The activities for each of our three main areas or
responsibility were as follow:
The members of the Institutes’ Web Page subcommittee
have continued working on the necessary requirements for
the implementation of a Customer Relation Management
Software (CRM) that is to be acquired by the Institute. The
external IT consultant is still working on the request for
proposal.
The institutes’ webpage context was reviewed and the
committee is discussing possible amendments, such as to
upload the Greek-English accounting lexicon and to set up
a page with templates downloads useful to the profession.
The subcommittee proposed to prepare an article on a
quarterly basis. In addition the members are working on
the preparation of a memo for the implementation and use
of a common Chart of Accounts in Cyprus. They are also
working on the preparation of guidelines for the selection
of an accounting software.
The members have contacted various Government officials
(that are responsible to set up IT policies) to examine their
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views regarding the possible implementation of XBRL in
Cyprus.
Nicholas Shiakallis
Chairman
PUBLIC RELATIONS COMMITTEE
During the first quarter of 2011, the Public Relations
Committee held 3 formal meetings. The Committee
focused its efforts on planning activities for the 50th
anniversary of ICPAC, aiming both at celebrating the
professional achievements of our Institute, as well as in
promoting networking among ICPAC’s members.
The social activities organised by the Committee for the
1st quarter of 2011 included the following:
are working towards the planning and execution of a
number of formal and informal events, which will soon be
announced by ICPAC. These include, among others, the
Annual Sports Day to be held on 8 May, the Annual
General Meeting and ICPAC’s dance.
Angelo Yiacoumi
Chairwoman
THE EUROPEAN UNION AFFAIRS COMMITTEE
The EU Affairs Committee of ICPAC has carried out the
following actions in accordance with its terms of
reference:
ñ Execution of the Action Plan of the Committee
ñ Meeting with Ms Marina Jenssen and her team from
On 19 January 2011, a get-together was organised at the
Blue Wine Bar in Nicosia. All who attended had the chance
to enjoy their dinner while listening to live music.
On 16 February 2011, ICPAC invited members and friends
at Club Red, for an enjoyable music evening with the
Greek singer Peggy Zina. This type of event, which was
organised for the first time by the Committee, was very
successful taking into consideration the large turnout and
is expected to be repeated in the future.
On 13 March 2011, a movie day was held for the children
of members. The movie was played at K-Cineplex in
Nicosia free of charge, and attracted a large number of
children with their parents. As part of ICPAC’s social
responsibility policy, children from the “Children’s
shelter”, which was visited by the Committee during Xmas
time, were also invited and attended the movie with their
guardians.
the Planning Bureau and discussion and update regarding
the actions and activities of the Planning Bureau and ways
that these actions can be valuable for the updating of our
members/ Discussion over the organisation of a seminar
for the members of ICPAC during the second quarter of
2011
ñ Communication with the Corporate Governance
Internal Audit and Risk Management Committee for the
joint organization of a training seminar for ICOAC
members in the second quarter of 2011
ñ Continuous follow up on the developments in the EU
affecting the accounting profession through research from
various sources such as the EU website, the European
business and accounting press etc and update of the
members if the EU Committee and update of the web page
of the EU Committee
ñ Preparation and publication of 3 articles for the
The start of 2011 also saw the end of ICPAC’s first Futsal
Championship, an initiative of the Public Relations
Committee which started in September 2010. The final
was held on 25 January 2011 in Larnaca, with KPMG
Limassol being the winner and the runner-up being Abacus
Nicosia. During a small ceremony at the end of the match,
both teams were presented with trophies and their
achievement was celebrated both by the players and their
supporters. Given its success, the Championship is
expected to be established as an annual event.
It should be noted that currently, various sub-committees
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magazine of ICPAC
ñ Continuous update of the website of ICPAC
I remain at your disposal for any further information you
may require
Maria Kaffa
Chairman
PUBLIC SECTOR COMMITTEE
During the 1st quarter of 2011 the Public Sector
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Committee has met three times and has carried out the
following activities:
Public Governance
ñ Finalisation of the Code of Public Governance
Seminars
ñ Planning of Seminars on Public Procurement and
Pensions
Membership list
ñ Updating of the list of qualified accountants in Public
Sector and semi government sector
50th Anniversary
ñ Planning an event (social or other) to celebrate the 50th
EDUCATION COMMITTEE
The following seminars have been organised and presented
during this period.
1. Capital Statements
The seminar was co-organised with the Taxation
Committee. The purpose of the seminar was to inform
members in public practice of the preparation of Capital
Statements and the major problems found by the Inland
Revenue during their investigation. The seminar was held
on 23 February 2011 in Nicosia and was repeated on 2
March 2011 Limassol. It was presented by Mr. Takis
Panayiotou, officer in charge of Capital Statements of the
Inland Revenue department. The seminar in Nicosia was
attended by 101 participants, and in Limassol by 70
participants.
2. Update on anti-money laundering regulations and
their impact on the audit firm
anniversary of ICPAC.
The seminar was held on 24 March 2011 in Nicosia and
was attended by 130 participants. The purpose of the
seminar was to brief participants on the legal, technical and
practice issues surrounding money laundering. The
seminar was presented by Mrs Eva Rossidou -
Rea Georgiou
Chairwoman
IFRS COMMITTEE
During the first quarter of 2011 the
committee completed the project of
reviewing all the technical circulars
issued to date and the appointed
subcommittees
submitted
their
proposals to the chairman of the
committee during the committee’s last
meeting. The results of the review and
the proposals have also been
submitted to Ms Lina Lemesiou. The
heads of the subcommittees together
with the chairman and Ms Lina
Lemesiou are planned to meet in the
following week to discuss the
findings.
There were no developments relating
to the adoption of IFRS for SME’s
and the committee is following up
developments and examples of
adoption and/or application in other
countries.
Marios Agathangelou
Chairman
A photograph from the seminar on Capital Statements
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Papakyriacou, Head of Unit for Combating Money
Laundering (MOKAS), Law Office of the Republic of
Cyprus, Mr Theodoros Stavrou, Investigator , MOKAS,
Mr Sha Ali Khan, Director-Practice Monitoring ACCA and
Mrs Haroulla Arkade Nicolaou, Senior Practice Reviewer
Professional Standards ACCA.
Several seminars are planned for the second quarter of
2011 in Nicosia, Larnaca and Limassol, in accordance with
the Action Plan of the Education Committee, with the view
of continuing to provide the members of ICPAC with
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.
Maria Pastellopoulou
Chairwoman
INTERNATIONAL BUSINESS, SHIPPING AND
FOREIGN INVESTMENTS COMMITTEE
institutions to join their efforts in promoting this idea and
a meeting with the Attorney General has been arranged to
take matters further.
Legislation for Fiduciary Services
The committee has submitted its comments on the draft
legislation governing the rendering of fiduciary services to
the Cyprus Securities and Exchange Commission.
CIPA
Members of the Committee have met with the Director
General and other officers of CIPA. It has been decided to
co-ordinate the Committee’s efforts with those of CIPA for
better results.
Fiduciary Future 2011
The Committee has submitted its suggestions for possible
topics and speakers for the forthcoming event being
organized by the Employers Federation of Cyprus.
Tonnage Tax
The Committee’s comments were taken into account in the
notification issued by the Department of Shipping and as a
result the tonnage tax law covers all companies which are
tax resident in Cyprus irrespective of their country of
registration.
Client Acceptance
The Committee made presentations to the appropriate
committee of our Institute following which the
recommendations to the Council of our Institute
concerning client acceptance will be modified.
Registrar of Companies
Members of the committee have met with the Registrar of
Companies and discussed the new procedures of e-search
and e-filing of the Registrar. Following the meeting it
became apparent that the time consuming procedures of
the Registrar will continue despite the imminent
computerization. The reason is the current practice of the
Registrar to check all documents submitted for filing. For
this, members of the Committee have met with the
president and members of the Cyprus Bar Association to
seek their help in finding legal ways to reduce and/or
eliminate the checks of the Registrar. It was agreed by both
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Costas Mavrokordatos
Chairman
ETHICS & INSTITUTIONS COMMITTEE
During the first quarter of 2011 the Ethics & Institutions
Committee held three meetings. Added to these meetings
were other informal meetings between various subcommittee members.
The main activities of the Committee during this period
were as follows:
1. The examination of The Auditors and Statutory Audits
of Annual and Consolidated Accounts Law 42(I)/2009 was
concluded, and a number of areas were identified that
warrant further action by the Committee.
2. Further work is currently in progress on areas that were
identified during the examination of the above Law.
3. Examination of the Exposure Draft for the Proposed
Redrafted International Education Standard IES 7,
“Continuing Professional Development: A Program of
Lifelong Learning and Continuing Development of
Professional Competence”, and proposal of comments to
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ICPAC for submission to the International Federation of
Accountants.
Antonis I Shiammoutis
Chairman
THE VAT COMMITTEES ACTIVITIES FOR THE
PERIOD FROM DECEMBER 2010 UNTIL THE
DATE OF COMPILATION OF THIS PROGRESS
REPORT WERE THE FOLLOWING:
ñ On its December 2010 meeting the Committee has set
up three additional and important sub -committees each
one having a specific role:
- The Sub Committee responsible for the proposal of the
expansion of the competences of the Tax Tribunal and the
execution of an action plan that will lead to a formal
presentation of this proposal to all interested parties.
- The Sub Committee responsible to prepare comments
and suggestions towards the “Green Bible” * debate
launched by the European Commission - comments to be
filed on or before 31.5.2011.
During the meeting the following issues where discussed
and mutually agreed:
- “Consultation Reporting”. Both Parties have agreed to
begin such a co-operation beginning with important
circulars that the Vat Department intends to issue.
- Common presentations and seminars. Both Parties agreed
that common presentation and seminars should be
initialized. As a first step, Parties agreed to organize the
first VAT FORUM in Cyprus. A joint organizing
committee has already been set up in order to explore the
idea.
- “Think Tank”. The new VAT Commissioner has
presented his idea of a creation of a think tank, with the
participation of ICPAC’s VAT committee. The first topic to
be discussed would be the “Green Bible”, a debate
launched by the European Commission.
- Further to the above topics of “principle”, parties have
agreed to concentrate on all pending issues currently
being:
ñ A debate concerning the future of the VAT system in
EU, towards a simpler, more robust and efficient VAT
system.
- The Sub committee responsible to propose to the Vat
Department, an attractive and competitive yacht scheme
(yacht finance leasing scheme).
Members of the above sub committees have set a time
table for their meetings and submission of proposals to the
committee.
In addition to the above the members submitted proposals
based on the feedback received form ICPAC members and
the VAT Department, about future VAT seminars including
the following subjects:
- Introduction to VAT
- Completion of the VIES form
- European Court Decisions
- VAT investigations
(a) The tax point of 18 months in the construction industry
(b) Yacht scheme (leasing)
(c) Missing traders
(d) Revision of VAT circulars
Finally, parties agreed that frequent meetings will continue
with the presence of the VAT Commissioner.
ñ On the same day, the Committee had its planned
January 2011 meeting. During that session, the members
had discussed all issues that have been raised by the VAT
Commissioner and especially the participation in the
“Think Tank” with the very first topic of the “Green Bible”
and the organization of the first “VAT Forum” in Cyprus.
More over, the following topics were discussed during the
meeting:
The Committee members also analysed all the important
European Court and Cyprus Supreme Court, VAT cases
and investigated whether there are issues that affect our
local legislation or law interpretation.
- A sub committee has been formed in order to examine the
tax treatment of the sale of building coefficient.
- The members have agreed on the proposed VAT Seminars
as follows:
ñ On the 19th of January 2011, the members of the
(a) “VAT Forum” - to be jointly organized with the VAT
Department
committee had their first meeting with the new VAT
Commissioner Mr Costas Nicolaides.
(b) Introduction to VAT - to be held in June 2011
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(c) VAT Investigation - to be held in May 2011
- Following the publication by the VAT Department of the
circulars 146 and 146 A, as well as 145, the committee has
set up a sub committee to further analyse the above
circulars and address further issues to the VAT
Commissioner.
ñ On its February 2011 meeting the committee has dealt
with the following issues:
- The Sub committee dealing with the Tax Tribunal has met
the General Manager of ICPAC Mr Theodoros Philipou
and the President of the Taxation Committee of ICPAC, Mr
Angelos Gregoriades in order to exchange views about the
preparation of the presentation concerning the Tax
Tribunal.
speakers from abroad will be invited in order to present
VAT issues in Europe.
- The sub committee for the “Green Bible” had its first
meeting and work has been distributed amongst members.
- Finally, the sub committee dealing with the recent VAT
circulars, has issued a report about circular 146 A and 145
and has been forwarded to the VAT Department.
Christos S. Christodoulou
Chairman
TAXATION COMMITTEE
The Taxation committee’s activities during the first quarter
of 2011 were mainly focused on resolving a number of
issues with the Tax Authorities. We are hoping that at least
some of the issues will be concluded during the second
quarter. We have also examined, commented and attended
meetings regarding the recent draft bill of the special
taxation levy on banks. Furthermore members of our
committee have participated in the negotiations of various
DTTs.
- The Sub Committee dealing with the proposed yacht
scheme has met with Mr Yiannis Tsangaris, of the VAT
Department and exchanged views concerning the existing
Maltese scheme and the proposed CY scheme - identifying
advantages and problems.
- During the same day, the President of the VAT Committee
has exchanged views with the Presidents of the Taxation
Angelos M. Gregoriades
Committee and the International Committee concerning
Chairman
the proposal to the VAT Commissioner about the
abolishment of liabilities of the company secretary and the
LIMASSOL - PAPHOS CORDINATION
directors acting as “nominees”. The Presidents have all
COMMITTEE
agreed that there is no base for the abolishment of
liabilities of the directors (acting in any capacity), but there
is for the case of the
secretary. The President of
the VAT Committee has
undertaken to explore this
issue
with
the
VAT
Commissioner and revert
officially.
- The VAT Committee and the
VAT
Department
have
mutually agreed to organize
the first “VAT Forum” in
Cyprus. The Board of
Directors of ICPAC has
approved a proposal made by
the President of the VAT
Committee so that ICPAC
will undertake the costs of the
organization of the forum.
The forum is set to be
organized
during
the
forthcoming months. At this
A photograph from the handing over of the double slide ladder
first VAT Forum, quest
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During the period from 1
January 2011 to 31 March
2011 the Limassol - Paphos
Coordination Committee has
carried out the following
activities:
1. As part of the Institute’s
social responsibility program,
the Limassol and Paphos
Coordination
Committee
purchased a double slide
ladder for children (in
compliance
with
EU
standards) and donated this to
the District Welfare Office,
Labour and Social Insurance
Foundation: ‘Day Nursery
and Kindergarten Ypsonas
Industrial Estate’ on 28th of
December
2010.
Four
members of the Limassol Paphos
Co-ordination
Committee attended the event
whereby they were greeted
A photograph from the speech by Governor Orphanides
by Mrs. Pepa Varnava,
members of staff and around
40 children who altogether
NEW MEMBERS
expressed their gratitude to the Institute for their generous
gesture.
During the period January - March 2011 the following
persons have been accepted as new members of the
2. On the 2nd of March 2011 the Committee coordinated
Institute:
the seminar “Capital Statements and practical problems”.
The seminar was held at St. Raphael Resort in Limassol.
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Theodoros Petrou
ACCA
3. On the 23th of February 2011 the Committee organized
a dinner with honor quest and speaker, the Governor of the
Central Bank of Cyprus, Mr. Athanasios Orphanides. Mr.
Orphanides delivered his speech on the subject of
strengthening economic governance in the euro zone.
Following his speech, Mr. Orphanides has answered
questions raised by audience on this subject and also on
issues relating to the Economic in general. Around 220
member and quests attended the dinner.
Kyriakos N. Panayiotou
Chairman
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Christina Christou
ACCA
3164
Panos Ioannides
ACCA
3165
Paris Mytilineos
ACCA
3166
Demetris Demetriou
ACCA
3167
Anastasis Constantinou
ACCA
3168
Eleonora Ioannou
ACCA
3169
Ioannis Styllas
ACCA
3170
Linos Vouris
ACCA
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3171
Charis Kalli
ACCA
3203
Chrystalla Eliadou
3172
Evaggelia Gabriel
ACCA
3204
Antonis Ioannou
3173
Christiana Soteriou
ACCA
3205
Andreas Michaelides
ACCA
3174
Marios Sienas
ACCA
3206
Panayiotis Theodorou
ACCA
3175
Constantinos Constantinou
ACCA
3207
Vicky Charalambous
ACCA
3176
Georgina Acworth
ACCA
3208
Yiannis Zarvos
ACCA
3177
Efremis Pavlou
ACCA
3209
George Georgiou
ACCA
3178
Ntoina Dionysiou
ACCA
3210
Charis Sianos
ACCA
3179
George Siammoutis
ACA
3211
Panayiota Chrysostomou
ACCA
3180
Leontios Vasiliou
ACA
3212
Maria Sofocleous
ACA
3181
Christakis Zapitis
ACA
3213
Christakis Theodorou
ACA
3182
Demos Nicolaides
ACA
3214
Victor Ioannides
ACA
3183
Chrystalla Anastasiou
ACA
3215
Marina Ioannou
ACCA
3184
Demetrios Philippides
ACA
3185
Ioannis Spanos
ACA
3216
Andreas Tziambos
ACCA
3186
Constantinos Pelekanis
ACA
3217
Marianna Mouzouri
ACCA
3187
Kypros Demetriou
3218
Natalia Sidereniou
ACCA
3188
Katerina Constantinou
3219
Katerina Pavlou
ACCA
3189
Ioannis Santis
ACCA
3220
Christos Tsioulloupis
ACCA
3190
Panayiotis Mousikou
ACCA
3221
Anna Petsa
ACCA
3191
Georgia Pitta
ACCA
3222
Stephani Fedonos
ACCA
3192
Nicoletta Kynigou
ACCA
3223
Maria Nikiforou
3193
Melani Miamiliotou
ACCA
3224
Elena Kimonos
3194
Kyriakos Phili
ACA
3225
Demetris Constantinou
3195
Panayiotis Damianou
ACA
3226
Elena Kalli
3196
Panayiotis Stavrou
ACA
3227
Maria Savva
ACA
3197
Arofat Salayeva
ACCA
3228
Phani Philippou
ACA
3198
Alexia Charalambous
ACCA
3229
Stelios Hadjimichael
ACA
3199
Gabriella Papaioannou
ACCA
3230
Aggelos Ioannou
ACA
3200
Petros Loizou
ACCA
3231
Panayiota Kagka
ACA
3201
Aggelos Petrou
ACCA
3232
Eftychia Panayiotou
ACA
3202
Antigoni Hadjiargyrou
ACCA
3233
Athanasia Afxentiou
ACA
12
CPA-USA
ACA
ACCA
ACA
ACA
ACCA
ACA
ACCA
Institute News
3234
Andreas Phellas
ACCA
3235
Dimitri Baltsoucos
3236
Antonis Antoniou
3237
Nicolas Ktori
ACCA
3238
Panayiotis Yiannakou
ACCA
3239
Mari Siatarevian
ACCA
3240
George Nicolaou
ACCA
3241
Andys Papadopoulos
ACCA
3242
Pantelitsa Schiza
ACCA
3243
Apostolos Sigkounas
ACCA
3244
Christos Kythreotis
ACCA
3245
Savvas Poyiadjis
ACA
3246
Maria Hadjichristou
ACA
3247
Chrysanthos Chrysanthou
ACA
3248
Melina Enotiadou
ACA
3249
Loucas Avgoustis
CPA-USA
3250
Panayiotis Kylilis
ACA
3251
Kleanhtis Papoutsas
ACA
3252
Georgia Christoforou
3253
Paris Aristidou
ACA
3254
Christos Damianou
ACA
3255
Constantinos Demetriou
ACA
CA South Africa
ACA
ACCA
RE-REGISTRATION
641
Avraam Kapiri
ACA
1521
Eesh Kumar Aggarwal
ACA
CORRECTION
Has not been removed from the Register
1879
Nicos Tsiolas
FCCA
15
Professional Briefing
PROFESSOR CHRISTOPHER A PISSARIDES
AWARDED THE NOBEL PRIZE FOR
ECONOMICS
Christopher Pissarides is the 2010 Nobel laureate for
Economics. He was awarded the Sveriges Riksbank Prize
in Economic Sciences in Memory of Alfred Nobel for his
“analysis of markets with search frictions,” together with
Association. He is also an elected Fellow of the British
Academy, the Econometric Society, the European
Economic Association and the Society of Labor
Economists. He is serving or has served as a member of
Council of the European Economic Association, the
Econometric Society and the Royal Economic Society.
He has served on a number of committees. He was as an
external member of the Monetary Policy Committee of the
Central Bank of Cyprus from its creation in 2000 to its
dissolution in 2007 and a member of the European
Employment Task Force chaired by Wim Kok, which in
2003. He has been a consultant on employment policy and
other macroeconomic issues for the World Bank, the
European Commission, the Bank of England and the
OECD.
Other honours include the IZA Prize in Labor Economics
(shared with Dale Mortensen in 2005) and the Republic of
Cyprus “Aristeion” for the Arts, Literature and Science
(2008) and the Grand Cross of Archbishop Makarios, the
highest award of the Republic, received in 2011.
ACCA APPROVED EMPLOYER - PROFESSIONAL
DEVELOPMENT CERTIFICATE AWARDED TO
THE INTERNAL AUDIT SERVICE (IAS) OF THE
GOVERNMENT
Professors Peter Diamond of MIT and Dale Mortensen of
Northwestern. He holds the Norman Sosnow Chair in
Economics at the London School of Economics and the
Marfin-Laiki Chair in European Studies at the University
of Cyprus. He specialises in the economics of labour
markets, especially the theory of unemployment and
labour-market policy. More recently he has written about
growth and structural change. He has written extensively in
professional journals and his book Equilibrium
Unemployment Theory, now in its second edition, is a
standard reference in the economics of unemployment.
Other interests include monetary and fiscal policy,
especially as they relate to employment issues.
He is the current President of the European Economic
16
During a ceremony held at the offices of the Internal Audit
Service on 28 December 2010, the ACCA Approved
Employer - Professional Development Certificate was
awarded to the Internal Audit Service.
The Certificate, with which the Service has been
recognized as an Approved Employer that will be given
the opportunity to offer to its employees, members of the
ACCA, Continuous Professional Development (CPD), was
awarded to the Commissioner of the Internal Audit Service
of the Government, Mr Andreas Lambrianou, by the
General Manager of the Institute of Certified Public
Accountants of Cyprus (ICPAC), Mr Theodoros Philippou,
on behalf of the both the ICPAC and the Association of
Chartered Certified Accountants (ACCA).
practice and to help improve standards
across the profession in Cyprus.
Mr. Theodoros Philippou awards the Certificate to Mr. Lambrianou
“The award of the ACCA Approved Employer status to the
Internal Audit Service is an important achievement”, said
Mr Lambrianou, who also continued to say that “even
though the Service was established in 2003 under the
Internal Audit Law 2003 [L 114(I)/2003], in a very short
time it has managed to become one of the few Services of
the Public Sector that has attained this status / certification.
The criteria that have been set by the ACCA, concerning
the work experience, supervision, evaluation and
development opportunities that have to be provided by a
Service to its employees, are very strict, and by meeting
them so far and by continuing to do so indicates the
commitment of our Service publicly to continue to provide
advanced and high quality education and training to our
employees.”
Mr Philippou, in his turn, congratulated the Internal Audit
Service for gaining the Approved Employer - Professional
Development certification. “The certification of the
Service demonstrates that both the ACCA and the ICPAC
acknowledge the commitment of the Service to provide
high quality education and training to its employees and to
meet the Standards of the International Federation of
Accountants.”
MEMBER FIRMS OF ICPAC WHICH QUALIFIED
FOR QUALITY CHECKED
ICPAC Quality Checked is a quality assurance scheme
introduced by ICPAC as from 1 July 2006 to promote best
The scheme is available to all ICPAC
member firms and the quality assurance
reviews of non-audit services are carried
out alongside the routine statutory audit
monitoring visits undertaken by ACCA
on behalf of ICPAC. Under the scheme,
ICPAC member firms can qualify for the
ICPAC Quality Checked certificate and
mark if they are able to demonstrate that
they follow best practice standards, in
addition to having a satisfactory
outcome on audit monitoring and on
compliance with ICPAC’s rules and
regulations.
In previous issues of this journal, reference was made to
ten firms that have been awarded the ICPAC Quality
Checked certificate and mark. In the meantime, the
following three additional firms have been awarded the
ICPAC Quality Checked certificate and mark:
1. Ioannides & Co Ltd, 2. Moore Spephens (Limassol) Ltd,
3. PEK Ltd
It is noted that about 200 ICPAC member firms have not
yet been subject to quality assurance reviews by ACCA on
behalf of ICPAC.
CONTRIBUTION
CYPRUS
TO
THE
UNIVERSITY
OF
Members of the ICPAC have contributed a grant of _
15500 for the support of Accounting Research
programmes of the University of Cyprus. The contributors
were the following firms:
m
Crowehorwath
2.000
Deloitte
2.000
Ernst & Young
2.000
KPMG
2.000
PwC
2.000
Meritservus - DI Ross
1.500
Moore Stephens Stylianou
1.500
Baker Tilly Klitou
1.000
Nexia Poyiadjis
1.000
Consulco
500
Total
15.500
17
IMF MISSION TO CYPRUS: PRELIMINARY
FINDINGS
Cyprus-February 2011 Staff Visit, Preliminary Findings
Nicosia, February 15, 2011
An IMF team headed by Wes McGrew visited Cyprus
February 9-15. The purpose of the visit was to review
economic conditions and policies. The IMF team would
like to thank the Cypriot authorities for their gracious
hospitality and open discussions.
A gradual economic recovery is underway, with growth
likely to reach the 11/2-2 percent range this year and
favorable prospects for a continued upturn in 2012.
Underlying inflation remains subdued, although higher
fuel prices will have an impact on headline inflation. This
generally favorable outlook remains subject to unusually
high risks, in particular from ongoing financial turbulence
elsewhere in Europe, which calls for extra caution in
economic policies.
The foremost challenge of economic policy is to reduce the
fiscal deficit from the high levels of the past two years and
to reverse the associated trend of rising public debt ratios.
Long-term prosperity in Cyprus depends in large part on
its continued growth as an international business and
financial center, which rests upon a foundation of sound
public finances. Durable improvement in public finances
will require structural measures to contain the growth in
expenditure, including public sector wages and pensions.
Countries across Europe are pursuing far-reaching reforms
to correct fiscal imbalances and preserve investor
confidence, and Cyprus should also seize this opportunity.
In this context, we welcome the government’s plans to
bring fiscal balances into line with European Union norms
over the next two years, although it would be preferable to
base adjustment more on structural expenditure restraint
and less on revenue increases. We are encouraged by the
commitment over the medium term to contain expenditure
through wage moderation and reduction in public sector
employment, to put public pensions on a more sustainable
footing, and to improve the targeting of social transfers.
These are important first steps that will help to ensure
sustainable public finances, and we encourage the
government to move forward forcefully with these
reforms.
18
The Cypriot banking system has weathered the economic
difficulties well and appears to be in sound overall
condition. It has benefited from reliance on deposits rather
than less stable sources of financing, conservative lending
practices, close attention to capital and liquidity buffers,
and vigilant supervision. These factors have helped shield
the banking system from the pressures that are prevalent in
many other countries. The ongoing risks in international
financial markets call for a continuation of conservative
balance sheet management and careful supervision.
IFAC POLL: ECONOMIC UNCERTAINTY POSES
BIGGEST CHALLENGE TO SMALL BUSINESSES
The effects of the financial crisis continue to be felt by
small businesses, according to the small- and mediumsized accountancy practitioners recently polled by the
International Federation of Accountants. Economic
uncertainty is still the biggest challenge facing small- and
medium-sized entities (SMEs), said the largest group of
respondents-nearly 30%-while the burden of regulation
was a close second. Regulations and standards challenge
small- and medium-sized accounting practices (SMPs) as
well: over 40% said that keeping up with regulations and
standards is the most important issue now facing their
practice.
Despite the prevalence of economic uncertainty, nearly
40% of SMPs expect their practices to perform better this
year than last year. Only slightly more (43%) expect
business to be even with 2010, and 19% expect business to
shrink in 2011.
SMPs continue to generate the largest proportion of their
revenue from traditional compliance-based services.
Nearly 45% of respondents indicated that audit and
assurance is their biggest source of revenue, followed
closely by accounting and compilation (40%). Tax and
advisory/consulting services comprised only 15%
combined.
IAASB EXPLORES FINANCIAL STATEMENT
DISCLOSURES AND AUDIT QUALITY;
RELEASES DISCUSSION PAPER AND
THOUGHT PIECE
The International Auditing and Assurance Standards Board
(IAASB) has released for public comment a discussion
paper exploring key issues relating to disclosures in
financial statements. Titled The Evolving Nature of
Financial Reporting: Disclosure and Its Audit
Implications, the paper highlights recent trends in the
range, volume, and complexity of financial statement
disclosures, and explores issues and practical challenges in
preparing, auditing, and using them. In addition, in order to
stimulate further debate on audit quality, and in its
continuing efforts to facilitate robust audits in the public
interest, the IAASB today also released a publication titled
Audit Quality: An IAASB Perspective.
global adoption and implementation of standards.
TRANSITIONING TO ISAs, SUSTAINABILITY,
ETHICS, AND SMPs ARE KEY ISSUES FOR
GLOBAL ACCOUNTANCY LEADERS,
ACCORDING TO IFAC GLOBAL SURVEY
Virtually all survey participants (98-99 percent) said that
IFAC plays a very important or important role relating to
confidence in, and adoption of, high-quality international
standards. In addition, 97 percent of respondents said that
recognition of IFAC as the umbrella organization for
international standards in the areas of auditing and
assurance, education, ethics, and public sector financial
reporting is very important or important. The vast majority
of survey participants said IFAC should continue to work
toward convergence and effective implementation of
international standards. To encourage implementation, 91
percent of those surveyed said that developing guidance
regarding international standards and corporate
governance principles is very important or important.
Profession Urges International Federation of Accountants
to Increase Role in These Areas
SUSTAINABILITY AND SMPS TAKE CENTER
STAGE
Credibility of the profession, standard setting, and
adoption and implementation are key areas of focus for
leaders in the accountancy profession, according to results
of the 2010 IFAC Global Leadership Survey of the
Accounting Profession, released today by the International
Federation of Accountants (IFAC), the global organization
for the accountancy profession with members and
associates in 125 countries.
Sustainability emerged as a key issue as well, with 91
percent saying that progressing corporate social
responsibility, including sustainability, is important,
compared to 82 percent last year. In addition, 95 percent of
respondents said that addressing the needs of SMEs and
SMPs is crucial.
“In our fourth annual survey, there was extremely strong
confirmation among survey participants that IFAC should
continue in its pivotal role as an international standard
setter,” said Ian Ball, chief executive officer of IFAC. “In
addition, respondents asked us to continue to work toward
convergence and the adoption of international standards,
and proactively support and restore public confidence in
the accountancy profession.”
The importance of ethics also was cited-auditor
independence and agreeing/discussing expectations to
prevent and detect fraud were cited by 91 percent and 89
percent of respondents, respectively. The survey also
confirmed the widespread opinion that there is a clear need
to have a global code of ethics to protect the fundamental
qualities of the profession, particularly relating to
independence. According to participants, the code needs to
take local culture into account, and needs to be effectively
enforced.
IFAC’S ROLE IN IMPLEMENTATION OF GLOBAL
STANDARDS IS CRUCIAL
The accountancy profession feels that transitioning to
International Standards on Auditing (ISAs) is a crucial
issue-96 percent of survey respondents cited this as very
important or important, compared with 83 percent last
year. There was also universal sentiment that IFAC, as a
representative of the global accountancy profession, has a
key role to play in convergence and leading the way in the
GLOBAL CODE OF ETHICS NEEDED
KEY BUSINESS LEADERS FROM AROUND THE
WORLD RECOMMEND FUNDAMENTAL
CHANGES TO BUSINESS REPORTING IN IFAC
REPORT
Elemental changes to the current format of financial
reporting need to be made to increase its relevance and
stakeholder value and stem the increasing complexity that
19
has plagued financial reporting in recent years, according
to key business leaders from around the world interviewed
by the International Federation of Accountants (IFAC).
Developing a new form of reporting that integrates an
organization’s social and environmental performance with
its economic performance, in a simplified manner, would
benefit all stakeholders, according to interviewees. These
and other recommendations are summarized in the report,
Integrating the Business Reporting Supply Chain, released
today by IFAC.
The report is based on IFAC’s interviews with 25
prominent business leaders, representing preparers,
directors, auditors, standard setters, regulators, and
investors, on what should be done to effectively improve
governance, the financial reporting process, the audit, and
the usefulness of business reports in the aftermath of the
financial crisis. The report provides a summary of
interviewees’ recommendations in each area and highlights
some of IFAC’s related initiatives.
reports, so that they are easily understood by all
stakeholders in the reporting supply chain, according to
interviewees. Interviewees also called upon regulators and
standard setters to limit the financial reporting burden on
smaller and non-listed entities. In the area of auditing,
interviewees agreed that limited audit choice is a challenge
that needs to be addressed. They also made
recommendations to further improve practice development
and auditor communication, and recommended that
auditors expand the scope of their assurance services to
include non-financial information, such as the social and
sustainable performance information included in
integrated business reports.
Interviewees acknowledged that achieving integrated
business reporting will be very hard to accomplish, and
will require all stakeholders in the business reporting
supply chain to manage the challenges-including litigation
risks and regulations that may inhibit change-in a
coordinated way.
“Society needs successful commercial organizations that
act responsibly, and it is important that the business
reporting system not only allows but actively promotes this
corporate philosophy. There is much debate as to whether
or not the current reporting system is fit for this purpose,
and this report seeks to drive forward the debate in the
crucial areas: governance, financial reporting, financial
auditing, and the usefulness of business reports,” said
Charles Tilley, chair of the IFAC Business Reporting
Project Group.
IFAC would like to thank all of the business leaders who
agreed to be interviewed, graciously lending their time and
expertise, and without whom this project would not have
been possible. To access a summary of the key
recommendations, the interview transcripts, and a series of
articles based on the interviews, visit the IFAC website at
www.ifac.org/frsc. More information about the project
group and their previous work is also available on this site.
“Strong governance lies at the core of high-quality
business reporting. Interviewees agreed that good
governance starts with tone at the top. Additional
recommendations to strengthen governance in
organizations include:
Note related to accounting Auditing and relevant issues
By Tassos Anastasiades, Deputy Editor
ñ Governance codes should be principles based and
PAY AND BONUSES
stakeholder driven;
ñ Collaborative, global effort is required to address
systemic risk; and
ñ More independence should be required of boards of
directors.
Improving financial reporting depends on simplifying
20
The debate about bankers’ pay often gets bogged down in
the question of quantum. But no less important is that rules
on pay should also make banks safer. One way to do this is
to use bonuses to boost capital as well as pay staff. Upfront
portions of bonuses should be paid in new shares or
convertible bonds as these strengthen banks’ ability to
absorb losses - even if they are immediately sold in the
secondary market.
BASEL REVEALS LIQUIDITY GAP FOR BIGGEST
BANKS
The world’s biggest banks have a combined m1,730bn gap
in liquid investments that they must fill within four years,
according to the Basel Committee on Banking
Supervision, the international banking watchdog. Under
the Basel III rule book, finalised by the committee, 91 of
the world’s biggest banks - tested in an impact assessment
- also have a m577bn capital shortfall compared with the
new 7 per cent headline number for equity tier one capital,
a measure of financial strength.
The Basel III rules, which are to be phased in in the next
few years, demand that 30-day liquidity be beefed up by
2015 and that the capital ratios are met by 2019. The
market has been braced for months for the capital
shortfalls, which analysts believe will be largely coverable
with retained profits. But the liquidity gap, particularly
sensitive given the currently malfunctioning interbank
markets in the eurozone, is a shock.
E&Y ACCUSED OF AIDING ‘MASSIVE’ FRAUD
New York prosecutors accused Ernst & Young of helping
Lehman Brothers engage in a “massive accounting fraud”
by approving a move that temporarily reduced the
brokerage firm’s debt and gave investors an impression it
was in a stronger financial condition. The civil lawsuit,
filed in a New York state court, alleges the auditing firm
“substantially” helped Lehman mislead investors from
2001 until the brokerage firm’s 2008 bankruptcy filing by
signing off on the accounting sleight of hand.
The strongly worded lawsuit goes further than accusing
Ernst & Young of misconduct. It alleges Lehman engaged
in a “massive accounting fraud” by using the accounting
treatment, known as Repo 105. The office of Andrew
Cuomo, New York attorney-general, does not name any
former Lehman officials in the lawsuit, leaving open the
question of whether additional charges will be filed against
any former officials.
PWC UNDER FIRE OVER ROLE IN ICELAND
PwC, the international accountancy group, is alleged to
have missed numerous warning signs about the state of
Iceland’s banks long before they collapsed in 2008,
according to a leaked investigation that exposes
widespread irregularities among the doomed lenders. The
findings were made by a team of international investigators
in reports commissioned by the Icelandic special
prosecutor who is probing possible criminal wrongdoing
before the bank crash.
The studies found that Landsbanki and Glitnir, two of the
failed Icelandic banks, had “grossly overstated” their
financial strength, hidden large risk exposures and failed to
disclose the full extent of lending to the banks’ owners and
other related parties. The banks were already in deep
trouble at the end of 2007. It is claimed that PwC showed
“negligence” in failing to spot financial misstatements that
should have led to the banks losing their operating
licences.
BANKERS FACE TAX SHOCK UNDER EU BONUS
RULES
European bankers could face heavy unfunded tax bills on
their bonuses, under the terms of new EU pay rules
published by the Committee of European Banking
Supervisors (CEBS). As well as confirming that up to 60
per cent of top bankers’ bonuses should be deferred for as
much as five years - with half of upfront and deferred
portions paid in shares - the CEBS said there should be a
“minimum retention period” for share awards beyond the
deferral period.
In practice, this would mean a UK banker awarded a í1m
bonus, for example, would receive £500.000 in shares over
a three - year deferral period, but could be barred from
selling the shares for an additional period of, say, three
years beyond that, even though the tax bill on the award of £250.000 - would be payable as soon as the shares
vested.
UBS SUED BY MADOFF TRUSTEE
UBS has been hit with a 23-count fraud lawsuit that seeks
the return of $2bn and alleges the Swiss bank enabled
Bernard Madoff’s Ponzi scheme. Irving Picard, the trustee
who represents investors in Mr Madoff’s failed brokerage
firm, alleged that UBS,, several related entities and
unnamed individuals “lent an aura of legitimacy” to the
Madoff fraud, which collapsed in 2008.
23
SARKOZY URGES G20 CAPITAL CODE
Nicolas Sarkozy, French president, called for a code of
conduct to regulate international capital flows amid
warnings that the money pouring into emerging economies
would grow again in 2011, exacerbating tensions seen last
year in the international financial system. Setting out
France’s ambitions for its presidency of the Group of 20
leading nations this year, Mr. Sarkozy said it was
imperative that the biggest economies deal with the
question of volatile capital flows and global imbalances if
crises were to be avoided.
MERRILL LYNCH TO PAY $10M TO SETTLE SEC
TRADE INQUIRY
Merrill Lynch has agreed to pay $10m to settle a case in
which the US Securities and Exchange Commission
accused it of piggybacking on large customer orders and
improperly charging clients to execute their trades. Merrill
agreed to settle an administrative proceeding, without
admitting or denying wrongdoing.
IMF RAISES WORLD GROWTH OUTLOOK AS UK
STALLS
The unexpected contraction in the UK economy at the end
of last year demonstrated just how uncertain economic
prospects are only a few hours after the International
Monetary Fund published a rosy updated forecast for the
world economy.
In the final quarter of 2010, the UK economy contracted by
0.5 per cent, the Office for national Statistics said,
although it added that without the disruption caused by
snow in December, the quarterly picture would have been
“flattish”. With faster growth in emerging economics the
world growth rate comes back to pre-crisis levels in every
year between 2010 and 2012.
NEARLY HALF OF CEOS POLLED ‘VERY
CONFIDENT’ ABOUT OUTLOOK
Business leaders round the world are now almost as
optimistic about outlook for their companies as they were
just before the financial crisis erupted, according to a
24
survey released from PwC, the audit and consultancy
group. Out of some 1.201 chief executive officers across
the world, 48 per cent said they were “very confident”
about their company’s growth prospects over the next 12
months - while 88 per cent said they had at least “some”
confidence in the outlook, PwC said.
GOLDMAN PRESIDENT WARNS ON BANK
RULES
A top Goldman Sachs executive has warned that the drive
to impose more regulation on banks could cause the next
crisis by pushing risky activities towards hedge funds and
other lightly supervised entities. The comments by Gary
Cohn, Goldman’s most senior executive after chairman
and chief executive Lloyd Blankfein, come as banks round
the world, emboldened by recovering profits and surging
markets, intensify efforts to shape financial regulation.
HEDGE FUNDS HEAD FOR MALTA TO ESCAPE
COSTS AND REGULATION
Some of London’s biggest hedge fund managers are
shifting their operations to Malta in response to both the
rising costs of business and the growing regulatory burden
in the UK. The Mediterranean island is emerging
alongside traditional rivals to London, such as Swiss towns
Geneva and Zug, as another European location for hedge
fund managers keen to maintain flexible operating
arrangements - and avoid heavy tax bills.
David Butler, founder of the consultancy Kinetic Partners,
which advises hedge funds on their domicile and tax
arrangements, said: “It’s dozens, rather than hundreds, that
are moving there at the moment, but opening an office
there gives managers flexibility. [They] are sitting in
London, saying: ‘I have too much country risk here - the
tax rate is through the roof, the regulations are too
intrusive’.”
Clive Capital, the world’s largest commodity hedge fund
manager, has established an office on the island and now
has about a quarter of its hundred or so employees based
there. Vector Commodity Management, a hedge fund
launched last year by ex-Goldman Sachs senior oil trader
Gilbert Saiz, has opened an office on the island, according
to people familiar with the firm.
BASEL III RATIOS NEED DOUBLING, SAY BANK
OF ENGLAND RESEARCHERS
The new Basel III rules requiring banks to hold more
capital are too weak and should be doubled to provide
optimal protection against future economic shocks,
researchers at the Bank of England have concluded.
The discussion paper issued calculates that forcing banks
to hold twice as much equity against potential losses would
cut economic output by 6 per cent over a long period. But
the authors, led by David Miles, an external member of the
Bank committee that sets interest rates, argue the
additional stability is worth it. The paper concludes that
global regulators should require banks to hold equity
capital equal to 16-20 per cent of their assets, adjusted for
risk. The new Basel III minimum, approved last year, is 7
per cent and phases in gradually over eight years.
ERNST & YOUNG APPOINTS FIRST
INDEPENDENT NON-EXECS
Three prominent figures from the worlds of business and
regulation have become the first independent nonexecutives to be appointed by Ernst & Young, the
accountant that is fighting to distance itself from the
collapse of Lehman Brothers. The trio are Mark Olson, a
former chairman of the Public Company Accounting
Oversight Board, which regulates US auditors; Sir Richard
Lambert, former director-general of the Confederation of
British Industry, the UK employers’ body; and Klaus
Mangold, a former DaimlerChrysler executive. Their
appointments are a response to an overhaul of the
governance of audit firms in the UK.
Last year, regulators told the country’s eighth-biggest
auditors to appoint independent non-executives to offer an
external perspective within these private partnerships and
serve as safeguards for their all-important reputations. But
even though Ernst & Young is following in the slipstream
of rivals KPMG, PwC, BDO and Grant Thornton by
announcing non-executives, its choices - particularly that
of Mr Olson - will be particularly closely scrutinised by
outsiders given its controversial role as auditor to Lehman
Brothers.
SEC FILES CHARGES AGAINST GUPTA
Rajat Gupta, who ran McKinsey for almost a decade, has
been hit with civil insider trading charges for allegedly
sharing secret information he learnt as a Goldman Sachs
board member with Galleon Group founder Raj
Rajarathnam. The Securities and Exchange Commission’s
charges allege Mr. Gupta shared information about Warren
Buffett’s $5bn capital infusion into the bank in 2008 within
one minute of the board’s approval of the deal.
SEC EXAMINES INSIDER TRADING LINK TO
EXCHANGE - TRADED FUNDS
The Securities and Exchange Commission is investigating
whether Wall Street traders are using exchange - traded
funds as a means of disguising insider trading. ETF’s have
emerged as a possible mechanism for maximising gains in
one stock while potentially masking trading pattens,
people familiar with the matter say. In one scenario, a
trader could learn information about a company, buy an
ETF that includes the company’s stock, and short sell the
other stocks in the ETF.
The practice, known as ETF-stripping, would allow the
trader to benefit from movements in the company’s share
price without directly buying or selling that stock.
Regulators, who work closely with the US justice
department, are concerned that traders are adopting this
approach, and others, to mask insider trading.
INDIA SET TO DELAY AN OVERHAUL OF ITS
ACCOUNTING STANDARDS
India is set to delay by one year an overhaul of its
accounting rules, after the government failed to issue the
new standards - designed to deepen its ties with the world
economy - early enough for domestic companies to
implement them. The ministry of the corporate affairs
published final versions of the 35 new accounting
standards that are supposed to bring India’s accounting
system in line with the International Financial Reporting
Standards followed in the European Union and other
countries. However, the ministry failed to give a timeline
on when the new rules would be applied.
A person advising the government on the adoption of the
new accounting standards said the new deadline for a
phased transition to the new standards would likely be
April 2012.
25
Interview
Interview with H.E. the Ambassador of Hungary
Mr. Csaba Lovro
To Ninos Hadjirousos, editor, and Tassos Anastasiades,
Deputy Editor, Accountancy Cyprus Journal
In an interview we had with
the Ambassador of Hungary
Mr. Csaba Lovro he
informed us, inter alia, that
Hungary maintains friendly
and close ties with Cyprus,
has contributed to the
peacekeeping in Cyprus in
the past 15 years, and that
several hundred Hungarian
companies are registered in
Cyprus primarily for tax
Mr. Csaba Lovro
purposes. With regard to
tourism Mr. Lovro stated that
there is a tourist exchange of about ten thousand tourists a
year in both directions and that Hungary is a favourite
destination for Cypriots to further their higher education
studies. Mr. Lovro also stated that Hungary welcomes
investors from Cyprus as it offers many advantages in
operating a business there or in the region having the HQs
in Hungary.
In 2008 Hungary turned for help to the IMF from which it
received a 20 billion euro loan in cooperation with the EU
and the World Bank which kept the economy afloat. The
prime Minister of Hungary Mr. Viktor Orban has stated
that Hungary is grateful to the IMF for readily helping it
when the crisis had eroded its creditworthiness.
Responding to our question about the priorities of the
Hungarian Presidency Mr. Lovro stated that the aim of the
Hungarian Presidency is to help create an economically,
socially, politically and institutionally stronger and more
attractive Europe. The priorities of the Presidency can be
summarized under the following headings:
- Growth, jobs and social inclusion
- Stronger Europe - building on the foundations and
protecting the future
26
- A Union close to its citizens
- Enlarging responsibly and engaging globally
Regarding the growth strategy of the Hungarian
Government, Mr. Lovro stated its aim is to render the
economy more dynamic, cut the budget deficit and the
public debt. Towards the first aim the tax burden has
significantly been reduced thus allowing assets in the real
economy to be used for production and investments
purposes. The budget deficit has been on the decline and
a deficit of 2.9% is expected which is one of the lowest
figures in the EU. At the same time Hungary is determined
to raise the investment ratio above 25 per cent of GDP in
the following 5 years.
The full interview with Mr. Csaba Lovro follows:
1. Mr. Ambassador we would like to start our interview
by asking you to give us a broad outline of relations,
specifically the economic relations between Hungary
and Cyprus.
Hungary maintains friendly and close ties with the
Republic of Cyprus based on some common interests and
concerns. We have also actively contributed to the
peacekeeping in Cyprus in the past 15 years.
Unfortunately, the bilateral economic relations lag behind
the political relations and also the potentials of the two
countries. The trade figures show relatively low export and
an increasing import with a significant fluctuation both in
terms of value and balance. The Hungarian export to
Cyprus amounted to 30.1 M euros in 2010 (down from
34,2 in 2009), while import was 57,2 M euros (up from
28,7 in 2009). Several hundred Hungarian companies are
registered in Cyprus for taxation considerations; however,
there is not a single company that operates in Cyprus. On
the sunnier side, we can boast with good numbers in tourist
exchange, approximately 10 thousand tourists a year in
both directions and Hungary is also a favourite destination
Interview
for Cypriots to further their higher education studies at
Hungarian universities that offer a wide range of courses in
foreign languages.
3. What measures has Hungary taken to face the
recession following the international economic crisis?
The government used its political mandate to
fundamentally reorient fiscal policies. The basic line was
not to exceed the 3,8% budget deficit while securing the
A pension reform has also been realized by returning to the
two-pillar pension system, from the three-pillar system
which was threatening the budget balance, and was
financially not viable. The government also set up a
roughly one billion euro Stability Fund.
The government announced a structural reform program
on 1 March that aims at reducing and preventing the regeneration of the public debt as well as giving an impetus
to the economy by the implementation of structural
reforms. These cover the employment
structure, the health care, the pension
system, the education, the public
transport, the public procurement - just
to name the major components of the
plan.
4. What are the country’s experiences
in using the facilities of the
International Monetary Fund?
resurrection of the economy and at the same time
guaranteeing social security. The tax system has been
radically changed; it has been made more transparent with
a decrease of tax rates aiming at diminishing tax evasion
and providing a better environment for the functioning of
SME’s to jumpstart growth. Due to the cut in corporate
taxes, implemented in July last year, the tax burden was
reduced to 37,6%. As a result of the implementation of a
flat-rate personal income tax from 1 January 2011, tax
liabilities further decreased to 36,5%.
Temporary levies have been introduced on financial
institutions, retail chains, telecommunication and energy
companies. Public spending has been curbed (introduction
of maximum salaries for state employees, cutting of
severance pays, re-evaluation of outsourcing by
government organizations, reassessment of investment
projects in the form of PPP, decrease of funding for
political parties, etc.)
To ease the life of enterprises and increase their
competitiveness administration cuts have been introduced.
In 2008 Hungary turned for help to the
IMF. A 20 billion euro loan provided by
the IMF - in cooperation with the EU
and the World Bank - kept the economy
afloat. Let me cite Prime Minister
Orb_n, who said that Hungary was
grateful for the IMF for readily helping us when the crisis
had eaten up the creditworthiness of Hungary. Hungary
was not given a present, but a loan, but it was a great help
back then.
Hungary has not used the entire loan available; she has not
drawn down from the loan facilities since July 2009. In the
meantime the program has expired and the government is
not seeking its renewal. Hungary will stand on her feet; she
returns to the international financial market, covers the
needs of the economy there from and does not wait for
resources that can be obtained through political
bargaining. This shift requires, however, a calculable,
creditable economic policy, a controlled budget deficit, a
clear medium and long term strategy. This is why the
government introduced all the measures I mentioned
before.
5. Could you brief us about the priorities of the
Hungarian Presidency of the EU?
Hungary took over the Presidency of the Council of the
27
Interview
European Union in a challenging time, in a period of
recovery from a global economic crisis that hit hard a
number of EU member states as well. Hungary, as the last
member of the Spanish-Belgian-Hungarian trio, continues
with finding a path out of the economic crisis and laying
the foundations for future development. Strong Europe this is our motto. For we believe that the crisis and the
decisions Member States have taken to overcome it show
that the response to the current challenges should be more
and not less Europe. This is our aim as Presidency: to help
create an economically, socially, politically and
institutionally stronger and more attractive Europe. The
priorities of the Presidency can be summarized under the
following headings:
- Growth, jobs and social inclusion
- Stronger Europe - building on the foundations and
protecting the future
- A Union close to its citizens
- Enlarging responsibly and engaging globally
To name some concrete tasks and initiatives, I would like
to mention the execution of the European semester which
aims at improving the planning of the budgets of the
Member States; laying the foundations for a common
European energy market; realization of the Danube Region
Strategy; the creation of an integration strategy for the
Roma people; the continuation of the enlargement process
by taking at least one step further with each candidate
country based on their merits and the strengthening of the
partnership with the eastern neighbours of the EU.
6. To what extent is one of the priorities of the
Hungarian Presidency the improvement of the status of
Roma people?
The priorities of Hungary and those of the EU in general
overlap in many areas, and the integration of the Roma
people is one of these. Under the priority of social
inclusion we devote significant attention to the
improvement of the integration of the Roma by paying
special attention to employment, education and health
issues and the eradication of poverty among them. The
Roma are the biggest minority in the EU, numbering 10-12
million people with groups of several hundred thousand
people in many EU member states, around 500.000 in
Hungary alone. Work began already prior to the Hungarian
Presidency and it stretches over our tenure which is
understandable given the complex nature and the
magnitude of the problem.
28
7. What is your growth strategy, especially fiscal policy,
to help boost economic growth?
The aim of the government is to render the economy more
dynamic, cut the budget deficit and the debt. Towards the
first aim the tax burden has significantly decreased that
frees assets in the real economy to be used for production
and investments. The budget deficit has been on the
decline, we expect a 2,9% deficit that shall be one of the
lowest figure in the EU. A new investment policy aiming at
the increase of the GDP will result in a decrease of the
debt. An impetus to investments is given by means of the
New Széchenyi Plan. We are determined to raise the
investment ratio above 25 per cent of GDP in the following
5 years. The resources available to serve this end are in
particular the funds from the EU. Increasing employment
is a cornerstone of both the Government Programme and
of the high-priority projects. The objective of creating one
million new jobs in ten years is presented among the
commitments of the New Széchenyi Plan as well as in EU
2020.
8. Is the country facing an ageing population problem
and if yes, what measures does it take or intends to take
to address them?
Europe on the whole faces serious demographic challenges
that threaten the prospects of the economic growth, the
sustainability of the pensions systems, etc. Hungary is no
exception. The population has been decreasing since 1981
and the loss is a shocking 715.000. If it weren’t the
immigration of a considerable number of people
(363.000), mainly ethnic Hungarians moving to the
motherland since the end of the 80’s, the total loss would
be by now more than a million people. The number of
inhabitants went below the psychological barrier of 10
million in August 2010. To boost the natural growth of
population the government provides such incentives as the
introduction of family income taxation, a child tax
allowance increasing proportionally with the number of
children in a household, child-care allowance irrespective
of previous work engagement and the re-extension of
childcare leave to 3 years. Apart from measures aiming
directly at children, other instrument that alleviate the
burden on families also considered to help boosting the
willingness to have children: state financed housing
programs, actuating of part-time work for mothers,
restructuring the system of student loans, etc.
Cyprus in the eurozone environment
Cyprus in the Challenging
Eurozone Environment
As was widely predicted,
worldwide recovery is taking
a slow and hesitant path with
unemployment the most
stubborn
and
painful
indicator. The emerging
economies are returning to
near pre-crisis growth rates,
while recovery in Europe is
uneven characterized by a
persistent sovereign (government) debt crisis in the
By Michael Sarris
eurozone. In parallel with
Former Minister of Finance
decisive and unprecedented
Central Bank action, most countries have responded to the
crisis with expansionary fiscal policies and banking sector
support, leading to larger budget deficits and ballooning
government debt levels, including guarantees. While
projected budget deficits in many countries are beginning
to decline, debt levels continue to rise and funding needs
for both the public and private sectors loom large in the
coming years.
THE CRISIS IN THE EUROZONE
The world economic crisis (i) brought to the surface
preexisting and homegrown structural problems in many
eurozone member countries, including persistent
differences in the evolution of unit labor costs and prices
(competitiveness) (ii) highlighted the damage done by past
relaxations (2004) and violations of the Stability and
Growth Pact and insufficient fiscal consolidation in the
good years, and (iii) underscored shortcomings in the
functioning of the Economic and Monetary Union. With
entry into monetary union, under the umbrella of a
common stable currency and lower interest rates, in many
countries fiscal policy, which remained a national
responsibility, was not adjusted leading to unsustainable
overheating of the economy, characterized by asset price
(construction) booms.
The crisis also revealed the weaknesses of the surveillance
and enforcement process at the European Union and
eurozone levels: besides the fiscal and debt criteria of the
Stability and Growth Pact, there was near total neglect of
other macroeconomic imbalances and of macro-financial
sector risks. Furthermore, despite sharp economic
performance differences, and differences in economic
fundamentals, government debt yields across member
states of the eurozone moved together and differed little
from each other until 2010, when we witnessed
unprecedented and remarkable diverging spreads on longterm government debt. As the sovereign debt crisis
developed, it became clear that persistent errors in national
economic policies not only damaged a country_s own
economic welfare but caused serious problems for the
eurozone as a whole.
MANAGING THE CRISIS
Largely for this reason, the European Central Bank took
exceptional and unconventional measures to help manage
tensions in the sovereign debt markets (unfolding not only
in Greece but also in Ireland and potentially in Portugal)
while the Eurogroup political leadership struggled with the
dilemma between, on the one hand, the moral hazard of
under-mining the no-bail-out principle, thereby providing
governments and markets with the wrong incentives, and,
on the other hand, averting the threat to the stability of the
common currency.
As the thinking of how to improve the governance of the
eurozone evolved, on the one side there was (i) the real
concern that a quasi-automatic bail-out system would
effectively validate bad policies and send the national
policy making in the wrong direction of unsound policies,
while on the other side (ii) there was a clear recognition
that the doubts implicitly expressed by the behavior of
markets could only be eased by correcting the perception
of a failure in European solidarity (which was evident in
the process of reaching agreements on the handling of the
sovereign crisis in the euro area over the past several
months) and reaffirming stronger mutual support among
eurozone member states.
31
BUILDING ON WHAT WENT WRONG
In several instances not only did the preventive part of the
Stability and Growth Pact not succeed in preventing
excessive deficits, but also the corrective arm of the Pact
failed in inducing prompt excessive deficit reversal, all this
amidst failures in budgetary reporting and surveillance and
the resulting inevitable reputational cost for the European
institutions. Not only were the rules not enforceable and
sanctions were not available, while peer pressure was not
enough for the avoidance of persistent excessive deficits,
but market forces failed to signal the urgent need for
budgetary discipline in that, until the onset of the crisis,
markets did not differentiate among the yields on
sovereign debt of different member countries of the
eurozone.
Indeed, we now know that markets take too long to provide
signals of underlying trouble and then, when the crisis
erupts, they overreact compounding severe disruption, and
they are not easily convinced that effective corrective
measures are taken and adequate external support is being
provided. Furthermore, it now seems that being a member
of the eurozone, which does not allow the exchange rate
flexibility that would contribute to macroeconomic
adjustment, while normally it brings significant benefits,
during times of crisis in the common currency area it can
be a distinct liability, for countries which do not follow
sound and sustainable policies as can be seen by the
behavior of markets, even as the recession appears to be
drawing to an end.
suggests significant betting on some sort of restructuring
of the Greek debt (discounting) and doubts for a number of
other eurozone member countries.
Critical to needed action in the second area is
strengthening the code of conduct for national
governments in the eurozone, notably the Stability and
Growth Pact, supported by improved economic
governance, including the possibility of reputational and
financial sanctions, as well as incorporating in the
surveillance process an assessment of the overall
macroeconomic situation (not only fiscal). Effective
improvements are essential to reap the benefits of the
European Stability Mechanism, a form of mutual
insurance facility which is currently under design. A key
lesson from the ongoing crisis is that quick, boald and
comprehensive action is needed, setting overachieving
targets thereby getting ahead of the markets.
MEDIUM-TERM FISCAL CONSOLIDATION
While immediate reduction in fiscal deficits is important,
much more critical is the adoption of a multi-year fiscal
planning horizon in budget discussions and design, with a
transparent and consistent framework with clear and
binding rules - these discussions should include contingent
liabilities such as long-term expenditures in which the state
or state enterprises are committed and unfunded social
security and other future retirement liabilities. Binding
rules should include setting limits on the growth of the
overall and specific expenditure categories to facilitate
budget consolidation in case of excessive deficit or debt
ratios.
THE WAY FORWARD
As we go forward there seem to be three areas of needed
action (i) first, how to deal with the fallout and the
consequences of the ongoing sovereign debt crisis (ii)
second, how to ensure that in the future economic policies
of member countries are consistent with membership in a
sound monetary union and (iii) how can the economic
governance of the eurozone be improved so as to restore
confidence in its financial stability. In the first area, strong
and painful measures are being taken by the countries most
seriously affected by the sovereign debt crisis, and by
others which do not wish to suffer the same fate, while at
the same time a massive coordinated package of financial
support by the European Union and the International
Monetary Fund has been put in place. While it is perhaps
not appropriate to speculate here on the outcome of these
efforts, for the time being the behavior of financial markets
32
Also needed at a European level is a rigorous and credible
budgetary data reporting and analysis as well as
surveillance, framework. For some countries, an
independent budget evaluation agency could be useful to
provide a cross-check to the national budget authority and
facilitate the analysis at the European level. To be effective
a compliance framework needs to be complemented by
strong incentives and effective sanctions. In this context,
clear and quasi-automatic sanctions are being discussed
including well publicized country recommendations ( a
reputational sanction), fines, reduced access to European
Union funds and other financial consequences, with the
severity of the breach determining the severity of the
sanction. Shorter deadlines under excessive deficit
procedures and more ambitious targets for the reduction of
public debt towards the 60% of GDP ceiling (and beyond
if necessary) seem appropriate.
THE ROLE OF COMPETITIVENESS
Beyond the clear message to bond markets, and other
economic agents who invest and create jobs, that the era of
fiscal misconduct is over, macroeconomic stability and the
prospects for economic growth need to be anchored firmly
on competitiveness in the eurozone. The primary
symptoms of a widening competitive gap which has hit the
eurozone, are to be seen in unit labor costs and inflation
differentials, growing private sector indebtedness and
mounting current account imbalances. The real damage to
the economy takes the form of persistent differentials in
output and employment growth and welfare.
In some countries, exemplified by Germany, where relative
labor costs have improved and labor market barriers have
been lowered, employment has risen. Going forward,
countries which take advantage of the crisis to implement
structural reform will reap the benefits. And Europe for its
part needs to establish a rigorous and credible framework
for monitoring the implementation of these measures and
the subsequent behavior of national cost and price
developments sending the message that if they are
persistently and significantly higher than the eurozone
average, competitiveness and growth will suffer.
REBUILDING CONFIDENCE IN THE EUROZONE
The third area of action which is designed to correct the
perception of failures in European solidarity in facing the
sovereign debt crisis in the eurozone, is the establishment
of a mutual support framework known as the European
Stability Mechanism. The objective of this mechanism is
to address situations where a eurozone member state has
lost, or is in serious risk of losing, the ability to finance
itself at sustainable interest rates on the capital markets.
While the need for such a mechanism is clear to help
restore confidence and has been demonstrated by the
ongoing sovereign debt crisis, a number of key issues need
to be resolved.
The avoidance of moral hazard through the strengthening
of the fiscal and competitiveness code of conduct is clearly
crucial for the success of the mechanism. Related to this, is
the governance of the macroeconomic adjustment program
to restore the eurozone member state to a situation where
it can finance itself on the markets. Other areas which need
to be worked out in detail are the appropriate size and
lending capacity of the mechanism, its capital structure
including an equitable burden sharing among member
countries, what instruments it will use and at what price
and how will the private sector be involved. Good work is
being done on all these issues.
CYPRUS: URGENT ACTION NEEDED
Much of what has been said about the eurozone member
countries needed course of action going forward applies to
Cyprus as well. What needs to be done has been repeatedly
analyzed and discussed and this is not the place to go into
detail. The deterioration in Cyprus_ public finances since
2008 has been severe and it cannot be simply explained by
the world economic crisis. Our ambition to continue to
grow as a regional financial center and not to undermine
the key role of our internationally - oriented banking sector
as a source of growth, demands urgent fiscal consolidation.
In parallel, the prudential banking regime must remain
vigilant and, if necessary, overachieve while banking
institutions themselves must emphasize transparency and
apply strict rules in presenting the quality of the portfolios.
The messages from the rating agencies are clear as are the
areas of concern and the urgency for meaningful action.
The adverse environment for the sovereign debt of several
eurozone member countries make it even more important
to set and achieve ambitious fiscal consolidation and
transparency targets. Modest revenue increases resulting in
marginal improvements in the fiscal situation must not
divert attention from the need for structural containment of
public sector expenditures. Short-term orientation in fiscal
management must be supplemented by dynamic mediumterm fiscal and structural consolidation. To be sustainable,
annual overall expenditure growth must remain below the
growth rate of the economy and potential public sector
liabilities must be taken into account in determining the
appropriate fiscal stance.
The required action program for Cyprus includes
addressing a structural fiscal deficit though a multi-year
program of expenditure control, focusing on the civil
service wage bill, much better targeting of social spending
with explicit ceilings, a reversal of the rapid growth of the
state and structural reforms to improve the productivity
and the competitiveness of the economy. The experience of
several eurozone countries demonstrates the high cost of
inaction and of the pretence that all is well, until much
more painful action becomes inevitable.
33
A new strategy for Europe
Europe 2020 - A new strategy for Europe
Europe 2020, the European
Union’s new strategy for the
future was formally adopted
at the European Council held
in Brussels in June 2010.
Europe 2020 is the EU’s
collective, strategic, longterm response to the crisis. It
is designed to help the
European economies recover
and return to growth. And
once this is achieved, it is
By Androulla Kaminara
designed to ensure that
Head of the European
growth continues. In the
Commission Representation
current world climate, for
in Cyprus
this to happen economic
growth must be based on
innovation, must respect the environment and must
recognise the need for social cohesion. Hence, Europe
2020 aims for growth that is smart, green and inclusive.
In the short-term, the first imperative of the new strategy is
the exit from the crisis. Going forward, Europe 2020 sets
three mutually reinforcing priorities:
1. Smart growth: developing an economy based on
knowledge and innovation.
2. Sustainable growth: promoting a more resource
efficient, greener and more competitive economy.
3. Inclusive growth: fostering a high-employment
economy delivering social and territorial cohesion.
consumption to 20%; and moving towards a 20% increase
in energy efficiency.
4. The share of early school leavers should be under 10%
and at least 40% of the younger generation should have a
tertiary degree.
5. 20 million less people should be at risk of poverty.
Work to achieve these targets will be channelled through
seven flagship initiatives
FOR SMART GROWTH
1. Innovation Union - to improve framework conditions
and access to finance for research and innovation so as to
ensure that innovative ideas can be turned into products
and services that create growth and jobs
2. Youth on the move - to enhance the performance of
education systems and to facilitate the entry of young
people to the labour market
3. A digital agenda for Europe - to speed up the roll-out of
high-speed internet and reap the benefits of a digital single
market for households and firms
FOR SUSTAINABLE GROWTH
For 2020, the new strategy sets five clear, measurable
targets:
4. Resource efficient Europe - to help decouple economic
growth from the use of resources, support the shift towards
a low carbon economy, increase the use of renewable
energy sources, modernise our transport sector and
promote energy efficiency
5. An industrial policy for the globalisation era - to
improve the business environment, notably for SMEs, and
to support the development of a strong and sustainable
industrial base able to compete globally
1. 75% of the population aged 20-64 should be employed.
FOR INCLUSIVE GROWTH
2. 3% of the EU’s GDP should be invested in R&D.
6. An agenda for new skills and jobs - to modernise labour
markets and empower people by developing their skills
throughout the lifecycle with a view to increase labour
participation and better match labour supply and demand,
including through labour mobility.
7. European platform against poverty - to ensure social and
3. The “20/20/20” climate/energy targets should be met reducing greenhouse gas emissions by 20% compared to
1990 levels (could go up to 30% if conditions are right);
increasing the share of renewables in final energy
34
A new strategy for Europe
territorial cohesion so that the benefits of growth and jobs
are widely shared and people experiencing poverty and
social exclusion are enabled to live in dignity and take an
active part in society.
The new strategy is not a mere high-brow intellectual
exercise. It was designed to make a difference to ordinary
citizens. The Europe 2020 strategy was not conceived in a
policy vacuum. There was a three-month public
consultation which attracted more than 1,400
contributions, from government and civic authorities,
NGOs, trade unions, business organisations, universities
and citizens. The strategy sets clear, measurable targets
and launches a number of pan-European initiatives that
will inform, for the next ten years, policy actions at the
national level. These actions are channelled through the
National Reform Programmes and these are regularly
reviewed by the Commission and the Council.
Cyprus is currently preparing for the EU Presidency in the
second semester of 2012. Europe 2020 will provide the
wider framework in which this Presidency will take place.
It is to this framework that Cyprus will have to adjust its
entire Presidency programme, as well as the country’s
specific efforts regarding national aspirations. The
European Union needs all member states to contribute
their best to the achievement of common goals. The
upcoming Presidency is a unique opportunity for Cyprus to
leave its mark in the construction of our common European
future.
Public debt and the banking system
Public debt, competitiveness
and the banking system
By Alexander Michaelides
Professor of finance at the
University of Cyprus.
The relationship between
public debt and banking
system stability recently
became an important topic of
discussion among economists and policy makers. The
recent global financial crisis
had examples of countries
that increased dramatically
government debt to save the
banking system. In these
countries, banks created
problems
across
the
economy and were saved to prevent a deeper recession.
Examples include the U.S., England, Ireland and Iceland.
We also had, however, examples of countries where the
causation was reversed and it was the financial needs of the
state which led banks into trouble. In Greece (and also
recently again in Ireland), for example, increasing the
interest rate on government bonds meant an immediate
increase in interest rates for interbank lending and a
reduction in the value of the banks’ bond portfolio. It is for
this reason that in a recent speech, the Greek finance
minister said that in Greece it was the banks that were the
victims of the government, rather than the other way
around.
35
Public debt and the banking system
The Standard and Poor’s downgrade of Cypriot debt in
is 90 days. Moreover, the only banking sector bailout we
November 2010 based its analysis on the size of the
have witnessed post 1974 involved a COOP, to the tune of
banking system and thus espoused the “banks to state
3% of GDP (more research needed on the exact magnitude
causality”. That is one possibility given the large ratio of
but this is a conservative estimate). What is more, for
private debt to GDP, as the recent (September 2010)
reasons that are beyond my comprehension, one of the
Report of the International Monetary Fund (IMF) on
largest COOPs (Limassol) is completely unregulated.
Cyprus points out. Moody’s two-notch downgrade on
When the COOPs were small, village companies, they
February 24 2011 adds another two factors. Apart from the
could not individually cause problems in the system. Now
large size of the banking sector, the report also emphasizes
that they have grown significantly and have shrank in
the structural nature of the budget deficit and
number, they have acquired the capacity to be too big to
competitiveness problems.
fail, but perhaps also too big to save. Perhaps one lesson
from the recent crisis (according to Ben Bernanke) is that
Starting from the banking sector, I do not know what the
organizations that ultimately cannot be allowed to fail
government can do other than let the central bank run the
should either remain small or be under constant
show without any intervention through, for example,
supervision, or both. Given how large some COOPs have
contentious board appointments. The optimal size of a
become (there is continuous consolidation), at some point
sector (particularly the banking sector with an international
they can create systemic risk to the economy. If we agree
presence) cannot be easily calculated. Large size does not
that the Central Bank of Cyprus (CBC) is responsible for
automatically imply an attempt to shrink it through higher
ensuring the stability of the financial system, then we must
taxation. Many countries in the world compete to lure the
give it the responsibility of supervising the COOPs. This
deposits of rich people. Countries like Singapore and Hong
does not mean that either the COOPs will be closed or that
Kong have larger banking systems than Cyprus and could
they will be made weaker. In fact, good supervision is in
be role models for a country pretending to be interested in
the long term interests of both the COOPs, and long term
becoming a financial hub. The recent crisis (perhaps
government finances (through the implicit state guarantee
because of the strict supervisory framework since the East
that hovers over bad bank investments).
Asian crisis of 1997) did not affect the banking systems of
either Hong Kong or Singapore. The lesson from this in my
As far as public debt and competitiveness go, the
mind is that strict regulatory supervision can work, even
government should do well to try to limit the government
though this is easier written than done.
budget deficit. A reduction in the public debt through
tighter budgets can help make the private sector more
But there is one part of the banking sector that is
competitive (currently the private sector loses talented
completely unregulated in Cyprus that can pose problems
workers to the public sector). At the same time more
in the future: the co-operative societies (COOPs). The
conservative government budgets can reduce the risk to the
authors of the above IMF report explicitly state that they
banking sector by allowing the government to borrow at
suspect more bad loans relative to public announcements
more competitive international interest rates. A tighter
due to “weaker classification norms” (page 18) relative to
budget (through targeted social transfers, fighting tax
the ones in commercial banks. For example, bad loans are
evasion and limiting the public sector wage bill) can give
defined as ones without payments after 270 days in
confidence to rating agencies that public debt can stabilize
COOPs, while the respective figure for commercial banks
as the economy returns to growth.
36
The EU Financial Transaction Tax
The European parliament pushes
forward plans for financial transaction tax
The
current
economic
situation, austerity measures
and bank bail-outs have hit
budgets, and in these hard
times, there’s a need to find
new measures of financing at
EU level. A non-legislative
report
on
“Innovative
financing”
by
Greek
Socialist
MEP*
Anni
Podimata backed by the
European
Parliament’s
By Tassos Georgiou,
Economic
and
Monetary
Head European Parliament
Affairs Committee on 1
Office in Cyprus
February, suggests an EU
financial transaction tax (FTT) could help finance budgets,
reduce public deficits and fight speculation.
In the aftermath of the financial crisis, the idea of taxing
banks has been widespread, though not consensual. While
many countries have expressed a wish and need to tax the
financial sector, suggestions range in scope and type of tax.
After the vote, Ms Podimata said “now is the right moment
for the EU, which has the largest financial market in the
world, to give a convincing reply to EU citizens by
achieving a clear position in favour of the introduction of a
tax on financial transactions.”
SMALL TAX FOR A BIG IMPACT
The Podimata report suggests a Financial Transaction Tax:
ñ of between 0.01% and 0.05%, to limit the risk of
transaction flows
ñ that aims to cut speculation
ñ has a broad base, including every type of transaction, in
order to avoid flows towards less regulated parts of the
financial sector
ñ has clearly defined exemptions and thresholds, taking
into account the needs of the retail sector and small
investors and individuals.
The report suggests revenue potential of a low-rate FTT
with its large tax base, of nearly m200 billion a year at EU
level and $650 billion at global level.
According to Ms Podimata, “The main advantage of
innovative financing tools is that they can bring a double
dividend, as they can at the same time contribute to the
achievement of important policy goals, such as financial
market stability and climate change policy goals, and offer
significant revenue potential.”
CRITICS SAY FTT WILL AFFECT
COMPETITIVENESS
The European Commission supports further development
of an FTT at a global level, but the Podimata report
suggests starting implementation in Europe: “Introduction
of a tax on financial transactions ought to be as broadly
based as possible or, failing that, the financial transaction
tax should be introduced as a first step at EU level.”
Critics argue that introducing the tax only in the EU will
negatively affect competitiveness. Swedish Liberal MEP
Olle Schmidt said, “I believe that a large part of the
European financial sector would simply move to other
jurisdictions, and probably to less transparent jurisdictions
than the European one. I don’t think that would serve
European interests.” MEPs have called on the Commission
to do an impact assessment on the FTT.
The tax would require approval from all member states. “It
will probably be very complicated to reach consensus.
Many different ideas on how the revenues would be spent
exist within EU,” Mr Schmidt said.
However, the rapporteur is optimistic. “It is up to the
Council and Member States to follow and give a
convincing reply to European Parliament’s call for a tax on
financial transactions. Therefore we anticipate that the
European Council and the Economic Affairs Council will
show the adequate will and commitment to move forward.”
The report will be voted by the European Parliament’s
plenary during its session in March 2011.
* : MEP = Member of European Parliament
39
The Cyprus Economy
Corrective measures
for the Cyprus Economy are needed
The Cypriot economy has
recently been downgraded
by Moody’s, the credit rating
agency, by two notches on
concerns about contagion
from the Greek debt crisis
and
continuing
fiscal
problems. The rating was cut
by Moody’s from Aa3 to A2
with a stable outlook. The
downgrading by Moody’s
By Averof Neophytou
followed
an
earlier
Deputy President
downgrading by Standard &
Democratic Rally
Poor’s last November to a
single A with a negative outlook. Also Fitch warned last
month of a possible downgrade of its AA rating for
Cyprus.
month’s notice for the upcoming downgrading there was
no response by the Cypriot government. On the contrary,
the
government
was
celebrating
the
European
Commission’s report that stated “that the Commission
therefore concludes that the budgetary outcome of 2010 is
expected to be in line with the Council recommendation of
reducing the 2010 deficit to at most 6% of GDP”.
So instead of taking measures to address the structural
problems of the Cypriot economy and prevent the credit
agencies from downgrading our economy, they spent their
valuable time in statements that the Cypriot economy is
out of the crisis. They even failed to understand the
Commission’s report on Cyprus because they focused on a
single paragraph out of the 4 pages that were exclusively
on Cyprus.
Had they read the whole report they would see that the
All these credit rating agencies, as well as the European
Commission and the International Monetary Fund in their
recent reports on Cyprus all suggested and called for
structural measures to contain wage growth and to reform
the pension system. The IMF specifically warned the
Cypriot government that the island’s long term growth as
an international financial centre depended on maintaining
a foundation of sound and solid public finances. The
European Commission in its 27th January 2011 report
stated that “the bulk of the fiscal consolidation measures
adopted by Cyprus have been on the revenue side despite
the Council recommendation for an expenditure-driven
consolidation strategy”.
However, even if any rational individual would assume that
action would be taken by the Cypriot government to
address the issues raised by the credit agencies, the
European Commission and the IMF, and prevent further
downgrading of the Cypriot economy, surprisingly no
action at all was taken. Even though Moody’s warned the
Cypriot authorities from January and gave more than a
40
Commission believes that a “marginal increase in revenues
is said to have been fully offset by a rise in expenditures”
and the reduction in operational expenditure that the 2011
budget aims “are fully offset by a rise in the public wage
bill, interest payments and in social outlays”. The
Commission even warns of the dangers in achieving the
deficit targets set in the 2011 budget “stemming from the
standard practice of adopting supplementary budgets
during the course of the year” and “the impact of the wage
indexation on the public wage bill”. The Commission
concludes that the Cypriot government needs to introduce
“measures aimed at addressing the long term sustainability
of Cyprus’ public finances, in line with the Council
recommendations”, that is to focus on the expenditure side.
Despite taking no measures to address the structural
problems of the economy the Minister of Finance even
became a forerunner of further downgrading of the Cyprus
economy. On the 8th March he stated that it would be
inevitable and almost likely that Fitch would follow and
downgrade the Cypriot economy as well. Instead of taking
The Cyprus Economy
the necessary measures to try and prevent these blows to
the economy, the Minister acts like a spokesman of the
credit rating agencies trying to explain the reasons for
these actions.
However the reasons are widely known and commonly
understood. What is needed from the government is to take
the necessary remedial measures to address the structural
problems of the economy and raise confidence in the
markets. By avoiding addressing the issues and just
watching the developments takes us nowhere. We need
decisive and bold actions now, before is too late. As time
passes the issues will be harder to address and deal with
and remedial action will be more arduous. But if we act
now and take some measures that will not affect the
existing civil servants but which will help the long term
sustainability of public finances, confidence can be raised
in the markets and further downgrading can be avoided.
But action needs to be taken now before the government
will need to borrow again from international markets.
Otherwise we will have to pay the price in terms of an
increased interest rate because of the government’s
inability to act.
Poverty internationally
Poverty has shifted from low
to middle income countries
BY Panicos Antoniades,
Board Member
KPMG Limited
Until 1990 more than 90% of
poverty line live in middle income countries and that only
the poor internationally were
1/4 now live in poor countries, mainly in Africa. The
living in poor countries. But
change reflects the success of developing countries to help
now this phenomenon has
their citizens to get out of poverty and to be turned into
been displaced. As Mr. Andy
middle income countries. In 1998 the World Bank was
Summer
British
classifying 61 countries as low income countries, meaning
Institute of Development
a yearly income of less than $760. But until 2009 this
Studies estimates almost 3/4
number was reduced to 39. It is noted that India, Pakistan
of 1.3 ml persons who live
and Nigeria have been turned into middle income countries
with less than $1,25 per day,
while China had passed this level a long time ago. But
which
to
even if China and India are excluded the share of the world
internationally to be the
poverty which is attributed to the other middle income
of
is
the
considered
41
Poverty internationally
countries has tripled between 1990 and 2008 to 22%. In
example with regard to rapid economic development are
parallel 70% of the world’s children which are
China and India. In general countries with greater success
malnourished live in middle income countries.
in reducing poverty are those with a higher economic
growth.
The United Nations reckon that more than 1/4 of the
children in developing countries are malnourished, 1/6 of
Researchers at the Oxford Poverty and Human
the people do not have access to clean water and about
Development
50% are using unhealthy toilets or none at all. But in spite
multidimensional Poverty Index to measure poverty and
the fact that these figures are distressing, yet a smaller
not simply whether people live on $1.25 a day. This index
number of persons is now affected than two decades ago.
seeks to measure poverty on the percentage of people
As a consequence, these figures show that has been
which do not have certain basic indicators. For example if
progress towards meeting the targets of the millennium
the family has a deceat toilet, whether the family has to
which were adopted in 2000. Among these targets is the
travel more than 30 minutes on foot to get clean water to
decrease by 50% of the people which live on less than
drink or whether they live without electricity.
$1.25 a day, that all children complete elementary
indicators refer to education and whether no one in the
education and provide equal education to both boys and
family has finished primary education or the extent to
girls. Also reduce the mortality rate of children below the
which school - age children attend school or not or the
age of five by 2/3 and reduce the percentage of the people
extent to which members of the family are malnourished.
who do not have access to clean water and sanitary
According to this multidimensional Index a family is
conditions.
considered to be poor if 30% of the indicators are lacking.
Initiative
have
introduced
a
Other
In Cyprus and generally in the European Union the poverty
If we consider the target of reducing poverty by 50%
line is considered a household income which is 60% below
between 1990 and 2015, the World Bank reckons that
the median income of the country.
while in 1990 46% of the population of developing
countries were living on an income below $1.25% a day,
But the most serious problem is that hunger has not led to
until 2005 this percentage dropped to 27% and probably
the introduction of policies to be addressed in the longer-
this percentage must now still be lower. Consequently the
ran.
target of reducing poverty by 50% by 2015 seems to be
production of food should rise by 50% to feed an
achievable.
expanding population which is expected to reach 9 million
Even the United Nations forecast that the world
until 2050.
But expenditure for agriculture has been
It may be noted, however that this success is mainly the
reduced by about 50% in real terms in the last 20 years.
result of the decrease of poverty in China from 60% in
Governments in Africa, where one in three persons are
1990 to 16% in 2005. But in view of the fact that China
malnourished, the expenditure is not more than 4.5% of the
and India constitute 62% of the world’s poor, the success
budgets of these countries. Fortunately the International
in reducing poverty in these two countries affect the Index
Development Association, which is the section of the
and thus the target. Studies made prove that countries
World Bank which provides grants and low interest loans
which have succeeded greater progress in reducing poverty
to poor countries, is expected to increase its aid in spite of
have done so not mainly by increasing public expenditure
the pressures faced by the development budgets of rich
or by international aid but with a more rapid economic
countries as a result of fiscal deficits faced by these
development which creates more work places. The best
countries.
42
The Cyprus Financial System
The financial system
is the heart of the economy
Standard
and
Poor’s
downgraded Cyprus by a
notch from A+ to A due to
the size of the risks of the
banking sector. The rating
agency has also placed the
Cyprus economy on a
negative outlook. This move
is directly affecting the cost
of borrowing of Cyprus from
the International bond
By Marios Mavrides
markets. The main reasons
Associate Professor Economics,
for the downgrading were
European University of Cyprus
the rapid expansion of credit
in the Cyprus financial system, the exposure of Cyprus
banks in Greek government bonds as well as the exposure
of Cyprus banks in the economy of Greece. That means
that the next time Cyprus needs money from the
International bond markets, its cost of borrowing will be
higher. That is independent of whether the Cyprus
government will take austerity measures designed to bring
public finances under control.
situation in Cyprus, appear in Table 1 below. The table
includes statistics obtained from the Central Bank and the
three large banks which publish such statistics. The Central
Cooperative does not publish such information and when
they were asked to do that, they refused. According the
figures in Table 1, from 2004 to 2009, total loans more
than doubled in Cyprus. The credit expansion rate has
been very high during that period, and during the hot
period of 2007-2009, credit expansion was three times as
the norm, which is around 12%. Non-performing loans
have exceeded 6% of total loans. Non-performing loans
refer to those loans whose payments are delayed for at
least 90 days, or three payments. This development is very
worrying for two reasons. First, non-performing loans
reflect harsh economic conditions in the economy and
second non-performing loans can significantly reduce the
capital adequacy of banks, which is now around 9-10% of
total loans. That will require fresh capital to replenish the
potential losses. Another important ratio is deteriorating.
Allowance for bad debt expenses have been increasing
steadily and are now above 1% for all banks in Cyprus.
The allowance for bad debt expense is deducted directly
from revenue and results in lower profits. In fact, it is
The economy is directly related to the financial system, not
only in Cyprus but everywhere. The financial system is the
heart of the economy. Just like a heart is pumping blood in
various parts of the body, the financial system is
responsible for transmitting cash to the various sectors of
the economy. Furthermore, when the financial system is
working efficiently, money is transmitted to the best users,
which are likely to make the best out of it. When then the
financial system gets “sick”, the economy is at risk of a
heart-attack.
The question that needs to be answered is how much risk
is undertaken by banks due to the rapid credit expansion
and due to their large exposure (about m5 billion all
together) to the Greek government bonds? Some selected
bank figures, which can give us a better picture of the bank
estimated that for 2010, allowance for bad debts will
exceed profits after taxes. Another increasingly worrying
factor for Cyprus banks is the exposure in the Greek
Government bonds, which is estimated to be around _5
billion. Greek bonds are traded at a deep discount in the
bond markets, around 70 cent for each euro. However,
these investments appear on bank balance sheets at face
value, at 100. A possible restructuring of government debt
would cause tremendous losses to the holders of these
bonds. Laiki Marfin holds around m2.9 billion worth of
Greek bonds and the Bank of Cyprus 1.9 billion. In the
case of Laiki Marfin the unrealized losses from the Greek
bonds lower value could reach m900 million, a little less
than its market capitalization, which is m1 billion. In case
Greece does not endure the tough provisions of the
austerity program enforced by the IMF, the ECB and the
43
The Cyprus Financial System
European Commission, will eventually proceed with debt
restructuring. In that case it is not clear how much debt
will be shaved off the face value of the debt. The future is
very uncertain. But if the worse scenario comes true, that
is if Greece goes bankrupt, all banks will be faced with
inadequate capital adequacy, and that will cause an
earthquake in the foundation of the Greek and Cyprus
banking system. In addition to all that, the m3 billion
bonds issued by the Cyprus government to serve as a
collateral for Cyprus banks to borrow cheap liquidity from
the ECB will vanish as well. These are the things that S&P
analysts had in mind when they decided to lower the credit
rating of the Cyprus government. What is frightening
however, is that the S&P analysts did not take into
consideration the deterioration of public finances. If the
measures taken to fix public finances do not convince the
investors that the government is determined to put its
house in order, another devaluation is expected soon.
Marios Mavrides
TABLE 1
Selected statistics from the Cyprus Financial System
2005
2006
2007
2008
2009
2010
Total loans (mbill)
28,1
31,4
41
54,4
57,9
59,7
Annual increase
12%
30%
33%
6.4%
3%
Bank of Cyprus
3.7%
3.8%
5.6%
6.7%
Laiki Marfin
4.8%
4.3%
5.9%
6.6%
Hellenic Bank
9.5%
7.4%
8.5%
9.3%
0.4%
0.41%
0.96%
1.1%
0.62%
0,61%
1.01%
1.05%
0.3%
0.6%
1.3%
0.8%
Non-performing loans as a percent of total loans
Allowance for bad debts as a percent of total loans
Bank of Cyprus
Laiki Marfin
Hellenic Bank
Information for loans cover all financial institutions while the rest of the information are based on the three largest
banks
44
Internal Audit Service
ACCA Approved Employer Professional Development Certificate
Awarded to the Internal Audit Service
of the Republic of Cyprus
By Andreas M. Lambrianou
Internal Audit
Commissioner of
the Republic
The Republic of Cyprus in
recognition of the need to
modernize
the
Public
Service, and in promoting
adherence to the values and
principles of good public
governance, in July 2003 it
passed the Internal Audit
Law
of
2003
[L
114(I)/2003], under which
the Internal Audit Service
was established, as the
independent body responsible for the performance of
internal audits at Public /
Government Services.
Following Cyprus’ accession
as a full member to the European Union as of May 1st
2004, the need to designate an independent Audit
Authority, responsible for the audit of the various
Programmes Co-funded by the European Union in Cyprus,
also arose. At that time it was assessed that the Internal
Audit Service met all the relevant requirements set forth in
EU Regulations, and was officially designated as Audit
Authority under the relevant Council of Ministers
Decisions.
The Service, in effectively responding to its “dual role” - to
perform internal audits (as the “Consultant” of the
Republic) and to also act as Audit Authority, is organized
in the following two departments:
ñ Internal Audit Department for Public / Government
Services.
ñ Audit of Programmes Co-funded by the EU in Cyprus
the Service’s goal to continuously improve its efficiency
level, decrease the level of bureaucracy and to save costs,
the Service continues to upgrade its computerized systems
- for instance most of the Service’s audit work is
performed using specialized audit software.
All the activities of the Service, as well as its staff, are
bounded by a Professional Code of Conduct which
encompasses and analyses all the principles with which an
Internal Auditor has to comply, these being independence,
integrity, objectivity, impartiality, confidentiality and work
capacity.
The Service has 34 internal audit positions in different
hierarchical levels within its organizational structure. Out
of all the officers employed by the Service, 14 of those
hold the relevant qualification of the Association of
Chartered Certified Accountants (ACCA) and are also
members of the Institute of Certified Public Accountants of
Cyprus (ICPAC).
In accordance with the regulations of ICPAC, all of its
members are required to undertake CPD (Continued
Professional Development) to ensure they will be able to
maintain and enhance their knowledge and skills so as to
succeed in today’s dynamic and demanding business
environment.
In cases where an organisation is found to employ certified
accountants, to whom it offers learning and professional
development opportunities, it may wish to apply to become
an ACCA Approved Employer - Professional
Development. As long as it is organized properly and is
found to successfully meet all the assessment criteria for
getting approved, it may be awarded the relevant certificate
from the ICPAC in cooperation with the ACCA.
Department.
The Service has an established Audit Strategy and a
Continuous Training and Education program for its
employees (in order to maintain the continuous
improvement of the personal and professional skills of its
employees) which it implements. In addition, in light of
With the aim of always delivering high quality professional
services, my Service has adopted a strategic planning
process under which a five year Audit Strategy has been
established. One of the objectives that have been set forth
in the Strategy for the period 2009 - 2013, is to continue to
promote the professional development and improvement of
47
Internal Audit Service
personal skills of all the staff through the development and
maintenance of contact with specialized bodies in the field
of education and training. In achieving this objective, our
Service applied to become an ACCA Approved Employer
- Professional Development.
After relevant consultations, an ACCA representative
visited our Service to undertake the assessment, which also
involved the performance of personal interviews with the
staff and the collection of relevant evidence. With the
successful completion of the assessment of our Service,
our Service officially received the ACCA Approved
Employer - Professional Development Certificate from the
ICPAC on behalf of the ACCA.
The benefits of becoming and ACCA Approved Employer
- Professional Development include amongst other the
following:
a. The certified Accountants employed by our Service will
be exempted from submitting annually to the ICPAC / and
ACCA detailed documentation / proof over the training
activities they have completed towards obtaining adequate
CPD.
b. Our Service will have access to the various support
mechanisms for employers provided by the ACCA for the
education and development of their employees.
c. Our Service will have an advantage over other
employers as far as the recruitment and retention of
certified Accountants is concerned.
d. It is demonstrated beyond a reasonable doubt that our
Service is committed to continue to promote the
professional education and training of its staff.
The award of the ACCA Approved Employer status to the
Internal Audit Service is an important achievement.
Despite the fact that our Service was only established in
2003, in a very short time it has managed to become one of
the few Services of the Public Sector that has attained this
status / certification. The criteria that have been set by the
ACCA, concerning the work experience, supervision,
evaluation and development opportunities that have to be
provided by a Service to its employees, are very strict, and
by meeting them so far and by continuing to do so
indicates the commitment of our Service publicly to
continue to provide advanced and high quality education
and training to our employees.
Obtaining this certification further strengthens the
commitment of all of us, at the Internal Audit Service, to
continue to work with exemplary zeal to maintain our
already high level of professionalism. On this basis we
strongly believe that we will successfully meet the
requirements arising from our Certification.
Social responsibility
Standard for guidance on social responsibility
There are those who believe
that Social Responsibility
(SR) is a trend that sooner or
later will end, and those who
believe
that
social
responsibility is a strategic
trick, which aims at making
profits and advertising.
Nevertheless,
social
responsibility does provide a
positive aspect within a
society void of institutions related to SR. Up to now,
Cypriot businesses and organizations were endorsing
social responsibility principles, recognizing its
importance, in terms of what they gain from it.
Nowadays, the implementation of social responsibility
within the society is also supported by policies of the
European Commission. In fact, the European Commission
intends to place more value on SR and in this way to
encourage the undertaking of more initiatives. Also the
International Community, through the International
By Marilena Nicolaou*
48
Social responsibility
Organisation for Standardisation (ISO), addresses the
importance of social responsibility by promoting an
International Guidance Standard.
the same time, it provides guidance on translating SR
principles into effective actions by implementing new
methods and tools.
The International Standard ISO 26000 “Guidance on
Social Responsibility” is a useful guidance tool for the
understanding and right implementation of SR. Despite of
not being mandatory, it is intended for use by organizations
of all types, in both public and private sectors, regardless
of their size, location and activity.
Due to the fact that social responsibility is considered a
type of ethical behaviour, it is advisable that a
business/organization take into consideration societal,
environmental, legal, cultural, political and organizational
diversity. According to the standard, SR’s success depends
on two fundamental pillars: The first is within the
business/organization and it involves the effective
governance through its policies, practices and decisions.
The second has to do with the external image of the
company. ISO 26000 addresses seven core subjects which
refer to: organizational/business governance, human
rights, labor practices, the environment, fair operating
practices, consumer issues and community development
and education.
It is worth noting that at the last meeting of the
International Technical Committee (ISO/WG SR), there
were 450 participating experts and 210 observers from 99
countries -members of ISO, as well as, 42 liaison
organizations. The ISO Secretary-General Rob Steel
commented
that
every
contemporary
enterprise/organization, through ISO 26000, has the
opportunity to operate in a socially responsible manner.
CYS, as the National Standards Organisation - full
member of ISO, had an active involvement in the voting
procedure and adoption of the ISO 26000. CYS, voted in
favor of the ISO 26000 standard as the majority of the
interested parties were in favor of the adoption of ISO
26000 as an International Standard.
Social Responsibility comprises a set of actions taken on
by businesses and organisations aiming at dealing with
various societal, environmental and other issues within or
outside the organization. ISO 26000 is a powerful tool to
assist businesses/organizations to move from good
intentions to good practices and build their social profile.
SR programmes contribute to sustainable development of
both business/organization and of the society. The benefits
of implementing social responsibility vary. Such benefits
include: competitive advantage, strengthening of the
reputation and image, ability to attract and retain workers,
consumers, clients and members, maintenance of
employee’s commitment and productivity in high levels.
Implementation of social responsibility reflects the
perception of the company by investors, volunteers,
sponsors, clients, media and the general public.
More specifically, ISO 26000 fosters an international
consensus of what SR means, and addresses the major core
issues that organizations/businesses need to integrate. At
Social Responsibility affects everybody. In a growing
society, no one can be indifferent towards the various
challenges. Especially, businesses and organisations, the
most vital parts of the economy, need to take actions for
the good of society, the environment, the employees, and
investors. Organisations acting in a socially responsible
manner increase their ability to continue operating
effectively. Moreover, compliance with the principles of
SR contributes to a healthier company environment and to
a better societal welfare in general.
The International Standard was launched on 01 November
2010 and it can be obtained from the Cyprus Organisation
for Standardisation (CYS), the National Standards Body of
Cyprus. CYS is a full member of the International
Organisation for Standardisation (ISO) as well as of the
European Standards Organisations (CEN, CENELEC,
ETSI). It aims at promoting International and European
standards amongst Cypriot Industry and Economy, as a
means to raise the level of quality of products and services
so as to ensure a better quality of life throughout the
Cyprus Economy and Society.
* Ms Marilena Nicolaou is working as an Administrative
Officer and International Relations Officer at the Cyprus
Organisation for Standardisation (CYS)
49
The Cyprus Economy and Education
If the Cyprus Economy is going to sink a
contributory factor will also be education
Statistics of the European
Union show that the salaries
for Primary and Secondary
education teachers are the
highest in Europe. On the
basis of hundred, which
indicates that the salary is
one time the per capita
income, in the case of
Cyprus the index which
shows the minimum salaries
is 135 in relation to only 69
By Tassos Anastasiades,
for the average index of the
Deputy Editor
EU and 112 for Greece while
for the maximum salary index for Cyprus is 300, which
indicates three times our per capita income in relation to
112.2 for the average index of the EU, 164.3 for Greece,
86.0 for Latvia, 130.9 for Italy, 204.1 for Belgium and 218
for Luxembourg. Also, while the teachers of Cyprus, are
the most highly paid teachers in the EU, they have also the
most holidays and the fewer working hours.
Certainly a country cannot have a very good educational
system, even if reforms are introduced, if there are high
salaries which practically hinders the state to hire more
teachers so that there will be a smaller number of students
per teacher so that teaching will be more effective and
productive. On the other hand if we are to employ the ideal
number of teachers we shall have a high cost for the
government and as a result either high taxes or reduced
public social and other expenditure. At the same time as
we all know the system of appointing teachers is unique in
the world since graduates are registered in a catalogue and
are waiting for their turn irrespective of their ability to
teach.
But while the teachers are the most highly paid in the EU
it does not seem that they are the most effective if we
consider the fact that no parent leaves his child without
private lessons if he is going to pass the entrance
examinations of the Universities. Also during the last two
years there is an increased tendency for the parents to send
their children to private educational institutions.
50
As a consequence since statistics show that they are the
most highly paid teachers in the EU, the government and
the House of Representatives should proceed to reduce the
salaries of the new - entrants. But a recent suggestion to
reduce the salaries of the new - entrants was faced by a
threat by the educational trade unions for strike measures.
And what was the reasoning? They do not want the salaries
of the new - entrants to be reduced because there is a
possibility that these places will be taken up by their
children. It is something to wonder as to whether a trade
Union whose objective is to protect the interests of its
members may also decide for the employer which will be
the salaries and conditions of work of the future persons to
be employed. If the salaries to be published are considered
by the interested persons that they are low, then there will
be no interest for them to apply for these jobs and thus the
educational authorities will have to increase their salaries
so as to attract applicants.
In the case of tertiary education the professors are also
highly paid, at scale 16, which, for example, is the salary
scale for the Director of the Inland Revenue or the Director
of Customs and Excise and VAT. For the tertiary education
the Public expenditure has increased from m213 million in
2005 to 236 million in 2006 and m318 million in 2008. But
these expenditures are paid by the state out of taxation
while the students not only they do not pay fees but they
also receive a grant of m1,700 per year and also allowances
for accommodation and for the purchase or upgrading of
computers. The cost per student at the state Universities
amounts to m21,000, while at the Private Universities the
fees paid are m8,000 and of course there is no subsidy for
this fee. The conclusion is that there are high salaries at the
state Universities and thus consideration should be given to
reducing the salary scales of new - entrants.
But it is unacceptable to provide free tertiary education, in
spite of the fact there some argue that tertiary education is
a right and should be financed out of taxation. However
something which is a more important right is food but the
government does not provide free food. Another more
important right than tertiary education is housing, but the
government does not provide free houses. Thus one
The Cyprus Economy and Education
country after another are introducing fees so as to face the
fiscal problems. At the same time it is a matter of fairness.
In this world there is nothing which is provided free.
Somebody has to pay for this. And the expenditure for
tertiary education should not be paid by the graduates of
Secondary Education who pay taxes to finance the
education of their future bosses. The persons who will
have tertiary education will be appointed in highly paid
managerial and similar jobs or they will become self
employed professionals with high incomes.
Of course the introduction of fees with the parallel
provision of students’ loans will mean that the students
will continue as of today to pay no fees, but they will pay
the cost of their education after they are employed, over a
number of years. School fees in tertiary education are also
paid in communist China where, as from 1989, there are
fees for all students while in parallel students’ loans are
provided which are paid after their graduation. A degree
from a University provides the possibility to be selected in
certain occupations with high salaries. A study carried out
by the Rectors of British Universalities has indicated that
graduates of Universities after the age of 40 are earning
about 70% more than the persons who did not complete
tertiary education.
The Irish Experience
The Turnaround - A perspective on how
Ireland transformed itself into one of the
strongest economies in the world,
and then squandered the legacy
INTRODUCTION
By Roger Acton
Regional Director - Europe
& Americas
ACCA
How does a nation turn
around - within the space of
half a generation - from
being the poor relation of
Europe to a situation where
its economy far outstripped
those of its European
neighbours? And, having got
there, how did it throw it all
away?
In order to answer the first
part of that question it is
important to describe what Ireland was like in times gone
by. It is important to understand a little of its history, the
mindset and character of its people, and appreciate the
paradoxes and contradictions that seemed to be a regular
feature of Irish life, certainly up to 1990.
SOME BACKGROUND
Ireland, for most of the 20th century, could fairly be
described as a backward looking, socially rigid,
conservative, agrarian society that was heavily influenced
by the Catholic church. Having achieved independence
from Britain, only in 1921, it is also a young country. In
fact the Republic of Ireland was only created in 1948.
51
For much of the 20th century Ireland lived in the shadow
of its larger neighbour in the United Kingdom. Britain was
still the most important trading bloc and indeed the
recipient of huge numbers of economic refugees
emigrantsright up until the 1980’s. In fact emigration as a
tool of Irish economic policy was a readily accepted fact of
life right up to 1990. In the late 1950’s and early 1960’s the
population of the Republic of Ireland was just 2,8m
people. Today it is well over 4m and growing.
Things started to shift, very slowly, following a change in
government policy during that period of the late 1950’s /
early 1960’s. Recognising that the protectionist economic
policies were just not working, the then Irish Prime
Minister, Sean Lemass and senior civil servant T.J.
Whittaker, developed a blueprint which would eventually
lead Ireland, in January 1973, into the EU or the EEC as it
then was. This is where the story really takes off.
Lemass and Whittaker recognised the importance of both
industrialisation and of free markets. They pioneered a new
wave of foreign and domestic investments, slashed import
and export duties and helped drive an economy through
strategic State investments in key infrastructural projects
such as rail, power generation, aviation and food
processing. For the first time the trend in emigration
reversed and more people were returning to Ireland than
were leaving by the end of the 1960’s. A further key policy
decision that would take a generation to really make its
mark was the introduction, in 1967, of free education to
every child in the State.
Even through the 1970’s, following accession to the EEC,
the Irish economy remained sluggish. As an open economy
on the edge of Europe, it was very exposed to world events
such as the oil crisis of 1973, or the deepening economic
crisis in Britain in the mid/late 1970’s. It was often said
that when the US or UK sneezed - Ireland caught a cold!
Notwithstanding that there were events over which Ireland
had no control, it spectacularly failed to manage those
events over which it did exercise control. Industrial action
and strikes were commonplace, with no sense on the part
of the strikers, and in some cases employers, of the damage
they were inflicting on the economy. For example, in 1979,
the post office was on strike for 7 months. Bank strikes
were commonplace as were strikes in the main transport
and electricity supply companies. And all of this before the
52
introduction of alternatives such as email and so on.
By the 1980’s things had become steadily worse. Bad
politics, weak governments and the pursuit of power
resulted in the State spending money it did not have.
Unemployment continued to rise throughout the 1980’s,
public services declined, emigration continued unabated,
and interest rates continued to climb. By the mid 1980’s
Ireland’s debt to GDP ratio was one of the highest in
Europe. Interest rates were in the high teens as was the
level of unemployment.
By 1987, national morale was at an all time low. The IMF
were looking anxiously at Ireland. The national debt had
remained stubbornly high, interest rates were still high as
were personal levels of taxation which resulted in many
placing their funds into offshore schemes. Ireland was not
a place that attracted inward investment and what
technology we had was hopelessly out of date.
However, things were about to change and a number of
seemingly unconnected events were to unfold which
would help Ireland to help itself to get up off the floor and
really progress as a small, modern and vibrant nation.
A NEW BEGINNING
A change of government in 1987 brought about a change
in Ireland’s approach to economic affairs. The new
government decided that a partnership approach with key
stakeholders was the way forward. A tripartite arrangement
between the government, employers and the trades unions
resulted in an agreement called the Programme for
National Recovery. This programme guaranteed a series of
modest pay increases combined with tax cuts - so that takehome pay could be increased without significant costs to
employers. In return there were to be no strikes - there had
to be a guarantee of industrial peace. This was to prove to
be a major selling point to potential inward investors,
particularly those from the USA. So successful was this
programme that productivity increased, tax revenues
increased, the national debt stabilised and industrial
harmony became commonplace. It was therefore little
wonder that a second programme was introduced in 1990.
In fact Ireland has had a rolling series of programmes since
then covering issues such as housing, welfare, health and
education, intended to be all embracing and as a
consequence as inclusive as possible to most sections of
the community. I have no doubt that these programmes
which combined steadily reducing taxes, moderate pay
increases and industrial peace proved enormously
attractive to investors over the years.
But I don’t believe that Ireland’s success was solely down
to government policy. I believe that many other factors also
helped as well.
Ireland has, as is well known, been hugely successful in
drawing down EU funds over the years. At the Edinburgh
summit in 1992, the EU Council of Ministers agreed a
package worth over í6bn / _8,5bn for Ireland. This funding
was critical in providing some real investment into
Ireland’s infrastructure. Road and rail projects, drainage
schemes, bridge building - all provided much needed
employment while at the same time greatly enhancing
Ireland’s internal infrastructure.
I mentioned earlier that the Ireland of the 1980’s was
technologically backward. This was to be a blessing
because when investment came it meant that Ireland could
leapfrog existing technologies and embrace the emerging
digital age. New mobile and IT infrastructures meant that
new industries could be developed. The earlier investment
in education was starting to pay off with a ready supply of
highly educated people to work in key IT related
industries. In addition to the development of hardware
technology, Ireland rapidly became a world leader in
software development and in animation. These industries
can be located anywhere in the world so Ireland’s
geographical isolation, lying west of an Island which itself
lies to the west of Europe no longer proved to be a
problem.
By the early and mid 1990’s things were really starting to
move. The software, IT and related industries proved
attractive to young people who no longer felt the need to
emigrate. Indeed inward investment continued because
Ireland continued to provide a supply of highly educated,
technically competent and often multi-lingual labour.
Ireland provided a springboard into Europe for the US and
critically, its rate of corporation tax remained at just
12,5%.
Ireland was fortunate in its demographics in that its
younger population started to peak in the late 1990’s rather
than in the 1970’s and 1980’s as happened in other
countries. It was a younger person’s country. As a result
Ireland became a destination of choice for many young
people from around the world. These people could obtain
well-paid work and have some fun at the same time. The
service industries associated with this age group begun to
develop at a great pace. Music concerts, festivals, shops
and entertainments, pubs and restaurants and so on all
developed to service this new customer base with a high
disposable income.
FEELING GOOD
What you now had, by the mid 1990’s, was a country
whose population was at ease with itself to a much greater
degree than at any time in its history. The shackles of the
Catholic church had been removed, following a series of
clerical scandals. There were now role models from all
walks of life who were successes on the world stage.
In sport, Ireland who had famously beaten England in the
European championships in Stuttgart in 1988 had reached
the world cup quarter finals in Italy in 1990. Ireland was
producing world class rugby players, formula one drivers,
golfers, snooker players and athletes.
In music, U2 were on their way to becoming the biggest
band in the world. Irish artists such as Van Morrison, Enya,
The Chieftains and others were strutting the world stage.
Others had chosen to live in Ireland as a destination of
choice. By the later 1990’s the Riverdance phenomenon
had reached levels that were beyond comprehension. Even
James Bond (Pierce Brosnan) was an Irishman!
The politicians also got in on the act. The new Irish
President elected in 1990 was Mary Robinson, a reforming
lawyer who had a major track record in human and civil
rights. She was not afraid to push out that agenda in the
early 1990’s. As a result she became a major role model,
particularly for the women of Ireland. The northern Ireland
peace process made steady, if not spectacular progress, and
was supported all the way by President Bill Clinton who
visited Ireland on several occasions.
Ireland also had very successful EU Presidencies in 1990
and again in 1996 when considerable progress was made in
55
developing the EU agenda. It was also during another
successful Irish Presidency that EU enlargement took
place in 2004.
All of these positive activities helped create an
environment where people thought “why not” rather than
“why”. It created an environment where being Irish was
seen as a positive rather than a negative feature. The
country and indeed the wider world was becoming familiar
with Irish success stories. This environment of positivity,
combined with a younger population who did not really
remember the bad old times, helped foster a “get-up-andgo” and “can-do” culture. No longer were we, as a nation,
inward looking.
NEW INITIATIVES
Government policy broadly continued along the lines that
set out the foundations for recovery. Tax rates continue to
fall. In fact in 1999, the then Finance Minister and former
EU Commissioner Charlie McCreevy halved the rate of
capital gains tax from 40% to 20%. The interesting thing is
that the revenue from capital gains tax then doubled for
each of the next two years. Business activity increased as a
response to this initiative.
The international Financial Services Centre in Dublin
continued to grow to a situation where there were over 430
operations approved to trade at the IFSC. In fact ACCA
grew substantially in Ireland on the back of this growth
with about 20% of our membership working in the IFSC.
SOME GATHERING CLOUDS
There were some serious concerns about the extent to
which Ireland’s continuing high rate of growth was
predicated on the construction sector. Economists warned
of the need for greater diversification, and they were right.
Over 25% of Ireland’s economic activity was tied up in the
construction sector. Our tax base was far too narrow and
depended heavily on stamp-duties (transaction taxes) to
fund an ever growing and costly public service. There were
many other features of an overheated economy as well.
Congestion, particularly in our main cities became a major
problem. Again this was a result of poor planning - in fact
much construction was developer-led rather than planningled. It had now reached a stage where it impacted badly on
the quality of life of many of our citizens with
extraordinarily long commuting times between home and
work. We continued to have a second rate health service.
Despite the increases in funding for the health service, it
was, and is, badly in need of reform and further
investment, particularly as it will need to cope with a
growing and an ageing population. In fact, reform was
needed through the public sector but despite government
acknowledging this it did precious little to change the
status-quo.
Ireland is a high wage economy - the minimum wage of
m8,65 per hour was struck in 2008. Telecommunications,
transport and other costs associated with business were just
too high to be sustainable in the longer term and there was,
in 2007/8 already evidence of jobs being lost to lowerwage economies.
IRELAND IN 2007
So, the economy in 2007 continued to thrive.
Unemployment was largely non-existent. Inflation at over
5% remained high but was regularly outstripped by yearon-year growth which averaged 6-8% for the previous 10
years or so. Interest rates remained low because of our
adoption of the Euro as our currency. Workers from other
EU member states continued to work in Ireland and make
a real contribution to the economy, particularly but not
exclusively, in the construction sector. I reported at the
time that the economy looked to be reasonably stable but
there are some clouds on the horizon. Little did we realise
how dark these clouds were to become!
56
Other features which were there at the time but which were
ignored include a very light touch regulatory regime
combined with some questionable corporate governance
practices. Banks were offering its customers 100% + loan
approvals and some were interest-only loans despite
historically low interest rates. Nobody was paying
anything back! We had a very real disconnect between land
prices and the potential return on investment. For many
projects to become profitable Dublin needed to become a
very high-rise city indeed, something that the planners had
not agreed to, let alone discussed. There was also the
continuing failure to widen the tax-base with government
opting instead for populist policies, including
unrealistically low tax-rates to retain popularity, and
power.
DISASTER STRIKES
By 2008 Ireland was heading into more difficult waters but
matters came to a head during the global credit crunch and
subsequent collapse of Lehman Brothers in the USA. Irish
banks were very exposed to a property market that had
overheated and which had started to cool down in any
event. The Irish banks were heavily dependent on the
international market and as liquidity dried up so too did the
banks capacity to function properly. Developers were
sitting on large amounts of property whose value was now
plummeting, and with it the value of the banks’ collateral.
Very quickly, and in what now looks like a very hasty
move, the Irish government moved to introduce its bank
guarantee scheme in September 2008. The difficulty here
is that government was offering a guarantee against an
unknown and unquantified liability. In fact the extent of the
banks liabilities and its exposure to the Irish property
development market has only now, in late 2010, come into
full view. It was ultimately this guarantee to the banks and
senior bond holders which has crippled the country
financially. This, and the decision to create a so-called
“bad bank” - the National Assets Management Agency
(NAMA) whose role it is to buy these loans from the banks
at a discount, the aim being to take all non-performing
loans off the banks books and house them all in one agency
which would be run down over a 20 year period.
Irrespective of this, Ireland was now running a budget
deficit as tax revenues had contracted yet public
expenditure continued unabated, but this would have easily
been managed over the course of two or three years with
the right fiscal policies in place. What we have now is a
situation where we have lost control over our fiscal
policies with the ECB, EU and IMF all determining Irish
fiscal policy for anything up to ten years, with the
guarantee of austere budgets for the foreseeable future.
processing and green technologies. We are improving our
competitiveness with lower manufacturing costs. We have
now much better regulation which is both robust and
independent. That said, the people are angry, they feel
betrayed and most now feel insecure. As a nation we have
no faith in government and little in political process and
there is little end in sight to the relentless negative media
that reports on all of this.
As a country we are ready for new leadership, and one that
articulates a vision as to the type of society we need in the
future. This will become more apparent as the anniversary
of the 1916 Easter Rising comes into view. We will also get
the structural reforms we so badly need, not because of any
great political will, rather because they will be forced upon
us from outside.
LESSONS LEARNED
Certainly there are many lessons to be learnt from this
rapid turnaround in Ireland’s economic affairs. As a small
country we should have been more aware of the inherent
risks in smaller societies where a small number of people
occupy all of the key roles. We should have kept politics at
arms length from the regulatory process. We should have
placed a greater emphasis on independent oversight and
learnt to live with any unpopular decisions that might have
resulted. We should have paid more attention to the
whistleblowers and listened more carefully to what they
had to say, no matter how unpalatable.
In economic terms we should not have allowed the
economy to overheat to the extent that we did. We should
have stayed real and not get caught up in the hype where
we all thought that easy money was here to stay. When we
had the money we should have invested more on key
infrastructure and we should certainly have widened our
tax base so that we were not so dependent on the income
taxes and stamp duty that were associated with large scale
property and development.
THE FUTURE
Ireland will recover. The people are resilient, creative,
hard-working, and generally optimistic as rule. We have
good industries such as IT, pharmaceuticals, food
Whether there are parallels with other countries is for
others to say. However, I believe that some of the points
touched on here are worth considering when formulating
economic and fiscal policies in the future.
57
Exchange rates
The problem of exchange rates
has again become topical
The dollar is not the only
reserve currency, but it is the
most important. Internationally at the end of the third
quarter of 2010 61% of the
foreign exchange reserves
were in dollars and 27% in
Euros. Since a long time the
USA complains about the
under - valuation of the
exchange rate of the Yuan and
presents this issue to various
forums,
such
as
the
By Maria Karantoni
International Monetary Fund
Ioannides, Director
(IMF) and the Group of 20
KPMG LTD
(G20). But China says that if
America raises the issue of the
exchange rate of the yuan, then China will complain about the
loose monetary policy of the USA. Recently during the visit
of China’s President Mr. Hu Jintao to the USA he stated that
the International Monetary System is “a product of the past”.
The conclusion from Mr. Jintao’s statement is that the dollar
reflects the economic power of America’s past not of the
present. For example the percentage of the world production
of America now is only 20% and of the international trade
11%. But as the President of the Chinese Central Bank Mr.
Zhou Xiaochuan and the President of China Mr. Jintao
complain, America prints money to give a boost its economy
without any consideration of the implications which this has
for other countries. The other Central Banks to remain in
equilibrium with the exchange rate of the dollar, they also
print more of their money thus risking inflationary pressures
and asset bubbles. As Mr. Jintao has stated the monetary
policy of America has serious implications for the world’s
liquidity and the movement of capital and thus the liquidity of
the dollar should be kept at a logical and stable level.
The USA benefits from the position of the dollar as a reserve
currency to borrow at low interest rates from the rest of the
world and increases its imports. On the other hand China has
trade surpluses which usually keeps in dollar assets. The
President of France Mr. Nicolas Sarkozy has stated that the
dominant position of the dollar and the international trade in
dollars cannot continue. Also in a speech in 2009 Mr. Zhou
Xiaochuan stated that the financial crisis and its expansion
globally reflects the weakness of the International Monetary
system, and stressed that the world should pursue an
international reserve currency which should be dissociated
from certain countries.
58
The question is to what extent the Yuan could become a
competitive reserve currency to the dollar. China’s economy
is expected to surpass that of America’s in 20 years, while
presently it is the world’s biggest exporter and induces its
companies to settle their international trade and to acquire
foreign companies in yuan. But if we examine the history of
the dollar, economic power is not adequate for a currency to
become a reserve currency. For the foreigners to hold the
yuan as a reserve currency they will need financial
instruments which should be safe, stable and freely
disposable.
Therefore the question is to what extent there is a solution to
the reform of the international exchange rate system which
could solve the problem. Some, including certain officials of
China, speak about the extension of the role of the Special
Drawing Rights (SDRs) as a reserve currency. Another
solution is for the yuan to become an international reserve
currency. In the long-run it will become so. But for the yuan
to be turned into a reserve currency it should be freely
convertible and tradeable. The rapid economic development
of China will mean that the yuan will become an international
reserve currency when it achieves full convertibility and
China gives up any foreign exchange controls.
The SDR was created as a reserve currency in 1969 when
again there were discussions about the dominant position of
the dollar. Mr. Zhou in his speech in 2009 stated that the SDR
can become a super reserve currency and asked Governments
to issue more financial assets which should be denominated in
SDRs and to promote the SDRs in international trade. The
IMF has the power to create more SDRs and to distribute
them to the member countries which they could use in the
international trade between them. But to-day the SDRs do not
make up but about 5% of the world’s foreign exchange
reserves.
Another alternative solution, which is less possible, is to peg
the currencies to the value of gold. This issue was recently
raised by the President of the World Bank, Mr. Robert
Zoellick. Also another solution raised also by Mr. Zoellick is
the gradual movement to a polypolic system of currencies
which will reflect the increased use of currencies besides the
dollar in the international trade and the movement of capital.
China has already permitted the greater use of its currency
which, inter alia, will include the issue of bonds denominated
in yuan in Hong Kong. Also the Euro has great possibility to
undertake an enhanced role as a reserve currency if the
Eurozone can address its internal fiscal difficulties and to
create a Euro - bond which can compete with the Treasury
bonds of the USA.
Consumer Price Index
Consumer Price Index - CIP
What does the CPI measure?
The CPI is the official index
used for the estimation of
inflation. It measures the
average percentage change
of the prices of various
goods
and
services
(shopping basket) consumed
by households in Cyprus.
By George Chr. Georgiou
Director
Statistical Service
WHAT IS THE
IMPORTANCE OF THE
CPI?
WHAT IS DEFINED AS THE WEIGHT OF A GOOD
OR SERVICE IN THE CPI?
Goods and services included in the CPI have a weight
associated with them. The weight of a specific good or
service is defined by the percentage of expenditure for its
purchase by households, compared to the total expenditure
for all goods and services in the CPI. The weights do not
reflect the quantities consumed by households on specific
goods and services.
HOW ARE THE GOODS AND SERVICES TO BE
INCLUDED IN THE CPI DETERMINED?
It is the official index for the
calculation of inflation; CPI
is also used for many other
different purposes, including the cost of living allowance
(wage indexation), the formulation of economic and
monetary policy (interest-rates, productivity, GDP, etc.),
collective pay agreements and the adaptation of contracts
(projects, rents etc.).
The items included in the shopping basket as well as the
expenditure of households to purchase them, are recorded
by the Household Budget Survey, which is conducted by
the Statistical Service of Cyprus every 5 years. The survey
records the expenses of households on a daily basis and in
this way, the goods or services acquired and the
corresponding amounts of money spent, are determined.
Conceptually, CPI is more a ‘Laspeyres-type price index’
rather than a ‘cost of living index’. Consequently, CPI is
not identical with the cost of living. The CPI measures
only the change in the level of prices. The cost of living is
of a wider significance since it is not only influenced by
prices but also by the quantities that are bought-consumed
and by the luxuries/needs of the households.
WHAT IS THE WEIGHT ASSIGNED TO EACH
CATEGORY OF GOODS BASED ON THE LATEST
SURVEY?
WHY IS THE CPI REVISED EVERY FEW YEARS?
The compilation of the CPI is based on goods and services
included in the shopping basket, which are derived
primarily from the Household Budget Survey. This survey
is conducted by the Statistical Service of Cyprus every 5
years and it records the daily expenses of households.
The shopping basket should be revised regularly in order to
reflect current consumption patterns of households. There
is no uniform basket applying to all European countries.
Furthermore, the expenditure of households on goods and
services defines the weight associated with each item
included in the shopping basket for the CPI.
The latest Household Budget Survey was conducted in
2009 and the new weights were introduced in the
compilation of the CPI as from January, 2011.
The latest Household Budget Survey was conducted in
2009. The percentage distribution of expenditure on the
main categories of goods (i.e. weights) is presented in the
table that follows. Comparison is made between the
weights used for 2010 (with half imputed and no imputed
rents) and 2005 (previous Household Budget Survey).
The table above shows some changes in the structure of the
expenditure of households between 2005 and 2010.
Specifically, comparing the column with half imputed
rents, the category of “Food and non-alcoholic beverages”
and “Clothing and footwear” show a significant decrease
in 2010, something which is expected, since it is a well
known fact that as the standard of living improves, the
percentage of expenditure on basic goods decreases and
the expenditure on luxury goods increases.
A decrease was also observed in the category of
“Transport”, due to the decrease in car imports observed in
2009. A significant increase was observed in the weight of
“Housing, water, electricity and gas”, which is attributed to
the significant price increase of all the sub-categories of
this main category between 2005 and 2010.
59
Weights (%)
CATEGORY
2005
2010
2010
(half imputed
(half imputed
(half imputed
rents)
rents)
rents)
1. Food and non-alcoholic beverages
17,50
14,59
16,15
2. Alcoholic beverages and tobacco
2,21
1,93
2,13
3. Clothing and footwear
8,93
7,66
8,48
15,87
20,76
12,30
5. Furnishings, household equipment and supplies
6,78
6,77
7,50
6. Health
5,03
5,97
6,60
15,99
13,69
15,16
8. Communication
3,94
3,97
4,39
9. Recreation and culture
6,33
5,83
6,45
10. Education
2,87
3,33
3,69
11. Restaurants and hotels
7,57
7,58
8,38
12. Miscellaneous goods and services
6,98
7,92
8,77
100,00
100,00
100,00
4. Housing, water, electricity and gas
7. Transport
TOTAL
An increase was also observed in the weights of categories
“Health” and “Miscellaneous goods and services”, which
is considered normal. The last column of the table presents
the weights of the categories when no imputed rents are
taken into account. This results in the decrease in the
weight for Housing, which drops to 12,30% from 20,76%
and a proportional increase in the weights of the other
categories.
The data for the survey were collected by interviewers,
trained specifically for this survey. The interviewers visited
the households and entered the data into an electronic
questionnaire, on laptops.
HOUSEHOLD BUDGET SURVEY
HOW MANY ITEMS ARE INCLUDED IN THE CPI?
The Statistical Service of Cyprus has conducted the
Household Budget Survey (HBS) for 2009 with the scope,
among other things, to revise the weights of the CPI. All
Household Budget Surveys conducted so far by the
Statistical Service of Cyprus (2009, 2003, 1996/97,
1990/91 and 1984/85), covered households of all income
classes in rural and urban areas.
About 850 goods and services from all categories of
expenditure are included in the “shopping basket” of the
CPI, compared to 700 items covered in the previous CPI.
Each time the CPI is revised, additional items are included
in the list of goods and services, in order to achieve a better
representation of the consumption pattern of households. It
should be specified here that “new items” in the shopping
basket are not necessarily new products or services in the
market. They are rather new items on the list, which have
now been included due to the fact that their weight in the
total expenditure of households has become large enough
to designate their inclusion on the shopping basket.
The latest HBS was based on a sample of 2.707
households. A multi-stage stratified sampling was used for
the selection of the households to be included in the
sample.
60
The aim of the survey was mainly the collection of data
concerning the expenditure of households, data which are
necessary for the revision of the weights of the CPI.
Categories of Goods and Services
Price Index (2005=100)
December
2010
January
2010
Percentage Change (%)
Dec. 2010
Dec. 2009
Jan. 2010
Jan. 2009
1. Food and non-alcoholic beverages
119,56
125,34
-2,81
2,18
2. Alcoholic beverages and tobacco
111,56
117,13
6,13
10,78
3. Clothing and footwear
106,91
82,83
-2,00
-1,40
4. Housing, water, electricity and gas
123,04
126,39
7,35
7,82
5. Furnishings, household equipment and supplies
103,78
104,86
-1,96
1,81
6. Health
124,62
126,24
2,11
3,36
7. Transport
105,61
104,00
4,69
3,62
99,58
100,14
-0,02
0,57
9. Recreation and culture
105,74
107,77
-0,67
1,79
10. Education
130,58
130,03
3,98
3,54
11. Restaurants and hotels
124,08
123,60
1,83
1,55
12. Miscellaneous goods and services
114,20
110,99
2,09
-0,28
General Consumer Price Index
114,45
113,51
1,64
2,84
8. Communication
HOW, WHERE AND WHEN ARE THE PRICES OF
GOODS AND SERVICES RECORDED?
The prices for the 850 goods and services are monitored
and recorded once a month, except for some seasonal
products, like vegetables, fruit, meat and fuel. For these
products, the prices are recorded on a weekly basis (every
Thursday).
As from January 2006, when the base year for the CPI
index was revised, three price quotations are recorded for
each good in the CPI. This means that prices from three
different stores are recorded in each city (instead of two
that were recorded previously). For fruit and vegetables, 8
price quotations are recorded and for fuel, prices from all
selling companies are recorded. The prices for goods,
excluding fruit and vegetables and fuel, are recorded on
predetermined dates and within a period of 3 weeks within
each month. They consequently represent a full-month_s
duration. The collection of prices is done by contacting
approximately 1.400 outlets and 700 houses (for rents).
The CPI covers the prices of goods and services in Nicosia,
Larnaca, Limassol and Paphos. For each city, the changes
in prices by product are weighted each month, according to
the population. Specifically, the weights for the districts
are: Nicosia 42%, Limassol 30%, Larnaca 18% and
Paphos 10%.
HOW IS THE CPI DISSEMINATED?
The main CPI index and relevant price indices for the 12
main categories of goods and services are disseminated on
the first Thursday of each month. The publication of the
CPI is announced to the media and the Official Gazette of
the Government. Furthermore, the CPI is published on the
website of the Statistical Service. In addition to the
presentation of data in the form of indices, the percentage
changes in the price of goods and services for each month,
compared to the corresponding month of the previous year
are given, as well as for the cumulative period since the
beginning of the year, compared to the corresponding
period of the previous year.
In the table that follows the general CPI and the indices for
the main groups are shown, as well as the percentage
change in prices for the months of December 2010 and
OTHER INFORMATION RELEVANT TO THE CPI
In addition to the CPI, the Statistical Service of Cyprus
compiles the Harmonised Index of Consumer Prices
(HICP), which is used by Eurostat for comparison between
the EU countries.
The HICP uses different weights than the CPI, since it
includes tourist expenditure in addition to the expenditure
of residents (something not covered in the CPI). The
weights for the HICP are revised on an annual basis while
the weights of the CPI are revised every five years.
63
The Cyprus EU Presidency
Cyprus Presidency
of the Council of the EU-2012
The Presidency of the
Council of the European
Union (EU) is rotated
between the Member States
every six months via a
“Presidency Trio”.
The countries making up the
Presidency Trio during the
period 1 July 2011 to 31
December 2012 are in turn
Poland,
Denmark
and
Cyprus. Cyprus will take
over the Presidency for the
Niki Christofi
first time in the second half
Tax Consultant
of 2012.
Ernst & Young Cyprus Ltd
The presiding countries are
Member of the EU committee responsible to set targets and
take actions for the interest
of 500 millions of Europeans.
Generally, each country takes over the Presidency for a
period of six months in accordance with a predetermined
order, during which time it has constant cooperation and
communication with the other two presiding countries,
with the aim of the effective implementation of a joint 18
month programme which covers specific EU priorities. An
important part of this 18 month programme includes
“inherited” issues from the preceding Presidency Trios.
Each country makes its own contribution in respect of the
18 month joint programme. There is an ongoing process, in
which all Ministries submit their own proposals.
In accordance with the 18 month programme, the presiding
countries prepare their own 6 month program which is
more detailed.
The General Secretariat of the Council of the European
Union has announced that the three Member States
(Poland, Denmark and Cyprus) have submitted their
planned contributions on time and that the material will be
further processed. The General Secretariat has also noted
that the countries have worked hard and has expressed its
satisfaction regarding the level of cooperation and the
quality of all contributions.
Currently, meetings are held with the head coordinators of
Cyprus, Poland, and Denmark who discuss the main points
of the joint 18 month programme, as well as the indicative
64
timetable for its implementation.
The final text of the 18 month programme is expected to be
ready until the end of June 2011, few weeks before the
Polish Presidency.
Each country holding the Presidency is responsible for
ensuring the smooth functioning of the Council of the
European Union. It hosts EU meetings and events. It is in
charge of the agenda of the Council and chairs all of the
Council’s and COREPER’s meetings, as well as those of
the various Working Groups for the duration of its sixmonth term with the exception of the sessions of the
Foreign Affairs Council, which are coordinated by the
High Representative of the Union for Foreign Affairs and
Security Policy. The presiding country acts as a mediator,
it finds compromised solutions and ensures that consensus
between Member States is reached on the various issues. It
represents the Council of the European Union at meetings
with other EU bodies. It also represents the EU at meetings
with other countries and international organizations in
conjunction with the Higher Representative for Foreign
Affairs and Security Policy.
A successful Presidency requires careful preparation and
coordination. In view of the Cyprus EU Presidency in
2012, the Cyprus Council of Ministers has decided on 27
August 2008 for the establishment of the “Secretariat of
Cyprus EU Presidency”, which directly falls under the
President of the Republic of Cyprus. The Secretariat is
headed by Dr. Andreas Moleskis
A main responsibility of the Secretariat of Cyprus
Presidency of the EU Council, is to coordinate and
supervise the overall work performed by the Ministries and
the departments of Government, with regard to the
preparation and management of the Cyprus EU Presidency,
both on substance issues (programs, priorities, contribution
to the 18 month programme, preparation of the 6 month
program), as well as to anything concerning the
organizational arrangements required. The Secretariat is
also responsible for the coordination of the European
matters, it provides ongoing information to the President
of the Republic for European issues, and informs/updates
the House of Representatives, both on matters of
Presidency, and EU matters in general.
For the effective preparation and handling of the Cyprus
Presidency of the EU Council, nineteen Working Groups
have been formed, which come under the supervision of
The Cyprus EU Presidency
the Secretariat:
1) Infrastructure-Facilities-Equipment
2) Transportation
3) Liaison Officers
4) Security
5) Accommodation
6) Hospitality
7) Catering
8) Gifts
9) Interpretation and translation
10) Events (cultural and other)
11) Legal and Institutional Issues including Personnel
Recruitment/HR
12) Finance and Budget
13) Software program/Press Registration
14) Education-Training with regard to Logistical issues
15) Embassies of EU Member-States in Cyprus
16) Sponsorships
17) Committees and Working Parties of the council of the
EU
18) Programme-Presidency Priorities
19) Communication
During Cyprus Presidency, it is expected that around 3,500
meetings will be held relating to presidency issues, both in
Cyprus as well as abroad. Around 150-170 meetings are
expected to be held in Cyprus (that might be dispersed all
throughout the island), out of which 8-15 will relate to
informal meetings of EU Ministers and 140-150 will relate
to meetings of senior officers / technocrats. The
International Conference Center in Nicosia (which is
currently being renovated), has been designated as the
main location to host most of the meetings that will be held
in Cyprus.
Taking over the Presidency of the Council of the European
Union, is a landmark event for Cyprus. It is a very
important event and a historic challenge, as Cyprus is
going to be for a semester at the centre of all aspects of the
European life. It is expected that Cyprus will participate
dynamically in the development of
Europe.
It is noted that the Presidency is an opportunity for a
country, to balance European and national concerns.
Taking over the Presidency is a highly demanding, multi
faceted and multi dimensional task. Cyprus responsibility
is expected to be very big given that the Republic is one of
the smallest Member States of the EU, with a small public
administration and will chair the Council for the first time.
Cyprus is invited to run the Presidency under difficult
times which raise major concerns: the global economic
crisis, the climate change and the demographic changes.
Cyprus will have to handle issues of major political
significance for the Union, like the negotiations for the
EU’s financial perspectives in 2014-2020, the revision of
EU policies such as Cohesion Policy and Common
Agricultural Policy.
The key to success is the support from all political parties,
cooperation of organized groups, social partners, civil
society and academic community. There must also be close
co operation and coordination of Cyprus with the General
Secretariat of the Council of the European Union, with the
European Commission, as well as with the European
Parliament.
The need to learn from the best practices of the previous
presidencies, in parallel with the collaboration with the
other two countries of the Trio (Poland and Denmark) is
more than essential.
For further information, please refer to the preliminary
Cyprus
EU
Presidency
website
http://www.cy2012eu.gov.cy. This site forms a source of
information on the preparations currently underway in
view of the great challenge of Cyprus taking over the EU
Presidency in the second half of 2012. It includes calendar,
speeches, press releases, as well as background
information and material regarding the Secretariat and
general information relating to Cyprus. The website is
available in four languages, Greek, English, French and
Turkish. The official EU Presidency website is expected to
be launched a month before the Cyprus EU Presidency.
Holding the Presidency is expected to
bring medium and long term benefits. It
is a unique opportunity for Cyprus to
promote the image of an equal, active,
credible, capable and effective partner
amongst the EU Member States. The
Presidency will strengthen Cyprus
relations with the other Member States.
Cyprus will have an excellent
opportunity to promote its culture,
traditions and civilization at a European
Level. Furthermore, the experience and
knowledge that Cyprus will gain cannot
be underestimated.
65
Changes in the tax system of Cyprus
Changes in the tax scene
The House of Representatives has voted last
December amendments to
various tax laws in an effort
to combat tax evasion and
tax avoidance. For a number
of proposals for which no
agreement was reached
between the political parties,
the taking of a decision was
postponed and these matters
are expected to be discussed
again in 2011.
Neophytos Neophytou
Member of the Board
Ernst & Young Cyprus
The Taxation Committee of
the Institute has played an
important role in formulating
these changes and for this
reason has attended many meetings of the Finance
Committee of the House of Representatives.
The most significant changes in the legislation are
presented below:
THE INCOME TAX LAW
Requirement of supporting documentation in order to
allow the deduction of expenses
Any expenses incurred for business purposes will be
deducted from taxable income only if they are supported
by invoices and receipts or other evidence provided by
Regulations issued under the provisions of the Assessment
and Collection of Taxes Law.
Notional interest on debit balances of shareholders
Notional interest under section 39 of the Law on debit
balances or loans to shareholders or directors (including
family members) at the rate of 9% will be imposed only in
cases of individuals. In case there are debit balances or
loans to shareholders which are companies, the provisions
of section 33 should apply (related party transactions).
Under the provisions of section 33, if interest is not
imposed using the market interest rates, then the
Commissioner has the right to impute notional interest on
these balances or loans.
Tax withheld on payments to non Cyprus residents
Tax withheld on payments to non Cyprus residents should
be paid to the tax authorities by the end of the following
month. In case this is not paid within the deadline, in
66
addition to the payment of interest at the applicable interest
rate (currently 5,35%) an additional tax equal to 5% of the
tax withheld should also be paid. These payments relate to:
_ copyrights for use within Cyprus at 10%;
_ rights for cinematographic films at 5%;
_ income of an individual for professional services, artists
and athletes fees at 10%.
It is noted that the above percentages of withholding may
be reduced or eliminated under agreements for avoidance
of double taxation or for payments to residents of EU
member states.
THE SPECIAL CONTRIBUTION FOR THE
DEFENCE OF THE REPUBLIC LAW
Amendments to the provisions for deemed distribution
Based on the provisions of the law, in case no dividend is
paid by a company within two years from the end of the tax
year, the deemed distribution provisions apply, where 70%
of the profits after taxation are considered to have been
distributed to the shareholders as dividend and defence
contribution is paid at the rate of 15%. Until today the term
‘taxation’ included only the income tax paid in Cyprus.
The law has now been amended in order for the term to
include special defence contribution, capital gains tax and
taxes paid abroad.
In case of a company which is placed into voluntary
liquidation, the deemed distribution forms for which there
was no obligation to file yet, ie regarding the year the
decision for liquidation has been made and the last two
preceding years should be submitted and any contribution
due should be paid within one month after taking the
decision for liquidation.
Furthermore, if during the liquidation of a company profits
arise, no defence contribution is paid for deemed
distribution if the assets of the company under liquidation
are not adequate for the repayment of the company’s
creditors and any defence contribution cannot exceed the
net value of the assets distributed to the shareholders.
In case of capital reduction of the company, any amount
paid to a shareholder who is individual (but not to legal
persons) in excess of the amount of the share capital which
was actually paid by the shareholder will be deemed as
dividend and defence contribution should be paid at 15%.
Until today, in case of capital reduction all undistributed
taxable profits of all years were subject to the provisions of
deemed distribution.
Changes in the tax system of Cyprus
It is noted that the provisions regarding deemed
distribution are not applicable if the shareholders of the
company are not Cyprus tax residents.
RENTS
A provision is introduced for withholding of defence
contribution on rents paid by a company, partnership, the
Republic or local administration authority. The
contribution is imposed at 3% on the 75% of the rents paid
and should be paid to the tax authorities.
THE ASSESSMENT AND COLLECTION OF
TAXES LAW
previous tax year.
The right of a taxable person for an objection on a tax
assessment issued in December is extended for one month,
i.e. it may be submitted by the end of the following
February, instead by the end of January, that was
applicable until today.
In the objection, the taxable person must precisely set out
the reasons for the objection and must determine the
amount of tax that is considered payable and attach any
documents or evidence to support this.
BOOKS AND RECORDS TO BE KEPT - POWER
OF COMMISSIONER FOR A FIELD AUDIT
Obtaining a Tax Identification Code
Following the registration or the incorporation of a
company with the Registrar of Companies, the company is
obliged to submit an application for registration with the
Tax Department and obtain a Tax Identification Code
(‘TIC’) within 60 days. For companies which have been
registered before the commencement of this law,
transitional provisions of six months for obtaining a TIC
have been granted.
BANKING SECRECY
Under the existing applicable tax legislation, for the lifting
of the banking secrecy for Cyprus tax residents, obtaining
a court order is required, while for the exchange of
information to foreign tax authorities under the agreements
for the avoidance of double taxation, only the approval of
the Attorney General is required. With the amendment of
the legislation, the same provisions are adopted for
approval of the Commissioner’s request for the lifting of
the banking secrecy by the attorney General also in case of
Cyprus tax resident, individuals or companies. The
legislation provides for certain conditions and procedures
which must be followed by the Commissioner before the
banking secrecy is lifted.
SUBMISSION OF ELECTRONIC TAX RETURNS
Provisions for the submission of electronic tax returns are
introduced in cases of tax returns of taxable persons which
are prepared based on audited accounts or their return is
submitted by a professional accountant. An extension of
three months is granted for the submission of an electronic
tax return, i.e. instead of twelve months, the tax return
which is submitted (based on audited accounts) may be
submitted within fifteen months from the end of the tax
year.
If the taxable person does not submit a tax return within
the specified timeframe, the Commissioner is allowed to
issue a tax assessment based on available information
including findings from a tax audit conducted for a
For businesses who are obliged to keep accounting books,
the books should be updated no later than four months
from the month the transaction was made.
The issuance of invoices must be made within thirty days
from the date the transaction was made, unless the taxable
person requests in writing from the Commissioner for an
extension and an extension of the deadline is granted to
him.
A business which has inventory must perform an annual
stock-take and the records of such a stock-take should be
made available to the Inland Revenue Department upon
request.
The Commissioner has the right to enter and inspect
buildings (except for private residence), used for the
purpose of the business, documents and goods of a
business, provided that the business which is housed in
these buildings is operating during its normal working
hours. A reasonable notice must be given to the taxable
person for such inspection.
ADMINISTRATIVE PENALTIES
Provisions have been introduced in the Assessment and
Collections of Taxes Law, the Special Contribution for the
Defence of the Republic Law, the Capital Gains Tax Law
and the Immovable Property Law, in order for various
administrative penalties to be imposed in case of non
timely submission of a return or submission of evidence
requested by the Commissioner (m100 - m200 depending
on the omission) or non timely payment of the taxes due
(5% of the tax due) in addition to the applicable interest.
DATE OF COMMENCEMENT OF THE RELEVANT
CHANGES IN THE LAWS
The aforementioned amendments, which were published
in the Official Gazette of the Republic on 31 December
2010, will come into force six months after their
publication, ie will come into effect on 1 July 2011.
67
The pension system
Double and triple pension payments
and other distortions
A good deal of discussion is
taking place again over the
issue of double and even
triple pession payments.
As long as the economy was some how booming, these
distortions were not causing an immediate problem, yet
now that things are not going well, the problem is more
than obvious.
And one wonders why, a
basically simple matter is
ending up as a topic of daily
discussions.
And as we have indicated for other similar problems, now
is the time, at any political cost, and even though
parliamentary elections are coming soon, to take the
necessary decisions, both for the multiple pension
payments’ matter, as well as for the scales of the new civil
and semi-civil servants to be employed, as well as for the,
many times, illogical and excessive benefits these two
groups of employees enjoy.
Though the above statement
may sound unsounded, the
truth is that this matter has
been complicated because
successive
governments
have not exercised the willingness to face it (either because
they did not wish to lose votes, or because it suited them
‘borrowing’ funds from the Social Insurance funds, or
both).
By Dr Ioannis M. Violaris
Associate Professor
of Economics
Frederick University
Each employee is entitled to receive one reasonable
pension related to his/her contributions.
The enactment of the law allowing multiple pension
payments was a huge mistake. (And for this it’s the
Parliament that has to be blamed and not the beneficiaries).
Additionally an equally huge mistake was the enactment of
the law waiving the obligation of the members of
Parliament in contributing towards their pensions, as well
as the law allowing the civil and semi-civil servants to pay
less than the private sector employees.
Each employee is entitled to receive
one reasonable pension related to
his/her contributions.
68
Our economy, among other measures, basically needs
structural reform of the public expenditure side, which
only through taking the above-mentioned measures would
The enactment of the law allowing
multiple pension payments was a huge
mistake. (And for this it’s the
Parliament that has to be blamed and
not the beneficiaries).
be able, in the long run, follow the right track and it
additionally several incentives need to be offered to the
enterprises, without implying that profits and wealth
shouldn’t be taxed.
The coming elections should act as an opportunity of
bringing to the surface these problems and the political
parties have to realize that the people are going to vote for
those parties that will indicate an honest intention to face
and not hide these distortions.
The Role of State Aid in the EU
The role of State aid in tackling
the Global Economic crisis
During the last two years and
a half the focus of European
interest in the field of state
aid was to tackle the impact
of the global economic crisis
both on financial institutions
and the real economy. The
extraordinary
economic
conditions that prevailed
internationally imposed the
adjustment of Community
By Christos Andreou
state aid rules so as to allow
Commissioner
Member States to take
for State Aid Control
effective action without,
however, disturbing the coherence of the internal market.
common market of the various measures to strengthen the
financial system. Under these rules, the Commission has
evaluated and adopted swiftly a large number of national
schemes
and
individual
measures,
which
were
communicated by Member States in compliance with the
provisions of the Treaty on the Functioning of the
European Union (hereinafter the “TFEU”).
These
measures allowed various forms of assistance such as:
-
Open and non-discriminatory guarantee schemes for
certain types of banking liabilities. The schemes were
based on an adequate remuneration by the beneficiary
financial institutions individually and/or the financial
sector at large and they also included appropriate
mechanisms to minimize distortions of competition and
the potential abuse of the preferential situations of
Naturally, this volatile and unstable environment put to the
test the correct implementation by Member States of the
European Union (hereinafter the “EU”) of Community law
on state aid, which consists of a specific set of rules
concerning the types of aid which are compatible with the
acquis communautaire and the procedure to be followed
for their assessment and approval. The European
Commission (hereinafter the «Commission»), having the
competency to legislate for nearly all of these rules, went
into concrete actions aimed at adapting the rules to current
conditions. First, the Commission published six
Communications to specify and analyze the conditions
under which it would assess the compatibility with the
beneficiaries brought about by the state guarantee;
- Restructuring aid measures for certain banks subject to a
submission of a restructuring plan in order to reestablish
individual banks’ long term viability without reliance on
state support;
- Recapitalization measures, notably in the form of
ordinary and preferred shares, subject in particular to the
introduction of market oriented remuneration rates,
appropriate behavioural safeguards and regular review;
- Impaired asset relief measures, which addressed the
issue of uncertainty regarding the quality of bank balance
Within the above general framework
sheets and therefore helped to revive confidence in the
the Commission approved the Special
sector.
Government Bonds Scheme of the
Within the above general framework the Commission
Republic of Cyprus to enhance
approved the Special Government Bonds Scheme of the
liquidity in the economy of an overall
Republic of Cyprus to enhance liquidity in the economy of
magnitude of EUR 3 billion.
an overall magnitude of EUR 3 billion.
The scheme
envisaged the issuance of special government bonds to
71
The Role of State Aid in the EU
credit institutions against a remuneration and appropriate
collateral. Then these special bonds could be used by the
beneficiaries as collateral to obtain liquidity from the
European Central Bank.
During the last two years and a half the
focus of European interest in the field
of state aid was to tackle the impact of
In the scope of the so-called “real economy”, the
Commission went further by establishing a Community
framework which introduced new types of temporary aid
to tackle the effects of the credit squeeze on the real
economy. More specifically this framework intended to
provide Member States with the possibility to adopt
additional state aid measures aiming at facilitating
companies’ access to finance and at encouraging
companies to continue investing in the future during these
exceptional circumstances. The aid may be given in the
following forms:
- State guarantees for loans at a reduced premium;
- Loans (public or private) at subsidised interest rate, in
particular for the production of “green” products (meeting
environmental protection standards early or going beyond
such standards);
- Risk capital aid up to EUR 2,5 million per SME (Small
and Medium-Sized Enterprise) per year in cases where at
least 30% of the investment cost comes from private
investors.
To date, the Commission adopted more than 210 decisions
on approvals, amendments and prolongation of aid
measures (national schemes and individual cases) designed
by Member States to support their financial systems or
the global economic crisis
Germany.
On the other hand, the amount of national
support to the real economy for the EU as a whole between
December 2008 and October 2010 totalled EUR 82,5
billion. In view of the high volatility of financial markets
and the uncertainty about the economic outlook, the
Commission prolonged until the end of 2011, with some
modifications, the special state aid rules that allow
Member States to preserve financial stability and to ease
access to finance for the real economy.
From the experience of application of Community rules on
state aid it may be concluded that, despite unprecedented
economic conditions faced by European countries and the
need for direct intervention, the Community control of
state aid has worked satisfactorily and the Member States
have fulfilled their obligations as deriving from the TFEU.
This is evidenced both by the large number of notifications
of aid measures and the speed of adoption of decisions by
the Commission. Particularly with regard to aid to the
banking system the Member States averted its collapse but
in compliance with the basic principles of rules, such
as open access for banks to aid schemes, limiting aid to the
minimum necessary, preventing the misuse of aid by its
recipients and the restructuring of banks that received large
amounts of aid.
individual banks and, in addition, more than 120 decisions
on measures aiming to support the real economy.
According to the latest data, the volume of national support
to the financial sector approved by the Commission
between October 2008 and October 2010 amounted to
around EUR 4,5 trillion. It is worth noting that almost half
of this amount was granted by only 4 of the 27 EU
countries, namely: United Kingdom, Ireland, Denmark and
72
For this reason, the crisis cannot be used as an excuse for
the breaking of state aid rules which, moreover, in any
event would be in breach of EU and domestic law. The
rules on state aid, as they have been adapted, give to
Member States various legal instruments for economic
intervention to mitigate the effects of the crisis and sustain
the economic recovery.
Diversity management of the Labour Force
Management of diversity in work area
Although the international
economy is going through a
crisis, we see that companies
are experiencing greater
participation of women,
minorities, immigrants and
older workers of different
nationalities. A number of
companies wonder whether
they should give such weight
to the issue of diversity.
By Rena Christofidou Gregoriou
Some leaders believe that a
MBA, BSc, Ministry of Finance
diverse workforce can
Republic of Cyprus
increase productivity of the
organization and help achieve the objectives of the
company and in addition, it can boost employee morale
and assist the company to penetrate the local and
international markets.
An understanding of diversity in the workplace has
become a science. The new constitutional amendments,
both in the United States and the European area, exerted
pressure on firms to hire more women and minority
employees and allow more opportunities to climb the
corporate ladder. Very quickly, however, it has been
observed that new recruitment methods applied within
organizations, for the female gender and minority, had no
significant effect, since the professional development was
limited to the “dominant culture”, namely that of the
“white man”.
The globalization experienced by an organization
nowadays, the progress in sciences and technology and
multiculturalism create a new setting which offer new
challenges in business. The distances have been
eliminated to zero. The intercontinental communication is
a daily practice. The movement of people and services is
in amazing numbers and with amazing speed. People
adapt quickly to new inventions and developments. All
these factors mould the private and professional conduct
and action. Businesses are moving to an area that tends to
establish international standards and create needs to
adjustment. Beyond the local and global competition
organizations are forced to act in new styles and meet
international standards. As a result they link diversity to
the following five most major advantages: (a) the
strengthening of cultural values within the company, (b)
the enhancement of corporate reputation, (c) the attraction
and retainment of talented/qualified people, (d) the
effectiveness of current staff and (e) the creation of
innovation, motivation and creativity among employees.
MANAGING DIVERSITY
Diversity management became known in the 90s, when it
began to broaden the multicultural society and its
reflection in business. Roosevelt Thomas, who was the
initiator of this concept, was the first to argue that
businesses should strive to maintain a culture of versatile
staff and how the companies themselves should change
their own culture. The company that recruits a manager
and is based on a multicultural staff should manage the
diversity and variety, accepting homogenization within
firms. Many organizations have implemented methods of
the type of mainstreaming, mentoring, etc., but the results
were not the expected, since the aim was to integrate the
individual’s current situation and to adapt to the dominant
culture. These applications seemed not to be sufficiently
“open” to accept the working man as he is, to invest in his
diversity, to incorporate him substantially and, ultimately,
to receive the benefits of his diversity when it falls within
the public workplace.
Additionally, it should be taken into consideration that
diversity is always associated with the mindset which it
differs and depends on the way a person has been brought
up. The ethnicity, religion, gender, experience and culture
of the individual play an important role in these
perceptions. In the workplace, working groups that are
distinguished by their diversity can help to strengthen the
organization’s ability to understand new market trends and
implement strategies in order to operate the company and
adapt to a large extent to new trends.
Of course, Managing Diversity is no panacea or easy
process that is simple and fast and can be applied directly
to the workplace. Its application requires full commitment
on the part of the body and requires the commitment of all
stakeholders in order. The difficulty that arises from the
fact that there is a standard procedure for application is
enormous. The latest developments come mainly from the
education sector and link this with the need of the
organization to deal quickly and effectively with the speed
of change occurring in the wider social environment, but
also to emphasize the value of the individual, of each
different personality, as a component of good governance.
73
Economic crime and Forensic Accounting
Corruption in the accounting profession:
Survey findings
“If technological advancement is the hallmark of
progress in modern society,
then corruption is its bane”
(Zarb, 2005)
Corruption affects all sectors
of the economy. In a recent
Harvard Business Review it
was mentioned by Professors
Nicholas Ambraseys of the
Imperial College of London
and Professor Roger Bilham
By Maria Krambia-Kapardis*
of the University Colorado at
Boulder
that
a
new
assessment of global earthquake fatalities over the past
three decades indicates that 83 percent of all deaths caused
by the collapse of buildings during earthquakes occurred in
countries considered to be unusually corrupt. The two
authors have argued that corrupt building practices (e.g.
substandard materials, poor assembly methods,
inappropriate placement of buildings and non-adherence to
building codes) have increased the death toll.
Corruption results in misallocation of resources, lowers
investment levels, fosters misguided and unresponsive
policies and regulations, reduces competition and
efficiency, increases public spending, lowers productivity,
increases the costs of doing business, lowers growth levels,
reduces the number of quality public sector jobs,
undermines the rule of law, hinders democratic marketoriented reforms and so on.
In an effort to identify the extent of corruption within the
accounting profession the Economic Crime and Forensic
Accounting (ECFA) committee carried out a survey of the
Institute of Certified Public Accountants of Cyprus
(ICPAC) members. The questionnaire was emailed to our
members and the analysis below pertains to 220 useable
responses.
DEMOGRAPHICS
The respondents were predominately male (69%). A
significant proportion (49%) were 31-40 year olds while
those aged 41-50 comprised 23%, and 82% worked in the
private sector. Interestingly, only 11% of the respondents
74
worked in the public sector or semi government
organisations (7%). Sixty five percent were from Nicosia,
22% from Limassol and the rest were spread in the rest of
the districts. The respondents were well qualified as most
of which (60%) had postgraduate qualifications.
FINDINGS
The survey was replicate of the 2009 Eurobarometer
Corruption Survey, amongst 505 Cypriot members of the
general public. The findings of the general public
perceptions on corruption are not very different to that
outline by the accountants in this study. On average, 53%58% of the respondents considered it a corrupt act to give
money or other consideration in return for a building
permit, a driving licence, a reduction in their tax payable,
recruitment in the public sector or in order to have a
favourable treatment in the army. Interestingly enough,
though, only 37% of them considered corruption the
pulling of strings for recruitment in the private sector or
receiving money or compensation for mediating to
facilitate someone’s winning a tender for a project.
Respondents are of the view that corruption is widespread
amongst: Politicians (80%), officials awarding public
tenders (67%), people working in the police service (64%),
officials issuing building permits (55%), people working in
the custom service (50%).
The great majority (91%) do acknowledge that corruption
is a major issue, that it does exist at national level (89%),
at local level (85%) and that corruption is inventible
(60%). The respondents believe that the reason corruption
is so widespread is due to the fact that there is no real
punishment for corruption (97%) , appointments in the
public are not based on merit/qualifications (95%),
politicians are not doing enough to fight corruption (97%),
and people accept corruption as part of everyday life
(94%).
The respondents also believe that the responsibility for
preventing and fighting corruption rests with the
government (96%), the police (88%), the judicial system
(79%) and to a lower degree with EU institutions
(65%).They believe that in order to combat corruption
there should be a speedier prosecution of suspects, the
penalties should be harsher and that the legal framework
Economic crime and Forensic Accounting
should be improved as far as detection, prevention and
punishment of corruption is concerned.
Regarding the accounting profession, 51% of the
respondents have stated that in their view there are cases
where accountants/auditors with their professional
behaviour approve corruption and 57% of them believe
that there are cases where accountants cover up corruption
so their clients can benefit. At the same time 84% of them
believe that accountants are aware of their obligations as
far as reporting and preventing corruption is concerned and
51% do not believe there is corruption amongst the
profession. Finally, and as illustrated in the diagram above,
81% believe that specific rules/regulations should be
established in the accounting/audit profession in relation to
the detection and prosecution of corruption in Cyprus.
CONCLUSION
The survey findings to a large extent mirror those of the
2009 Eurobarometer corruption Survey by the European
Commission. Like the general public in Cyprus, most of
the respondents consider corruption is indeed a major
social problem especially, for example, among politicians,
the police, and customs but not among the judiciary. They
also believe there is corruption in national institutions,
including local ones and that corruption is unavoidable as
people accept it as part of daily life. Respondents prefer
more convictions and harsher sentences as a measure to
combat corruption. In addition the respondents are of the
opinion that the responsibility for tackling corruption lies
primarily with the government.
Finally, it is comforting that accountants are aware of what
constitutes a corrupt act thus they can identify it in their
client or their employer and take necessary measures to
address it.
* Maria Krambia-Kapardis (PhD, M.Bus, B. Ec., ACA),
Associate Professor of Accounting, Cyprus University of
Technology, Chair of the Economic Crime and Forensic
Accounting Committee of ICPAC.
REFERENCES
Zarb B.J (2005) On Corruption and Accounting: No
Panacea for a Modern Disease, Dec CPA Journal
www.nysscpa.org/cpajournal/2005/1205/perspectives/p6.h
tm[accessed 2 February 2011]
Harvard Business Review (2011)
http://beforeitsnews.com/story/353/905/83_of_Earthquake
_Deaths_Caused_By_Building_Collapse_Occurred_in_U
nusually_Corrupt_Countries.html [accessed 2 February
2011]
European Commission (2009) Attitudes of Europeans
towards Corruption Full report,
http://ec.europa.eu/public_opinion/archives/ebs/ebs_325_
en.pdf [accessed 7 February 2011]
75
Economic Crime and Forensic Accounting
Corruption and the fight against it
Corruption
has
no
conscience. When allowed to
spread, its corrosive effects
destroy trust and fuel
injustice, regardless of
location or sector.
According to Transparency
International “Corruption is
the abuse of entrusted power
for private gain. It hurts
everyone
whose
life,
By Stelios Savvides*
Accountant, Electricity Authority livelihood or happiness
depends on the integrity of
of Cyprus Secretary
of the ECFA committee
people in a position of
authority”.
According to the Association of Certified Fraud Examiners
it includes conflict of interest, bribery, illegal gratuities and
economic extortion.
Corruption hurts everyone, and it harms especially the
weak, the poor and those not participating in force
channels. Sometimes its devastating impact is obvious:
ñ
ñ
ñ
ñ
competitive market through illegal kickbacks to
corrupt government officials, at the expense of the
honest companies who didn’t.
ñ
Post-disaster donations provided by compassionate
people, directly or through their governments, that
never reach the victims, callously diverted instead into
the bank accounts of intermediaries.
ñ
The faulty buildings, built to lower safety standards
because a bribe passed under the table in the
construction process that collapse in an earthquake.
ñ
Increases in taxes to the public or businesses in order
to raise government’s incomes so as to replace
incomes that are escaping through tax evasion due to
corruption.
Corruption is both a cause of poverty, and a barrier to
overcoming it. It undermines democracy and the rule of
law, distorts national and international trade, jeopardizes
The
Group
of
States
against
Corruption (GRECO) was established
The unsuspecting sick person who buys useless
counterfeit drugs, putting their health in grave danger.
in 1999 by the Council of Europe to
A small shop owner whose weekly “bribe” to the local
inspector cuts severely into his modest earnings.
organisation’s anti-corruption stan-
Land developers and people trying to invest in land
developing that have to pay “bribes” to public officers
in order for their applications being promoted.
A father who cannot pay his house loan because his
insufficient wages are used to pay a “bribe” to teachers
for private lessons to his child in a supposedly free
school.
Other times corruption’s impact is less visible:
The prosperous multinational corporation that secured
a contract by buying an unfair advantage in a
ñ
76
monitor States’ compliance with the
dards.
sound governance and ethics in the private and the public
sector. It also threatens domestic and international security
and the sustainability of natural resources.
Public and Political Corruption poses a great challenge
also. It undermines democracy and good governance; it
reduces accountability and results in the inefficient
provision of services. Corruption erodes the institutional
capacity of government as procedures are disregarded,
resources are siphoned off, and public offices are bought
and sold. At the same time, corruption undermines the
Economic Crime and Forensic Accounting
siphoned off, and public offices are
Cyprus joined GRECO in1999. GRECO adopted the First
Round Evaluation Report in respect of Cyprus at its 7th
plenary meeting in 2001 and the Second Round Evaluation
Report at its 27th plenary meeting in 2006. GRECO’s
current Third Evaluation Report launched on January 2007
deals with the following themes:
bought and sold.
ñ
Theme I - Incriminations: Criminalisation of
corruption.
ñ
Theme II - Transparency of Party Funding
Corruption erodes the institutional
capacity of government as procedures
are
disregarded,
resources
are
legitimacy of government and such democratic values as
trust and tolerance and also undermines economic
development by generating distortions and inefficiency.
Relevant legislation is not enforced and this facilitates
environmental destruction and diminishing in protection of
peoples rights. At the end tax payers have to pay for Public
and political corruption and fraud.
There are two organisations worth mentioning at this point.
Transparency International (TI) and GRECO (Groupe
d’Etats contre la corruption i.e. Group of States against
corruption).
Transparency International is a nongovernmental
organization_ founded in 1993 from active citizens of
different countries and has its base in Berlin, Germany. It
is a global network including more than 90 locally
established national chapters and chapters-in-formation.
The Cyprus Chapter is under formation currently. TI’s
mission is to create change towards a world free of
corruption. One of TI’s work is to publish an annual
Corruption Perception Index. Cyprus ranks reasonably
well in this Index. In 2010 it achieved the 27th position out
of 178 countries with a score 6,3. Greece ranked 78th ,
with a score 3,5 and was last of the 30 European countries
included in the list.
In conclusion it is worth stating that a key strategy to
combat corruption is through education, and in building a
better culture which does not accept or approve corruption.
At the same time there has to be an infrastructure set up to
address corrupt acts and to ensure that criminals are
brought to justice. Legislation, and guidelines are not
enough unless Cypriots acknowledge that corruption is a
crime and offenders will be punished.
According to Transparency International “Corruption is the abuse of
entrusted power for private gain. It
hurts everyone whose life, livelihood
or happiness depends on the integrity
of people in a position of authority”.
Accountant, Electricity Authoxxx of Cyprus Secretary of
ELFA Committee
REFERENCES
The Group of States against Corruption (GRECO) was
established in 1999 by the Council of Europe to monitor
States’ compliance with the organisation’s anti-corruption
standards. GRECO’s objective is to improve the capacity
of its members to fight corruption by monitoring their
compliance with Council of Europe anti-corruption
standards through a dynamic process of mutual evaluation
and peer pressure. It helps to identify deficiencies in
national anti-corruption policies, prompting the necessary
legislative, institutional and practical reforms. GRECO
also provides a platform for the sharing of best practice in
the prevention and detection of corruption.
Association of Certified Fraud Examiners (2010), Report
to he Nation on Occupational Fraud and Abuse Available
at: www.acfe.com
Group of States against corruption (GRECO), Third
Evaluation Round, Draft Descriptive Part (DDP) of the
evaluation Report on Cyprus on Transparency of Party
Funding. Available at www.coe.int/greco
Transparency International, The 2010 corruption
perceptions index. Available at www.transparency.org
79
Sustainable business
Sustainability and the role of the accountant
Rachel Sinha, Sustainability
Manager, ICAEW
What is sustainability?
Why is it important, and
what is the role of the
accountant within it?
These were the key
questions tackled at an
ICAEW/ICPAC event in
Nicosia in January, hosted
by the UK Institute, who
were invited to Cyprus to
share their perspective on
this important issue.
WHAT IS
SUSTAINABILITY?
ICAEW CEO Michael Izza launched the session by
describing sustainability as ‘a world in which resources are
at least maintained’ and explaining that ‘sustainable
business’ could be characterised by all the activities that
business take towards achieving that goal.
Sustainability, he said, involved social, economic and
environmental issues and required an understanding that
any business activity that we undertake will have an impact
on all three of these in varying degrees. The key was to
maximise the positive and reduce the negative impact of
business.
He gave the example of Coca Cola who opened a bottling
plant in Kerala, in Southern India and in doing so used an
unfair proportion of the local community’s natural water
reserves. They paid for the water that they used, but they
depleted it to such a state that the livelihood of the local
community suffered. NGOs found out about this and there
was an international media outcry, and as a result Coke lost
their licence to operate.
This was, he said, a clear example of an environmental
issue (one of water), which had a social impact because the
local community were unable to sustain themselves, and
80
had an economic cost; David Cox of Coca-Cola Asia said
at the time; “the issues undoubtedly had a short-term
significant impact on sales”.
ICAEW believe that sustainability is one of the biggest
challenges facing business today and that our reaction to
it should not be one of compliance, but should be to
harness this opportunity by encouraging enterprise and
entrepreneurship - doing what business does best.
To offer an unsustainable example; when Henry Ford took
his ideas to the Pacific Railway company, they threw him
out, not because they didn’t like the idea, but because they
thought it would be impossible to train enough chauffeurs.
The railway company were viewing the world through a
prevailing paradigm and Henry Ford was viewing it
differently. This is largely what sustainability is all about.
Looking out for future trends and challenges that are
emerging now and working out how we are going to
change our business behaviour to meet them. After all, it’s
not the strongest but the most adaptable that survive.
BUT, WHY IS SUSTAINABILITY IMPORTANT?
There are many reasons, but a couple that really stand out.
The first is that business doesn’t operate in a vacuum. Any
business is reliant upon people that surround it for its
success. These include government, customers, clients,
suppliers and so forth and vary depending on industry and
sector.
Internationally, the attitudes of these stakeholders are
changing. Certainly in the UK, we have seen a huge shift
in the last 5-10 years where most International companies
now take sustainability very seriously and have a dedicated
Corporate Social Responsibility or Sustainability
department to manage performance in this area.
Indeed the most forward thinking businesses are adapting
fast and the environment has gained some unlikely allies.
In July 2009, Dr Norbert Reithofer, Chairman of the BMW
board announced that BMW would pull out of Formula 1.
Why? He said “Premium will increasingly be defined in
terms of sustainability and environmental compatibility”.
In other words maintaining their premium brand was
reliant upon being aligned with the attitudes of their
customers and damaging the environment was becoming
unfashionable.
Another very compelling reason that sustainability is
important is because our current trajectory is based on an
equation that doesn’t add up. As accountants we not very
fond of those!
We now know we have a hugely growing world
population, coupled with limited resources. With the rise
of China, Brazil and India, this issue won’t simply
disappear.
As Nick Jenkel Elliot of innovation consultancy We Create
said; “We must always remember that our economy sits
within our ecology, not the other way around. If there’s no
ecology, there is no economy.”
So sustainability is about meeting expectations of those
people important to your business and sustaining the
resources on which your business is based. It’s logical and
it’s really just about doing business better.
WHAT HAS THIS GOT TO DO WITH
ACCOUNTANTS?
Accountants in business and in practice internationally are
playing an increasing prominent role in guiding their
organisations’ sustainability strategy. They are being asked
to do things like setting budgets for purchasing carbon
allowances and investment and managing sustainability
data as it becomes a regulatory requirement.
A recent study by Accenture and the UN Global Compact
launched at the Summit in New York in June found that
80% of Chief Executives believe sustainability will be
“fully integrated across their global business” in 10 to 15
years’ time.
And another study by The Carbon Trust in the UK found
that 72% of the 200 Finance Director’s anticipated all
businesses will be required to measure their carbon
footprint and pay a price for the carbon they emit within
the next decade, yet only 26% FD’s interviewed believed
their organisation is prepared for the change to a low
carbon economy.
So accountants’ skills are being utilised for sustainable
business, but they are also being called for elsewhere in
this space. A recent article in UK newspaper The Guardian
carried an article entitled; Are accountants the last hope for
the world’s ecosystems? It read: “The global biodiversity
crisis is so severe that brilliant scientists, political leaders,
eco-warriors, and religious gurus can no longer save us
from ourselves. The military are powerless. But there may
be one last hope for life on earth: accountants”
It referred to a recent UN meeting where a need to produce
accurate, reliable sustainability information was
highlighted. This is of course the natural remit of the
accountant and as such they bring crucial skills to the
sustainability debate.
HOW CAN YOU START TO BECOME A MORE
SUSTAINABLE BUSINESS?
Members in practice in the UK have developed full service
offerings around the management of sustainability
performance. PwC alone have around 600 people working
on this internationally.
Members in business, especially those in SME’s often start
by looking at sustainability as an opportunity for cost
saving.
Stattons hotel in Norfolk, UK is a good example. They
developed and environmental policy and in doing so
discovered that leaving their espresso machine on all day
cost í1000 a year, so they switched to kettles and coffee
pots instead. Further, they used oak tables without table
cloths, cutting laundry costs by í1,944 and built a single
occupancy linen policy that saves the company í600 a year
.
This shows how business, by applying the lens of
sustainability to their strategy, can make real cost savings.
The Intercontinental Group are at the other end of the
hotelier spectrum in terms of scale. They developed ‘Green
Engage’, an online system used by hotels which
automatically generates reports and benchmarks against
similar hotels in their chain across the world.
It provides hotel owners with sustainability advice on all
aspects of their value chain, from picking a suitable site,
selecting the correct lighting for the hotel through to
choosing responsible cleaning materials and providing
81
staff training on sustainability. The return on investment,
carbon reduction and potential impact on their customers is
calculated for each suggested activity. Finally, reports are
produced which allow Intercontinental Hotels, as well as
guests and corporate clients, to review an individual hotel’s
progress.
From an environmental point of view we have ambition to
become a zero carbon Institute - reducing and offsetting
our energy consumption, and to encouraging staff and
members to get involved in useful actions in the
community.
SUSTAINABLE BUSINESS- HOW TO
WHAT ARE ICAEW DOING IN THIS AREA?
ICAEW is firmly committed to sustainability and it has
been a strategic priority for us as an organisation in the last
two years.
We produce guidance on sustainability, develop material
and host road shows on important issues in this area. We
partner with a whole range of organisations and produce
high level, technical thought leadership work on issues
ranging from whether GDP is still a good measure of
progress, to how we can create a financial system that
sustains people and planet - a multi stakeholder initiative
known as the Finance Innovation Lab that we are hosting
in partnership with the Worldwide Fund for Nature in the
UK.
We take our in-house sustainability activities seriously too
and focus on a range of ways we can strengthen our
positive impact on society, the economy and the
environment and reduce the negative.
We do this, for example, by helping other countries
develop sustainable accountancy professions. We help to
train and strengthen the accountancy profession
worldwide, particularly in developing countries like
Bangladesh and Botswana. We have recently won a
number of World Bank capacity building projects. Our aim
is to leave the countries where we work in a position to
self-train and self-govern their own accountancy
professions, in other words to build a sustainable
profession. We believe that one of the prerequisites for a
thriving economy is a strong profession. It won’t bring
about overnight change, but it is one step on the way to a
stronger, more diverse economy.
We have a financial inclusion project in a deprived area of
East London in partnership with Grant Thornton. It’s a
simple idea but is already having dramatic effects on
reducing rent arrears by training people in managing their
finances. We will be rolling the project out in the UK over
the coming year.
82
To support our members, ICAEW have developed the
Business Sustainability Programme (BSP) with our team
in learning and professional development and with KPMG.
The BSP is an e-learning guide for business people on
what is sustainability, its business case and how do you get
started.
The starting point is to identify what your key stakeholders
see as the most pressing social or environmental impacts of
your business. Stakeholders are the people that surround
your organisation, and who signal their desires and wants
to business through the market mechanisms. Businesses
should identify the most powerful ones, those that will
have a significant impact on their business success and ask
them how they would like to see sustainability
performance improve.
Secondly, businesses are encouraged to look at where you
currently have the largest negative impact in terms of
society and the environment and indeed where you are
creating a positive one and build on that. You can find out
more about how to build a more sustainable business at
www.icaew.com/corporateresponsibility and access the
programme online www.icaew.com/bsp.
THE ENVIRONMENT OR PROSPERITY?
To conclude, the argument is no longer about
“environment and social wellbeing” or “prosperity”, but
how to achieve a sustainable and prosperous world.
ICAEW believe sustainability is a huge challenge and one
that our profession has an important role to play within.
As HRH Prince of Wales said at 2009 Accounting for
Sustainability Forum:
“The finance and accounting community is the engine
room of our economy and, indeed, of society as a whole.
You have a particularly important and central role to play
in addressing the challenge of sustainability.”
The road to convergence
The road to convergence: some recent
common proposals
by the IASB and the FASB
By George C Kazamias
Partner
Assurance Services
PwC Cyprus
Towards the road to
converge between International Financial Reporting
Standards (IFRS) and US
Generally Accepted Accounting Principles (US GAAP)
the International Accounting
Standards Board (IASB) and
the US Financial Accounting
Standards Board (FASB)
have recently issued some
common proposals which
are considered in this article.
(A) IASB and FASB issue
proposals to address differences in balance sheet
offsetting requirements
Realisation of a financial asset and settlement of a financial
liability is treated as simultaneous only when the
transactions are made at the same moment, and there is no
exposure to credit or liquidity risk for the gross amounts.
Master netting agreements where the legal right of offset is
only enforceable on the occurrence of some future event,
such as default of the counterparty, do not meet the
offsetting requirements.
The proposals will require more extensive disclosures than
are currently required under IFRS and US GAAP. The
disclosures focus on quantitative information about rights
of set-off, including conditional rights of set-off, and
related collateral arrangements.
IMPACT OF PROPOSALS
These proposals primarily affect financial institutions that
The IASB and FASB have issued proposals to address
prepare their financial statements under US GAAP. The
differences in the balance sheet offsetting requirements
offsetting proposal is largely consistent with IAS 32,
between IFRS and US GAAP. This is considered to be one
‘Financial instruments: Presentation’, so the main effect
of largest quantitative balance sheet difference between the
for IFRS preparers will relate to the additional disclosure
two accounting frameworks today. The exposure draft will
requirements.
result in a converged standard for offsetting financial assets
and financial liabilities on the balance sheet.
(B) IASB and FASB seek comments on common
Key proposals
impairment model for financial assets
The proposals require an entity to offset a recognised
The IASB and FASB have also issued a ‘supplementary
financial asset and financial liability only if it has an
document’ to the their original proposals on impairment of
unconditional right of set-off and intends either to settle
financial assets. This document, entitled ‘Financial
the asset and liability on a net basis or to realise the asset
instruments: Impairment’, proposes a common approach to
and settle the liability simultaneously. An unconditional
the timing of recognition of expected credit losses on
right of set-off is one where the right is not contingent on
financial assets managed in an open portfolio. The
a future event. In other words, the right exists in the normal
proposals reflect the feedback received on the boards’
course of business and is enforceable in all circumstances
original impairment models and will assist the boards in
(that is, not only in the event of default or bankruptcy).
developing a common approach to credit loss recognition.
83
The road to convergence
KEY PROPOSALS
to the common proposal.
The supplement proposes a dual impairment model driven
Under the IASB alternative approach in the supplement, an
by the credit characteristics of the financial assets. This is
entity recognises the time-proportionate lifetime-expected
often referred to as a ‘good book’ and ‘bad book’ approach.
credit losses on a ‘good book’ with no ‘floor’, and the full
amount of lifetime-expected losses on a ‘bad book’. This
* Financial assets in the ‘good book’ - Impairment will be
reflects the IASB view that expected credit losses are
recognised on a portfolio basis over the life of the book
priced into the margin earned on financial assets.
such that the allowance account is the higher of: (1) the
time-proportionate expected credit losses; and (2) the
Under the FASB alternative approach, an entity
credit losses expected to occur within the foreseeable
immediately recognises all credit losses expected to occur
future (but not less than 12 months). The supplement does
in the foreseeable future, with no minimum period
not describe how to measure expected credit losses.
specified. There is also no split between ‘good book’ and
However, it illustrates how to use expected loss estimates
‘bad book’. This reflects the FASB objective of ensuring a
and the weighted average age and life of a portfolio to
sufficient impairment allowance at any point in time.
calculate the time-proportionate expected credit losses.
* Financial assets in the ‘bad book’ - The boards have
SCOPE
concluded it is not appropriate to recognise impairment
losses over time on a ‘bad book’. Instead, the entire
The scope of the proposals is limited to open portfolios _
amount of the lifetime expected credit losses will be
that is, portfolios that contain financial assets with similar
recognised immediately.
credit characteristics irrespective of the time of their
origination. The boards invite comments as to whether the
Whether or not it is appropriate to recognise expected
credit losses over time depends on the degree of
uncertainty about the collectability of a financial asset.
When collectability becomes so uncertain that the entity’s
credit risk management objective changes from receiving
regular payments to recovery, it is no longer appropriate to
recognise impairment losses over time, and the financial
asset should be transferred into a ‘bad book’.
Financial assets therefore move between the ‘good book’
and the ‘bad book’ according to the entity’s internal risk
management policies.
proposed approach is suitable for closed portfolios,
individual instruments and any other types of instrument.
For the IASB, the proposals exclude from the scope shortterm trade receivables, pending redeliberations of the
revenue exposure draft.
The boards are not re-exposing other aspects of the
impairment model, such as measurement of credit losses or
interest revenue recognition. They will continue redeliberating these issues based on the feedback received
from their original exposure drafts while the supplement is
open for comment.
ALTERNATIVE APPROACHES
IMPACT OF PROPOSALS
The common proposal is the result of the joint IASB and
FASB discussions on an impairment model for credit
losses that addresses the primary objectives of the
individual boards. However, some members of the IASB
and FASB prefer the models that they were developing
separately. The supplement therefore also seeks comments
on the respective IASB and FASB approaches, in addition
84
The common proposal will mainly affect financial
institutions that manage their financial assets on an openportfolio basis. If the proposals are extended to other types
of portfolio and financial assets, they may affect any entity
that holds financial assets measured at amortised cost
under IFRS 9.
The sphere of negotiations
Getting to know negotiations
“Let us move from the era of
confrontation to the era of
negotiation” was being
stated by the 37th President
of America, Richard M.
Nixon in the 20th century.
The 21st century has proved
that negotiation with others
who defend their own
interests, ambitions is an
entire part of any business.
People negotiate on a daily
basis to sell, to buy, to sign
contacts, to agree a price
range etc.
that success of any negotiation involves clarifying the
goals and making sure that he/she is psychologically
prepared to act with his/her negotiating opponent.
Negotiations have significantly rooted in business
life as its integrated part.
One of the reasons can be found in dramatic changes and
turbulence that exists in modern market place. Managers
are forced to negotiate with their employees (salaries,
timetable), with their clients (fees, deadlines), colleagues
(for their clients), sub-contractors (fees, deadlines) and so
on. However, it is usually the case that negotiation is being
practiced without identification and intentional analysis of
WHAT makes negotiations be successful.
Negotiations entirely involve interaction and an element of
discussion that helps to prevent existing dilemma.
Negotiations serve several functions:
By Christos Antoniou
Senior Manager, Audit
KPMG
Member of the
Larnaca - Famagusta
Co - ordinating Committee
Starting from the etymological notion of the word
negotiation brings us to the Latin words, negotiari (to carry
on business), negõtium (the business), and was formed
from the parts nec (nor) / nego (to refuse) and õtium
(leisure), meaning not leisure. So negotiation has its
quintessence related to the
process of making efforts,
carrying business, and on
the contrary, not being
passive and rigid.
“Negotiation in the classic diplomatic sense assumes
parties more anxious to agree than to disagree” (Dean
Acheson, American Statesman, Diplomat and Lawyer
(1893-1971)).
So, keeping this in mind, the purpose of this article is to
make a preview of the matters that should be considered
when you are one step to negotiate. It can be viewed as a
possible checklist that might encourage managers to reflect
and think once more about their negotiation strategies or to
underscore some practical hints.
ñ Informational - exchanging views, ideas between two
or more parties while negotiating,
ñ Communicative - establishing new business
connections, normalization of relations,
ñ Controlling - coordinating and monitoring actions and
achieving results/ signing of the agreements.
There are certain steps that need to be followed from the
very beginning. The first question that should be asked is
whether the goal of negotiations has been specified. If not?
If there is no proper preparation for the negotiation
process? This is not a way to start negotiations. Do not
forget that negotiation is not just the process of using your
authority of being a manager; negotiation is a long, wellstructured and organized process. It embraces three
common stages:
ñ Preparation for negotiations,
ñ The process of negotiating,
Negotiations involve hard
work which should be
focused and committed to
success.
With
this
philosophy in mind, any
manager needs to realize
ñ Analysis and implementation of the results.
Fisher, R. and Ury, W. in their best-selling book “Getting
to Yes. Negotiating Agreement without Giving In” (1981;
1991 (second edition)) (the Harvard negotiation Project)
have highlighted the primary principles of negotiations:
87
The sphere of negotiations
to a negotiated agreement) if you have to do one
step back from what you have preplanned
ñ Make a thought of possible driving motives of your
opponents:
ñ Analyze what is more likely to be asked
ñ Anticipate the goals of another party
ñ Think of their possible B.A.T.N.A. (the best
alternative to a negotiated agreement)
1. Separate the people/ relationship from the problem/
substance of the deal
ñ Be hard on the deal, soft on the people,
ñ See the deal from inside the shoes,
ñ Make your proposal consistent with their value
2. Focus on shared values and interests, but not on the
positions each side takes
ñ Values define the deal,
ñ Each side has multiple interests - be clear on yours,
discover theirs
3. Brainstorm/ invent opinions for mutual benefit
ñ Be creative, think outside of the box,
ñ Identify shared interest
4. Use objective criteria for decision-making process
ñ Strike a deal based on principle, not pressure
ñ Agree on fair standards and procedures
ñ Frame issues as a collaborative quest
Negotiation should be considered as a productive way of
solving a problem and achieving mutual understanding
between parties/ opponents. However, the path of getting
to yes is not an easy one, and a proper preparation and
reflection of weaknesses and strengths is needed in order
to succeed. Here, there are some possible
recommendations that should attract attention at each stage
when you are being ready to negotiate.
1. Preparing:
ñ Start from yourself. Prepare, prepare, and once again
prepare yourself:
ñ Clarify your goals for negotiations
ñ Prepare a sketch plan in advance of what should
be said, bearing in mind to leave some freedom
ñ Think about your B.A.T.N.A. (the best alternative
88
2. Negotiating - process:
ñ Avoid deviations from the subject of negotiations
ñ Be an active listener:
ñ Listen carefully, leaving the room for questions
and summary of what have been said by you and
your opponent
ñ Maintain diplomatic and tactful tone of your
voice
ñ Exercise moderate emotions
ñ Stick to your principles /goals when answering
your opponent questions
ñ Use a combination of open-ended (why? / how?)
and closed (assuming the straight answer yes/no)
questions in order to master your discussion
ñ Pay attention on what you say. Avoid ambiguity in
your presentation and core points.
ñ Your speech should be concise, systematic and
clear
ñ Be focused on your goals or try to find acceptable
solution which is going to satisfy your needs as
B.A.T.N.A. (the best alternative to a negotiated
agreement)
ñ Pay attention to timing. Time is your money!
3. Ending. The practical conclusion:
ñ Do not allow their problems become yours
ñ Build a common ground
ñ Summarize what have been achieved
ñ Make sure that everyone confirms the exit
solutions.
Close with mutual CONFIRMATION!
ñ Follow-up (written/ electronic notification letter)
ñ Make a checklist of your successful experiences
of this negotiation.
Finally, last but not least: your ability to negotiate
successfully in today’s flexible business environment can
make a real difference between your personal and
professional triumph and inevitable failure for you and
your business. So, do manage your negotiations and there
is always space for improvement and progressive change!
Risk management systems
Risk elimination or risk mitigation?
RISK ELIMINATION OR
RISK MITIGATION?
much risk they are willing to take for the expected value of
the business strategy they are pursuing. It is therefore
important for management to have a comprehensive
Most risk management
systems aim to avoid risk.
But, one must consider the
risk-reward dilemma; if a
business does not take risks,
how can it grow? Rather than
avoiding risks altogether, it
is important for organiBy Michalis Stavrides
sations to continuously
Senior Manager
manage their risks; to have a
Advisory Services,
good understanding of the
PwC Cyprus
Secretary of ICPAC’s
risks undertaken as well as
Corporate Governance, Risk the measures needed to
Management and Internal
successfully manage those
Audit Committee
risks.
understanding of the organisation’s operations and to
define the balance of risk and value that the organisation is
willing to pursue going forward.
Having established the organisation’s risk appetite, it is
then necessary to align the organisation’s strategic and
business objectives with its risk appetite and adjust its
operating model so that it will support rather than hinder
future business performance.
CONCENTRATE ON THE RISKS THE
ORGANISATION CAN MANAGE
Frequently organisations find themselves in situations
where they have taken risks that they cannot understand
and/or manage.
Management should therefore aim to
During a downturn, it is often the case that organisations
tend to become more cautious in their attempt to limit the
impact of the risks they have identified. Nonetheless, an
ever changing business environment continuously creates
new risks and raises new challenges. An organisation
trying to eliminate risk is likely to end up in a situation
where it does not take advantage of new opportunities.
select carefully the risks the organisation is undertaking.
Consequently, organisations should not aim to avoid risks,
but rather seek to determine their risk appetite.
Subsequently, a good risk management process should be
established to allow organisations to stay within the limits
of their risk appetite and at the same time make informed
decisions and maximise their chances of success.
ESTABLISH AND PROMOTE A RISK
For example, the organisation should take on risks that it
knows it can address more effectively than the competition
and which will provide a future competitive advantage. In
addition, the organisation needs to focus on the risks it can
really manage and spread over time, thus limiting its risk
exposure within levels it can bear and properly monitor.
MANAGEMENT CULTURE ACROSS THE
ORGANISATION
Management often fails to assess the true impact of the
organisational culture on its business. However, culture
differs between organisations and some organisations are
Some key steps in helping organisations achieve this are
described below:
better than others at recognizing and taking advantage of
opportunities and at mitigating risks. Therefore, a key
factor in establishing an effective risk management process
KNOW THE BUSINESS AND ESTABLISH THE
ORGANISATION’S RISK APPETITE
It is often the case that organisations do not know how
is embedding a risk management culture within the
organisation.
Organisations also tend to over-concentrate on risks and
89
Risk management systems
changes that happened in the past, thus being unprepared
function and level.
to address the future and the new risks and opportunities it
will present. Management should therefore strive to
A common reason for organisations failing in risk
enhance the flexibility of the organisation to enable it to
management is the fact that they fail initially to make every
respond quickly and effectively to new opportunities and
employee accountable for managing risk. Transferring risk
risks.
management responsibility, away from every employee
and the organisation’s divisions, to a designated risk
Moreover, it is imperative for the organisation to have a
management team bears the risk of people becoming less
proper and credible system to collect information on the
risk conscious and passing the responsibility of monitoring
risks it undertakes and to enable a timely and holistic
the impact of their actions to their colleagues.
monitoring of the organisation’s exposure to these risks.
It is therefore critical for the organisation’s divisions to be
ENGAGE YOUR PEOPLE
responsible for the decisions they make, the behaviour of
their employees and the effectiveness of the controls they
As is always the case but often forgotten, it is people, not
use in their day-to-day business. Employees will need to
plans or systems, that will implement change and deliver
understand that they should always select acceptable risks
real benefits. Establishing a culture in which the right
and manage them effectively.
people do the right thing at the right time is critical to the
organisation’s ability to take advantage of opportunities
To
and avoid problems.
responsibility, authority and accountability at all levels. In
achieve
this,
management
needs
to
clarify
addition, for employees to be held responsible and
It is therefore critical for employees to have a clear
therefore accountable for a specific function, they should
understanding of the organisation’s risk appetite and
be given the appropriate resources (i.e. financial, people,
specifically the risks they should be willing to take and the
information etc) and adequate authority to make the
ones they should avoid. Management needs to be
necessary decisions.
transparent regarding the organisation’s risk appetite and
must offer continuous guidance and training to its
Management also needs to set an example and practically
employees. The aim should be to establish a culture in
recognise the contribution people make to the organisation.
which ‘doing the right thing’ comes naturally.
It is important to reward the people who maintain the right
attitude and who operate responsibly and in alignment with
At the same time, management needs to establish and
the organisation’s risk management culture.
enforce a clear set of rules to protect the organisation from
people’s
actions
that
are
inconsistent
with
the
organisation’s risk management framework.
In conclusion, organisations should not aim to avoid risks,
but instead be careful in assessing the risks they are taking
and establishing the right measures to manage them
REFOCUS RISK MANAGEMENT
effectively. In doing so, management needs to have a
RESPONSIBILITY
comprehensive understanding of the way the organisation
operates and behaves, establish the organisation’s risk
Risk management is often considered to be the
appetite and risk management culture and take all
responsibility of a designated ‘Risk Management’ team.
necessary steps to embed such a culture within the
However, risk management should be the responsibility of
organisation. To achieve this, risk management should be
all the members of the organisation, irrespective of their
everybody’s responsibility.
90
Who will audit the auditors?
“Quis custodiet IPSOS custodes?”
If this is all Latin to you,
Max Anderson and Peter Escher are just two professional
worry not. It simply means:
people, like you and I, which asked the same question
“Who
the
among many other questions about the changes in the way
guardians”? or to be in line
we do business. In searching for the answer, Max and Peter
with our discipline here:
were joined by hundreds of others around the world to take
will
guard
a stab at capturing some of the new rules of doing business.
“Who
will
audit
the
auditors”?
They formed the MBA Oath (www.MBAOath.org) and
published if for the first time in 2010. Just like our ancestor
Hippocrates created the Hippocratic Oath, these MBA
How often do we stop our
graduates drafted the MBA Oath to address the crisis we
actions or consider this on
all face in business leadership. The propose is a new
our Board meeting agenda?
business ethic and on page XX of the Preface to their book,
How often do we look back
they mention: “...discussions of business values should be
to our own individual actions
an open marketplace, like the world of business is an open
and take responsibility for our empowerment, our
marketplace. It should be a forum for debate whose symbol
accountability, our responsibility and transparency?
is not the pulpit, but the agora of ancient Greece. So read.
Surely, this is neither an easy nor a simple subject.
Debate. Help us find a better way”.
The excuses are many, the environment non conducive, the
I would like to share the spirit of oath with you today. The
‘way we’ve done things all these years’ too complicated to
intention is neither to ‘sell’ you the value of the oath nor to
question, let alone understand. In the meantime lack of
persuade you of its correctness should there be any. It is
transparency and responsibility builds up to the detriment
simply to provide an example that the power of change lies
of ourselves, our organizations, our society, and our
within each of one of us. The responsibility of guarding the
countries.
guardians lies in each one of us, in each one of you, from
By Marina Theodotou*
Managing Director
Curveball Limited
your desk as a junior officer, to your seat as a CEO and the
With the reverberations of the financial crisis still hitting
Chairman of your Board. There is power in information.
many economies, including that of Cyprus, one thing is for
This power multiplies if we apply our own intellect to this
sure: the old rules are out and new rules, new ways of
information, and process it and guide it to serving the
doing things are being formed. The pace of business has
greater good.
gotten even faster, as information moves at the split of a
second. Today, revolutions spread at the click of the send
“All we have are the choices we make” is a quote that rings
button on your mobile phone and your personal facebook
true, even though it is borrowed from a Hollywood
account is worth in excess of 100,000 euro. Companies
movie...
like twitter, facebook and Google have unprecedented
socioeconomic and political powers.
As professional business people we undertake the
responsibility of implementing the unwritten laws of
Yet, at the core of all this incredible financial crisis and
business. In our everyday endeavors, we interact with
unprecedented fast change, lies the simple Latin quote by
counterparts and colleagues around a changing world. The
the Roman satirist Juvenal: “Who will guard the
rate of this change is increasing at an increasing rate and
guardians” asked a couple of thousand years ago.
we can no longer deny, pooh-pooh or dismiss it as some
91
Who will audit the auditors?
business practice implemented in a far far away, ultra-
I will safeguard the interests of my shareholders,
developed, western economy. I wish we dropped a euro in
coworkers, customers and the society in which we operate.
a large jar perched somewhere in the central plaza in the
I will manage my enterprise in good faith, guarding against
capital for every time we have been told the following
decisions and behavior that advance my own narrow
adage: “But we are not in Germany, this is Cyprus”. Well,
ambitions but harm the enterprise and the societies it
such statements simply won’t fly any more, and neither
serves.
will lip service. Being part of the global economy
translates to both being empowered and accountable at the
I will understand and uphold, both in letter and in spirit,
individual and the collective level. Membership in local,
the laws and contracts governing my own conduct and that
regional or global organizations be it the European Union,
of my enterprise.
FIFA or the International Association of Butterfly
Collectors, means that we have a responsibility to both
I will take responsibility for my actions, and I will
represent our country with integrity and transparency but
represent the performance and risks of my own enterprise
also to earn and command respect and credibility with
accurately and honestly.
empowerment and accountability as individuals, as
organizations and as a people. It’s a two way street; a give
I will develop both myself and other managers under my
and take; debit and credit. And it all goes back to the two-
supervision so that the profession continues to grow and
sided coin of trust. One side of the trust coin is
contribute to the well-being of society.
empowerment and on the other side is accountability.
I will strive to create sustainable economic, social, and
It is our individual responsibility to use our intellect and
environmental prosperity worldwide.
seek empowerment and accountability to broaden not only
our own, but also our collective horizons. Without further
I will be accountable to my peers and they will be
delay and with full credit to the authors, here is the MBA
accountable to my for living by this oath.”
Oath for each one of us to contemplate, revise, adopt, adapt
or even reject. As long as we each think about the spirit of
this oath, we become part of the times that are indeed
changin’!
Sources: The MBA Oath by Max Anderson and Peter Escher
www.mbaoath.org
THE MBA OATH
“As a manager, my purpose is to serve the greater good by
* Marina Theodotou is an Economist (BA Honors, MA) and a Six
bringing together people and resources to create value that
Sigma Black Belt with over 15 years of professional experience.
no single individual can create alone. Therefore, I will seek
She is the founder of Curveball Ltd, a strategic consultancy
a course that enhances the value my enterprise can create
services provider. Previous roles include Director of Business
for society over the long-term. I recognize my decisions
Development and Operations at the Cyprus Investment
have far-reaching consequenses that affect the well being
Promotion Agency, Country Director of the Financial Services
of individuals inside and outside my enterprise, today and
Volunteer Corps Amman, Jordan and Vice President in Strategic
in the future. As I reconcile the interests of different
Benchmarking/Quality & Productivity at Bank of America. In
constituencies, I will face difficult choices.
2009 she was voted one of the 100+ most powerful women in
Therefore I promise :
Business in Cyprus, and in 2010 she was selected as one of the
10 Women Entrepreneurial Ambassadors by the European
I will act with outmost integrity and pursue my work in an
Commission.
ethical manner.
www.curveballlimited.com
92
For
more
information
visit
Land transfer fees
Lands office + transfer fees
There is some confusion as
to how the Lands Office
transfer fees are calculated.
The Lands Office has the
authority, if it believes that
the sales price is not in
accord to the market value,
to adopt what it believes it is
the market value. As such if
you bought the property say
for m100.000 and the Lands
Office believes it is worth
more, say m120.000, you
will be called upon to pay
By Antonis Loizou
the transfer fees on the
F.R.I.C.S. - Antonis Loizou &
m120.000. The Lands Office
Associates Ltd - Real Estate
valuation can be questioned
Valuers & Estate Agents
and you can pay the
increased transfer fees under protest and ask the Lands
Office to carry out a detailed valuation by inspecting the
property etc. At the same time you have 45 days to object
by submitting yourself a valuation duly reasoned through
the use of a valuer. If no agreement on the value, you can
object to the Court. The 45 days limit is not a fixed time
limit and based on a recent High Court decision, the 45
days are indicative and not absolute.
Transfer fees are calculated on the date of sale. If you have
your contract deposited with the Lands Office, then the
Lands Office will accept the date of sale on the sales
contract as being correct. If you have not, then you must
prove when you actually bought the property (receipt of
down payment etc). Such proof includes also the
production of a stamped sales contract (be it later than the
purchase date, but then you will pay a small fine to stamp
the sales contract - maximum period with no fine 2 months
to stamp from the date of acquisition). You may be also
required to produce your payments/receipts when you
actually bought the property (with dates etc). Other proof
is your occupation details e.g. electricity/utility bills etc.
The following scale transfer fees are calculated based on
the market value.
VALUE m
The fees are calculated cumulatively with each scale
separately.
In case that one buys a property in shares (it is done so that
the scale will be at the lower end), when you buy the first
share and subsequent to that and provided you buy another
share within 2 years from the previous share, the transfer
fees will be calculated on the total number of shares value
less the fees, which you have already paid.
It is rather a “common” practice to under-declare the
acquisition price in an effort for the buyer to pay lower
transfer fees and the seller lower income tax/capital gains
tax liability. Whereas, however, the Lands Office has the
authority to upgrade the sales price to the market value
level, the Capital Gains Tax people may not, but must
adopt the declared price, unless they prove fraud (a very
strange situation we add, but these two cases are governed
by the relevant laws and which are different).
Those who under-declare their acquisition cost must bear
in mind that the buyer, when he comes to sell his property,
he will be faced with an increased income tax/capital gains
tax liability (with an average amounting to 20% on the
difference - gain). So in certain cases in an effort for the
buyer to save the 7%-8% transfer fees, he is faced with an
increased capital gains/income tax of 20% (the other
complications in addition). Our suggestion is not to underdeclare the acquisition price, since you do not know what
this rather small saving will cause you in the future.
In case you buy real estate owned by a Co i.e. acquisition
of shares, your accountant’s advice must be sought.
Transfer of shares do not attract transfer fees but, if the Co,
the shares of which you buy, has a historic cost of the
property’s acquisition, you will get a surprise when you
come to sell/develop the property, since the tax authority
will adopt as the basis of your cost, the historic cost of the
Co’s acquisition and not what you have actually paid
(which might be many times more) on the date of the
acquisition.
We hope that we have shed some light for some people
who are in a confused situation.
TRANSFER
FEES
ACTUAL FEE
m
TOTAL
m
Up to 85.430
3%
2.563
2.563
85.430 - 170.860
5%
4.272
6.835
170.861 - up
8%
95
The Excel Wizard
The Excel Wizard
By Stratos Panayides,
BA(Econ), ACA Training Consultant at AKTINA
96
ACCOUNTANCY CYPRUS ñ VOLUME 102ñ DECEMBER 2011
The Excel Wizard
97
The Excel Wizard
98
Work Life Balance
Mission possible - tips and strategies
to achieve a better work life balance
There was a time when the
boundaries between work
and home were fairly clear.
Today, however, work is
likely to invade your
personal life and maintaining
work-life balance is no
simple task. Still, work-life
balance is not out of reach.
An important part of
By Demetris Stylianides,
building a happy life is
DipLC, CTM, CL, FAIA,
creating a balance among
FCCA, CPA,
work, personal, and family
Certified Trainer of NLP
needs that allows you to
pursue your dreams, achieve
your goals, and improve your physical and emotional wellbeing.
Today, many people feel that their lives are out of balance.
Their priorities always seem to be competing with many
areas of their life, perhaps they enjoy career achievements
but can’t find the time to exercise, or their work seems to
be interfering with having a loving family life. Whatever
type or degree of work-life imbalance you might be
experiencing, this article will assist you in creating the
balance that is best for you.
Work life balance often seems too vague. In fact, many
people think getting balance in their lives is an
unobtainable goal. Your journey towards work life balance
begins with the development of 3 essential things:
Choice allows you to create the life you want. Developing
effective work life balance will require you to make
choices based on information about your life and your
world.
TRUST
By raising your awareness and increasing your choices,
you will increase your ability to trust in yourself. Your life
is in your hands. Once you know that you have what it
takes to achieve a work life balance that works for you,
you’ll trust yourself to make good choices in other areas of
your life.
A POSITIVE APPROACH
Sometimes it seems like we have no control over the
factors that affect our work life balance. While it is true
that there are some external factors that you cannot affect,
you have more control than you think.
If we put all factors involved in a formula, then it would
look like the following:
POSITIVE MENTAL ATTITUDE + POSITIVE
MENTAL ACTION = IMPOSSIBLE IS NOTHING!
Many people find that they focus on positive thinking
without seeing any positive changes happening in their
lives. They may believe for a few moments that the car will
miraculously wash itself, just by thinking about it! :) They
soon realise that positive thinking alone is not enough! A
1. Awareness
2. Choice
3. Trust
AWARENESS
If you want to achieve a work life balance, your first step
is to develop awareness. You have to become aware of your
surroundings, the positive aspects as well as the negative
things. Cultivating awareness will in turn lead to more
choice in your life.
CHOICE
The ability to choose is very important to everybody.
99
Work Life Balance
more correct approach is to combine positive thinking with
massive action. Attitude plus Action gets things done. You
need to think positive so that you can carry out the required
positive action.
Balance is something that is so hard for us to achieve; and
yet, so necessary. The importance to find time for fun and
relaxation seems to be forgotten among the demands of
work and responsibility. So often we give into what is
expected of us pushing aside our own needs for down time.
We are constantly pulled in two directions. On one side are
our responsibilities. They tell us about those assignments
due at work and about promises made to friends and family
that must be fulfilled. It all seems overwhelming, but it is
our duty to meet these obligations.
remember that “yes” there are responsibilities and
deadlines to be met, but if you push too hard you’re going
to run your body down and nothing is going to be
accomplished. Think of your physical, mental, and
emotional health in terms of Newton’s First Law: “For
every action there is an equal and opposite reaction.”
Basically this means you can only push so hard before
something breaks.
There are two schools of thought as to how to handle free
time. One says that it is important to be spontaneous about
relaxation. The other says that setting aside time
specifically to relax is better. Both schools of thought have
their good and bad points.
Being spontaneous about relaxing and having fun is great
because it’s an unexpected luxury. Living in the moment
gives that freeing feeling that all of us enjoy. It makes you
feel like a kid again doing what you want to do where fun
is the only objective.
On the other hand planning for free time gives you
something to look forward to. Knowing that something
pleasant is coming makes it easier to get through your
tasks because there is always a light at the end of the
tunnel.
On the other hand is the need to take time to breathe. To
simply enjoy reading a good book or to watch the movie
everyone has been talking about. There may even be the
thought of a holiday.
Most of us go back and forth like the waves of the ocean.
It seems like every time we accomplish a goal, our duties
pull us back. In our heads we go over to our “to do” list,
but at the same time think about how important it is to take
time for ourselves in order to reduce stress and relax. This
is always followed by, “I’ll make some time to relax after
I do A, B, C, and part of D.” By then the only reason we
may take some time off is because of over exhaustion.
Even then we still try to push more!
It shouldn’t be such a struggle. Like the ocean we should
learn to accept the flow of the push and pull. Try to
100
Check out the diagram regarding the wheel of life just to
get an idea whether your life is currently in balance. Each
segment of the wheel represents an area of your life.
Consider each section - how satisfied are you with all these
areas of your life? Are you putting as much time, energy
and attention into these areas as you would like? The
centre of the wheel is 0 and means you are totally
dissatisfied; the outer edge is 10 and represents full
satisfaction and achievement. Decide your degree of
satisfaction from 0 to 10 and mark it on the relevant spoke.
Now draw a line to join your degree marks together. How
balanced is your life? Which areas make you happy,
satisfied and fulfilled? Which areas need improvement?
This is the first exercise that my clients take before they
embark on an executive coaching service package.
Techniques for improving work life balance include the
following:
LEAVE THE OFFICE EARLY
Easier said than done but if you set a departure time as a
clear goal very early on you can do it. If you set an
absolute time to leave earlier in the day, that time serves as
a deadline to get your tasks done for the day, making you
stay more focused throughout the day. Your reward is to
actually get out of the workplace at a reasonable time.
Work Life Balance
on doing too many things and assume that only 50% of the
things you plan on doing today will actually get done. If
you don’t, you’ll just waste valuable time trying to find out
why things didn’t happen.
SLOW DOWN
Life is simply too short, so don’t let things make you
nervous. Take steps to stop and enjoy the things and people
around you. Schedule more time between meetings; don’t
make plans for every evening or weekend, and find some
ways to distance yourself from the things that are causing
you the most stress.
EXAMINE YOUR LIFE
Don’t check that email when you are at home. Don’t leave
the office mobile switched on. Leave your office mobile at
work or just turn it off when you leave and deal with any
problems when you return at work.
Examine your life regularly. Use your free time as a time
of reflection. Often our lives become derailed from the
track we set it on, and as a result we don’t realize where
our lives are going until we really examine them. Or we
can get so caught up in a routine that we don’t realize that
we can change it. Regular self reflection is the answer:
think about how your life is going, how you’re spending
your time, and decide whether you need to make changes.
Then schedule time to make those changes immediately or
make the changes right away if possible.
MANAGE YOUR TIME
FINAL WORDS
Organise household tasks efficiently, such as doing a load
of laundry every day, rather than saving it all for your day
off. Put family events on a weekly family calendar and
keep a daily to-do list. Do what needs to be done and let
the rest go. Limit time-consuming misunderstandings by
communicating clearly and listening carefully. Take notes
if necessary.
Remember, finding a healthy work-life balance isn’t a oneshot deal. Creating work-life balance is a continuous
process as your family, interests and work life change so
periodically examine your priorities and make changes if
necessary, to make sure you’re keeping on track.
TURN OFF ANY COMMUNICATION LINKS
AFTER YOU LEAVE THE OFFICE
GET INVOLVED IN A PERSONALLY IMPORTANT
PROJECT OUTSIDE WORK
Some people tend to get absorbed in their job because they
don’t have a meaningful element of their life outside of
work, so they let their job become their life. Over the long
run, this is dangerous, as it wears you down. A much better
approach is to find a major project to involve yourself in
outside of work, for example a community group, a
volunteer project, or something around personal growth.
DON’T OVERBOOK YOUR SCHEDULE
The problem is that things rarely go according to plan and
that means a lot of time chasing down appointments,
unreturned phone calls and other items. Don’t try to plan
103
Electricity generation cost
Electricity generation cost in
isolated power systems
In 2008, the European Union
CHARACTERISTICS OF ISOLATED ELECTRICAL
(EU) settled on a policy
SYSTEMS
agenda whose purpose was
Dr. Andreas Poullikkas
Assistant Manager,
Electricity Authority
of Cyprus
to comply with certain key
Isolated
energy objectives, such as,
characteristics that contribute to increase the cost and the
sustainability, competitive-
uncertainty of the electricity generation. The main problem
ness and security of supply.
facing these types of electrical systems, is the increased
To that end, goals were
cost of the electricity supply caused by, among other
established
reduce
things, high fuel transportation costs resulting from the
greenhouse gas emissions by
distance of supply sources and by the absence of
20%, to increase the share of
endogenous energy sources.
renewable
to
energies
electrical
systems
exhibit
a
series
of
in
primary energy consumption
The smaller the electrical system size, however, the more
by 20% and to improve
the expenses will be. The power generation units cannot
energy efficiency by 20%
exceed a certain size since the loss of a unit or a group of
(the well known 20-20-20 initiative). Along the same lines,
units would mean the loss of a high percentage of the
Cyprus Government set measures to reduce emission
entire system. As a result, economies of scale cannot be
levels and its dependence on oil, thanks to the introduction
adequately exploited like in large electrical systems, which
of natural gas and to the promotion of renewable energy
serve to complicate the technical control of the grid in
sources, especially solar and wind power, to generate
terms of frequency and voltage. The isolation also requires
electricity.
maintaining a greater reserve capacity to ensure an
adequate supply. Also, the greater flexibility offered by
interconnected grids is not available in isolated power
Cyprus represents a clear example of an isolated energy
systems. Thus, such isolated systems require be planning
system of relative important size within the EU. Isolated
and treating differently from continental grids.
grids feature a set of characteristics that usually imply a
greater energy dependency and vulnerability, requiring the
Territories belonging to a country normally charge the
need for specific planning. Generally, these systems do not
same rate, meaning that isolated systems, due to the higher
have access to every technology available, nor can they be
supply costs, must be subsidized by the citizenry as a
connected to continental grids, such as the European grid,
whole, as in Greece or Spain. Obviously, in such a
if necessary. That is why the role of renewable energies
situation, regulations play an important interterritorial
and their complementarity with fossil fuels presents a solid
redistributive
path for Cyprus to achieve its main energy commitments to
introduction and development of renewable endogenous
the EU. A study of the electrical system in Cyprus can
energy sources is an important complement to
serve as an example for other similarly sized isolated
conventional models based on fossil fuels. This
systems in which the only endogenous energy source is
complementarity offers a solid tool for achieving the main
provided by renewable energy sources.
energy policy goals, such as, economic efficiency, respect
104
role.
Under
these
conditions,
the
Electricity generation cost
for the environment and security and diversification of the
electricity cost due to the dependance in oil products. As a
supply. And yet, the interruptible and irregular nature of
consequence of this energy planning a set of appropriate
renewable energy sources, along with the isolation of the
measures will allow the power generation system to
economy, can significantly condition the penetration rate
diminish its dependence on oil from the current 98% to
of renewables into these electrical systems. So, given the
54% by 2020.
current state of technology in renewable sources, these
economies continue to rely on conventional plants as the
The main initiatives affecting the electrical industry are (a)
basis for their electrical systems. Hence, ideally, these
the rational use of energy with the increase of the overall
plants should be as efficient as possible and be able to
efficiency in the industry, (b) renewable energy sources by
provide the greatest guarantee of the security of supply.
increasing their contribution to reach a 13% of the primary
energy sources, which would imply a 16% of electricity
THE ELECTRICAL SYSTEM IN CYPRUS
generation by 2020 (an installed wind capacity for the
Cyprus of 300MW is proposed for 2020, along with
Cyprus depends on external sources of energy and features
192MW in photovoltaic energy, 17MW in biomass and
almost no diversification. The electric industry in Cyprus
75MW in solar thermal technologies, also for 2020) and
has the features of an isolated system because it is
(c) natural gas would be used in combined cycle
disconnected from the large European grid or other
technologies bringing a total of the power generation share
neighbouring grids. The installed capacity on the island of
of 30% by 2020.
Cyprus, as well as the peak demand, are similar to those on
the islands of Crete, Malta and Canary Islands, all within
FINAL REMARKS
the EU territory. Also, Cyprus power system is comparable
to that of the islands of Puerto Rico, Jamaica and Trinidad
In isolated electrical systems the complementarity between
and Tobago.
fossil and renewable energies offers a solid path to
achieving sustainable development. For Cyprus, the cost of
For such small isolated power systems means that oil
generating electricity from natural gas is the most
derivatives are used almost exclusively as the primary
inexpensive. Regarding renewable energy sources biomass
energy source, which also limits the technologies utilized
is the least cost option followed by the wind technology.
and the size of the generating units. Thus, in 2010, 98% of
Achieving sustainable development requires the maximum
the power generation units in Cyprus used fuel oil. In
exploitation of endogenous energy sources and the
comparison to other isolated systems, this extreme reliance
introduction of natural gas. This situation would allow for
on oil is not unusual. In Malta, for example, the reliance on
significant reductions in not only cost, but also in CO2
oil is 100% and in the Canary islands is 74%. Trinidad and
emissions. Additional investment in the grid as well as the
Tobago rely 100% on natural gas, while Jamaica is 98%
construction of liquefied natural gas regasification plants
dependent on oil.
would be essential components in any plan to introduce
natural gas to the island. The complementarity between
ELECTRICITY REGULATION IN CYPRUS
fossil energies (and natural gas in particular) and
renewable energies is a relevant factor for the energy
The regulation of the electrical system Cyprus features
policy of Cyprus isolated system where few supply options
some notable differences with respect to the European
exist, since it is the only way to reduce dependence,
main grid, such as, (a) greater level of intervention in
increase diversification and lower greenhouse gas
planning the sector at the generation stage and (b) high
emissions.
105
EC Green Paper: Audit Policy
EC Green Paper - Audit Policy:
Lessons from the crisis
auditor: alternatives to that and whether the appointment
PUBLICATION OF
by a third party could be justified
GREEN PAPER
ñ limit on the maximum level of fees an audit firm can
On 13 October 2010, the
receive from a single client
European
Commission
ñ transparency of the financial statements of audit firms,
published a Green Paper on
governance of audit firms to enhance the independence of
the European audit market
auditors, alternative structures to allow audit firms to raise
seeking
By Gabriel Onisiforou,
Member of the Board, Ernst
& Young Cyprus
Member of the International
Business, Shipping &
Foreign Investments
Committee of ICPAC
views
from
capital from external sources
stakeholders and the broader
ñ increased integration and cooperation on audit firm
public on a range of issues
supervision at EU level
related to the statutory audit
ñ enhanced cross border mobility of audit professionals
(‘audit’). The Green Paper
within EU; “maximum harmonization” combined with a
comprised of 38 questions
single European passport for auditors and audit firms.
each of which was also
ñ introduction of a lower level of service than an audit, a
commented
the
so called “limited audit” or “statutory review” for the
Commission. Among the
financial statements of SMEs instead of a (full) statutory
issues discussed were:
audit
on
by
ñ enhanced oversight of global audit players through
ñ audit quality and how this can be further enhanced
international co-operation
ñ expectation gap within the users/stakeholders and how
SUMMARY OF RESPONSES
this can narrow
ñ role of the audit and how this can be explained to users
ñ how to tackle the negative perception to qualifications
The consultation closed on 8 December 2010.
in audit reports
ñ what additional information could be provided to users
On 4 February 2011 the European Commission issued the
and how
Summary of Responses Paper to the Green Paper. In all,
ñ whether there should be more regular communication
688 responses were received. This was the highest level of
by the auditor to stakeholders
responses of any consultation in the Internal Market and
ñ whether the time gap between the year end and the date
Services area since the completion of the public
of the audit report can be reduced
consultation on Solvency II in February 2008 and was
ñ whether audits could provide comfort on the financial
certainly the widest consultation response coming out of
health of companies
the financial crisis.
ñ introduction of ISAs in the EU and whether they could
further be adapted to meet the needs of SMEs
The responses have come from various stakeholders; these
ñ mandatory
included members of the profession, supervisors,
audit firm rotation and mandatory
retendering/change of audit firms after a fixed time
investors, academics, companies, government authorities,
ñ compulsory joint audits
professional bodies and individuals.
ñ bans on the provision of non-audit services
majority of the responses were from within the European
ñ down-sizing the “Big 4” firms
Union, there have been a number of responses from third
ñ potential conflicts of the company appointing the
countries.
106
Although the
EC Green Paper: Audit Policy
Analysis of replies by stakeholders:
fair values and going concern. The academic community
believed that professional skepticism could be achieved
ñ 87% of replies were received from the EU Member
through eight-year audit firm rotation.
States;
ñ On ISA adoption, the European Commission concludes
ñ 10% of replies were received from other European non-
that “views are mixed”.
EU groups; and
ñ The same is the case with non-audit services.
ñ 3% from parties of worldwide interests.
ñ Views on whether the Big 4 represented a systemic
risk were generally mixed.
Analysis of replies in terms of the interest groups:
ñ On joint audit, with the exception of the Small & Mid
Tier firms, there was no support for joint audits from any
ñ A majority (59%) of responses represented the interests
stakeholder group.
of the audit profession; it should however be noted here
ñ There was no support for audit firm rotation except
that there were more than 200 replies identical in their
from the academic community although there was some
content as these were all received from the German audit
support for mandatory retendering from government and
profession. It is also worth noting that the four biggest
regulatory authorities
audit networks (‘Big Four’) have each submitted one
ñ There was general support for creating a European
response on behalf of the whole network.
market with the exception of the public authorities.
ñ The second biggest group of respondents were the
ñ On limited audits, there was general opposition to
preparers of the accounts and businesses in general (21%).
introducing these. The academic community questioned
ñ There has also been good representation of public
the need for a statutory audit for all companies.
authorities and users, respectively 8% and 3% responses.
ñ There was strong support from all respondents for
ñ The remaining replies included academia (4%), audit
increased international cooperation.
committees (2%) and other replies (3%- of which the
majority came from private persons).
WHAT’S NEXT?
In terms of Cyprus originated responses, in addition to our
Institute, replies were received by the Association of
Taking into account the written and verbal input they have
Cyprus Banks, the Employers Federation OEB, the Cyprus
received and will continue to receive, the European
Chamber of Commerce and the University of Cyprus.
Commission intends to come forward with draft legislation
by November 2011.
In its Summary of Responses paper, the European
This will be accompanied by a
detailed Impact Assessment.
Commission has presented arguments for and against the
various suggestions in the Green Paper. Of particular note
In the meantime, debate continues in the European
are the following:
Parliament who will be voting on its own Report, which
will help shape the European Commission proposals,
ñ Comments on the role of the auditor were generally
towards the end of May.
There will also be active
positive. For example, there was huge rejection of the idea
discussions with Member State governments over the
of “going back to basics”, no support for reducing the time
summer months as the European Commission works on it
between the year end and the audit sign off, no support for
draft proposals.
appointment by third parties but general support for an
expanded audit role (although investors do not expect to
This is a lengthy process and we would not expect to see
have to pay more for this). There were numerous
adopted EU legislation until the end of 2013. It is of
references to audit committees and a strengthening of their
paramount importance that the profession continues to be
role.
intensely engaged with the European Commission, the
ñ There was wide support for increased levels of
European Parliament and various stakeholders throughout
professional skepticism, particularly in connection with
this process.
107
Natural Gas
Sustainable management of Cyprus offshore
natural gas potential
The large gas deposits that
were
very
recently
discovered offshore Israel
have changed considerably
the world energy ‘map’,
classifying at the same time
the Mediterranean Sea as a
very prospective region
regarding
natural
gas
deposits.
By Solon Kassinis
Director of the Energy
Services, Ministry of
Commerce and Industry
Cyprus, being situated at a
strategic point within this
region, follows closely the
new developments in the
area and has already taken
significant steps towards hydrocarbon exploration and
future exploitation of potential gas deposits within its
Exclusive Economic Zone (EEZ).
funds are active in investing in property located at prime
places around the world. Countries that created Sovereign
Wealth Funds are usually those that exhibit budgetary
surpluses (mainly due to additional revenues from the
export of indigenous hydrocarbon resources) and have
little or no international debt.
The recent increase, mainly in the US, in the production of
shale gas and the resulting redirection of large LNG
cargoes to Asia, as well as, the latest large gas discoveries
in the Mediterranean Sea, all played a significant role in
the marketing of the gas and shifted the problem of
discovering the gas to one of marketing the gas. However,
there are ways of working around this problem and Cyprus
The proceeds arising in the future from
such gas production activities are
considered to be a national wealth,
The proceeds arising in the future from such gas
production activities are considered to be a national
wealth, which belongs to all the people of Cyprus. It is
therefore important to sustainably manage this national
wealth so as to last for future generations and serve for
their long term benefit.
which belongs to all the people of
Considering the above, revenues from the exploitation of
natural gas resources must not only be invested in activities
that deliver short-term results (such as investments in
infrastructure), but also in actions that would maximize
long term benefits, such as investments in real assets and
financial assets. The latter could be achieved through a
special sovereign wealth fund supported by commodities
(primarily gas) exports.
term benefit.
Sovereign Wealth Funds originated from Kuwait and are a
model that is now closely followed by Norway and many
other countries, of which their respective sovereign wealth
108
Cyprus. It is therefore important to
sustainably manage this national
wealth so as to last for future
generations and serve for their long
is expected to play a particularly crucial role in this, both
as a producer, as well as a transit, country.
Currently an importer of energy (mainly oil), Cyprus, is
soon expected to turn into an exporter of raw materials,
such as natural gas. It is though of paramount importance
that the revenues resulting from this activity (production
and export of natural gas) are invested to last for a longer
term, far after the exhaustion of gas deposits.
Asset bubbles
Protecting the future
By Frixos Kyprianou
Manager
MK KYPRIANOU LTD
Free market economy is the
only system that has proven
over the years that it can
provide people with the
incentive to progress and
move forward. In the process
it creates jobs and helps
people to lead better lives.
The only weakness of the
free market economy, which
can also lead to its downfall,
is human nature itself.
The biggest side effect of financial bubbles is that wealth
tends to move from the masses to the few. The masses are
the ones that have foolishly bought at the peak or near the
peak of the bubble and when the bubble burst found
themselves in a very bad state financially. The few are the
ones that had the knowledge to recognise the signs of a
bubble reaching its end and got out early. People that did
not have the knowledge themselves but could afford to pay
the right consultants they are also included in the few.
At our local level the great success of the so called Cyprus
economic miracle after 1974 is that it has created a strong
middle class. In economies with a strong middle class it is
From an economic point of
easier to maintain social peace and avoid unrest with all the
view human nature and more specifically human
associated negative results. A strong middle class
psychology tend to move like a pendulum from extreme
contributes to the collective feeling of well being as the
optimism to extreme pessimism. After a number of
majority of people maintain a good standard of living.
consecutively good years, people tend to become
overoptimistic and begin to act recklessly. This usually
In the last 10 years our leaders have failed miserably to
leads to what is commonly known as financial bubbles.
protect this middle class from the financial bubbles. The
After the bubbles burst fear sets in and human psychology
result is that a great number of Cypriots have become
moves to the other end of the pendulum. Because of the
poorer. The most severe mistake was the inability to stop
collective fear that takes over the collapse tends to be
or at least limit the creation of the real estate bubble.
severe, much more severe than it would actually be
Housing is one of the things that can drastically affect the
standard of living of people.
A set of indicators can be agreed in
Just to stress the point that a great number of Cypriots have
advance and when some criteria are
actually become poorer in the last few years the following
met the decision to pull the brakes on
example makes the case clear. During 2004, in the block of
an imminent bubble should be taken
up for sale for m80000. The same apartment was sold 4
automatically without the need for
years later for an amount closer to m200,000. If we assume
political intervention.
flats that I used to live, a two bedroom apartment was put
that the additional m120,000 will be financed by a 20 year
mortgage with an average interest rate of 5% this
immediately creates an additional hole in that family’s
necessary to correct things. We in Cyprus have also
budget of m800 per month. Even if we assume that salaries
are growing by about 3-4% per year the hole in the family
experienced this with the 1999 stock market bubble and the
budget is still substantial. In effect the person that bought
real estate bubble which is still in a state of collapse since
the flat at the peak of the real estate bubble is the big looser
2008.
and actually has become poorer. The available cash after
111
Asset bubbles
instalments, necessary for this family to enjoy a
comfortable living, has been seriously reduced. Examples
like this are numerous. The behind the scenes situation
however is that a small number of entrepreneurs were
making super profits at the expense of a large number of
Cypriots.
The most severe mistake was the
inability to stop or at least limit the
creation of the real estate bubble.
Housing is one of the things that can
drastically affect the standard of living
One additional risk that comes with real estate bubbles is
the adverse effects that can have in the financial health of
the banks. Banks usually have huge exposure in the real
estate market. If we assume that an average mortgage is
around 70% of the selling price the risk that exists is that
when the bubble bursts the banks might end up with
thousands of properties where their value is actually
smaller than the mortgage itself.
Due to increased lending that precedes the period prior to
the collapse of a real estate bubble the picture of the banks
is of great strength with great profitability and sound
financials. However when the bubble bursts the collapse of
the banks can also follow. The best example of this is the
Irish banks. The whole saga is well known with Ireland in
an effort to avoid its banking sector from collapsing ended
up at the IMF. The biggest problem of the Irish Banks was
their exposure in the real estate market that has collapsed.
For the IMF to get its money back the Irish people will
suffer for the next ten years at least.
Financial bubbles in a free market economy tend to repeat
on average every 15-20 years. In order to protect the banks,
the economy as a whole and more importantly the social
cohesion of Cyprus, financial bubbles and especially in
real estate must be killed on inception. The aim of every
Usually low interest rates create a
sudden surge in demand for housing
that cannot be covered by supply. The
result is an unsustainable increase in
prices.
Government and also our Central Bank should be to
maintain steady growth and not to allow prices to run wild.
A first and sure sign of a real estate bubble is the steady
drop of interest rates. Usually low interest rates create a
sudden surge in demand for housing that cannot be covered
112
of people.
by supply. The result is an unsustainable increase in prices.
As the interest rates are decided at the ECB level, our
Central Bank must use other ways to cool down demand
such as increasing the initial contribution of the buyer or
by limiting the maximum allowable years for a mortgage.
Additionally at the Government level the building zones
can be expanded to create over supply of land and
therefore push the prices down. The building permits
should also be expanded to allow bigger and taller
buildings to be built. This will reduce the cost of land as a
percentage on the total building cost per square meter. Also
and in relation to stock market bubbles, the banks should
be obliged to stick to banking activities only and refrain
from providing unnecessary liquidity to the stock market
as they have done during 1999.
The possible actions discussed above to limit the creation
of bubbles unfortunately have an inherent risk which will
not allow their implementation easily. This risk comes
from the political establishment. Basically the above
suggestions ask to put on the brakes and slow down
economic growth in order to avoid severe economic
accidents a few years later. Economic growth by definition
makes politicians look good in the eyes of the people. As a
result there is very high probability that they will refrain
from taking any action to slow down growth. Knowing our
politicians most probably they will refrain from taking
precautionary measures such as the above, even if they
know that big troubles will follow in the years to come.
Additionally the implementation of the above suggestions
can become even more difficult if the head of the Central
Bank comes also from the political establishment. The
only possibility that I see for the right decisions to be taken
the right time is to automate the decision making process.
For example a set of indicators can be agreed in advance
and when some criteria are met the decision to pull the
brakes on an imminent bubble should be taken
automatically without the need for political intervention.
The Development of Accounting in Cyprus
Abstract: It is fair to suggest
that in Cyprus in 1960
accounting practice, like the
local economy, was not well
developed. Now, half a
decade later, the practice of
accounting in Cyprus is as
developed as elsewhere
around the world. This short
history of professional
accountancy in Cyprus is
presented in two separate
Peter Clarke
articles. The first article
University College Dublin
describes some contributory
factors in the development of
accounting practice in Cyprus. A subsequent article will
outline some of the main developments which have taken
place in Cyprus since the Republic was founded and
independence achieved.
Turkish control. However, this never happened because, in
1914, Turkey entered World War I on the side of Germany
and Britain immediately annulled the Cyprus Convention
and annexed the island. In 1923 Turkey relinquished all
rights to Cyprus (Treaty of Lausanne, 1923) and
subsequently Cyprus became a Crown Colony in 1925.
Keywords: Cyprus, accounting history, accountancy
profession.
First, income tax was introduced in Cyprus in 1941 (and in
other British colonies around that time) and was intended
to pay for the increased war-time expenditure. The
provisions of this legislation, in the author’s opinion,
created an initial demand for a professional accounting
service. For example, the 1941 Act, based on British prior
legislation, provided for the deduction of “all outgoings
and expenses wholly and exclusively incurred” in the
trade/profession but also provided that these deductions
would not be allowed “unless proper accounts, to the
satisfaction of the (Income Tax) Commissioner...are
produced”. Furthermore, the legislation required that
where a taxpayer appealed his assessment, the
Commissioner “may require the person giving the notice
of objection...to produce all accounts, books or other
documents...relating to such income”. It is easy to argue
that proper compliance with this income tax legislation
would have been facilitated by the proper keeping of
accounting records and the preparation of final accounts
for the business. In addition, the income tax legislation also
contained several very interesting anti-avoidance
provisions. For example, at that time the shareholders of
family companies could have avoided paying income tax
by the simple expedient of not paying a dividend to its
members. Thus, an anti-avoidance provision in the 1941
Act allowed the Commissioner to “deem” a dividend
payment from a (family) company where a dividend
INTRODUCTION
Very little has been written on any aspect of accounting or
business history in Cyprus. This is especially surprising
given the significance and richness of Cypriot history in
general. This is the first of two papers in an attempt to
make a small contribution to this vacuum. This paper
describes some unacknowledged but contributory factors
in the development of accounting practice in Cyprus,
especially during the time of British control. A subsequent
article will outline some of the principal developments
since gaining independence in 1960.
By way of historical background, most readers will be
aware that in 1878 an agreement between the British and
Turkey (the Cyprus Convention) provided that Cyprus
would be occupied and administered by the British, while
remaining under Turkish sovereignty. (This agreement had
more to do with protecting British interests in the recently
opened Suez Canal than assisting the Ottoman Empire).
However, it is fair to suggest that this was considered to be
a temporary arrangement because it provided for, under
certain circumstances, the evacuation of the island of
Cyprus by the British and the return of the island to
THE IMPACT OF INCOME TAX LEGISLATION
By the time of independence in 1960, the British had most likely unintentionally - provided important stimuli
for the development of accounting in Cyprus. For
example, the language of commerce was English and the
British also introduced a bureaucratic administrative
system to the island in which basic accounting records
were important. However, in addition, two important
pieces of legislation should be noted, namely the Income
Tax Act (1941) and the legislation relating to Companies
(1922 and 1951).
113
“could be distributed without detriment to the company’s
existing business or without detriment to the future
expansion or development of the Company’s business”.
Thus, individual shareholders would be assessed as if they
were in receipt of dividends. Therefore, in theory, family
shareholders would not be able to avoid income tax if the
company did not pay dividends to those individuals! A
more general anti-avoidance provision specified that
“where the Commissioner is of opinion that any
transaction which reduces or would reduce the amount of
tax payable by any person is artificial or fictitious he may
disregard any such transaction and the persons concerned
shall be assessable accordingly”. Normally anti-avoidance
legislation is introduced only after an abuse and/or
shortcomings of existing legislation become apparent sometimes referred to as the ‘hole and plug’ approach to
drafting tax legislation. However, this 1941 anti-avoidance
provision represented a most powerful pre-emptive
approach to tax avoidance and empowered the
Commissioner to deny the benefit of a tax advantage to a
taxpayer if the perceived purpose was primarily to avoid
paying income tax. Clearly, the services of a professional
accountant, well-versed in tax matters, would have been
beneficial for individual taxpayers in negotiating with the
local tax authorities. In this context, it is interesting to note
that the first book on Cypriot taxation was published by
Mr. D. Th. Antoniades (in Greek) in 1941 (with a second
part in 1942). Translated into English the title of this book
reads: Income Tax in Cyprus. Complete Translation of the
Law, Explanation and Meaning of the Law.
THE IMPACT OF LEGISLATION FOR
COMPANIES
Secondly, accounting practice in Cyprus was further
stimulated by developments in company law. In 1922 the
Companies (Limited Liability) Law was enacted - based
on the 1908 British consolidating legislation. This
legislation provided, for example, that the directors of
every limited liability company shall “cause true accounts
to be kept” and that companies, except private companies
“prepare a balance sheet, audited by the company’s
auditors.” Furthermore, it was provided that auditors had to
state whether, in their opinion, the balance sheet is drawn
up (to) “give a true and correct view of the state of the
company’s affairs”.
It is, therefore, understandable that around the time of
these two pieces of legislation we see the formation of
professional accountancy firms in Cyprus. The first
professional accountancy firm in Cyprus was Russell and
114
Company, which was formed on 10th May 1937, registered
as a partnership in Cyprus under the Partnership Law of
1928, and which is now part of Ernst & Young. Its first
partners were, understandably, a cosmopolitan group and
consisted of John Charles Sidley (Cairo), William Gibson
Carmichael (Alexandria), Robert Rainie Brewis (Cairo),
Sherley Dale (Cairo), Oscar Couldrey (Alexandria) and
Alfred Nicholson Young (Jerusalem). The second oldest
firm is D. Th. Antoniades - the author of the first book on
taxation published in Cyprus - which was established in
1942 and is now part of Grant Thornton. As far as can be
established, the third accountancy firm was Syrimis &
Company, formed in 1948, which later became part of Peat
Marwick and which is now part of KPMG International.
Subsequently, and throughout the 1950s, we see the
formation of other professional accountancy firms on the
island of Cyprus, most of whom are in existence in current
times.
New company legislation was enacted in Cyprus in 1951
and was largely modelled on the 1948 Act in the UK.
Again, this legislation contained important provisions
which would impact on both accounting practice and the
accountancy profession. For example, it contained
additional sections relating to the preparation of the profit
and loss account, the balance sheet and group accounts. It
also provided that a person shall not qualify for
appointment as auditor of a (public) company unless either
(a) he is a member of a body of accountants established in
the United Kingdom, or alternatively, (b) other persons
who were authorised by the Governor of Cyprus as having
obtained adequate knowledge and experience either in the
course of his employment by a member of a body of
accountants recognised in (a), or by having before the
commencement of the Law, practiced in the Colony as an
accountant. One of the first recipients of the Governor’s
discretion was the previously mentioned D. Th.
Antoniades who, with Alan Tickle, was authorised to act as
an auditor of (public) companies. There can be no doubt
that this provision for the qualification of auditors - which
encouraged British education and training - in addition to
the political unrest in Cyprus during the 1950s, encouraged
some Cypriots to train and obtain professional
accountancy qualifications in England. Some of these
individuals subsequently returned to Cyprus and post
independence were instrumental in the formation of the
Institute of Certified Public Accountants of Cyprus
(ICPAC) in 1961.
End of first article
The second article will be published in the June issue.
Corporate Social Responsibiliting in Russia
Change in Russian business environment
corporate social responsibility
As more and more Western
companies are entering
Russian market space the
CSR issues are brought to
the
foreground. These
questions are important for
the development of Russian
economy and also for
strengthening business ties
with foreign companies.
Cyprus - despite its small
size - is one of the leading
By Alla G. Dementieva
countries with which Russia
PhD (MGIMO-University), MBA
conducts high volume of
(Cyprus International Institute
business. Russia’s commitof Management)
ment to Cyprus is paramount
Professor at the Department
of Management&Marketing
to its developing success as
MGIMO-University, Moscow,
an international financial
Russia
centre. Upcoming Russian
WTO membership is another
focal point to highlight the issue.
Corporate social responsibility (CSR) is a concept with a
growing importance around the world. It includes
corporate
sustainability,
corporate
sustainable
development, corporate responsibility, and corporate
citizenship. It covers the relationship between corporations
and the societies with which they interact. Business ethics
and CSR nowadays are increasingly standardized
throughout the world.
EVOLUTION OF CSR IN RUSSIA
For the last five years CSR has been the “it” business term
in Russia. This recognition started at the turn of the
century. From about 2000-2001, the country’s progress
toward economic and political stability, growth in output,
and the dynamic entrance of Russian companies into the
international marketplace provided the conditions for the
active stage of corporate responsibility in Russia. At the
end of 2001 the UN Global Compact was officially
launched in Russia by the ministry of Foreign Affairs and
the Russian Union of industrialists and entrepreneurs1 in
partnership with UN agencies. The primary objective of
the UNGC network Russia is development and
implementation of projects for minimizing economic,
social and environmental repercussions on participating
companies of the global Compact in the territories where
they do business. The network’s participants aim to
achieve progress in the following areas:
ñ human rights
ñ labor standards environment
ñ anti-corruption
The main focus was to provide a push for Russian
companies to be part of global CSR initiatives. At this
stage only large companies have began to prepare social
reports and they mostly outsourced this work anyway.
The next wave of social reports came in 2004. The
adoption in 2004 of the Social Charter of Russian Business
drafted by the Russian Union of Industrialists and
Entrepreneurs (Employers) became a milestone. For the
very first time in Russia the Charter formulated the public
role, mission, values, and goals of the corporate sector. The
Charter sets forth a standard for responsible business
conduct for Russian companies. By the beginning of 2007
190 Russian companies signed the Social Charter and the
number grew to 230 by the end of 2010.
There are two reasons why Russian companies started to
pay serious attention to CSR at this time. On one hand, an
increasing number of big Russian companies are acquiring
significant assets in Western countries and using
international financial markets to raise capital. Having a
serious CSR strategy can help Russian to lower the cost of
capital and the risk premium that Russian companies pay
when raising capital internationally.
On the other hand, there is a changing nature of municipal
governance in Russia. The Russian federal government has
been shifting the burden for funding public programs to
regional administrations. Faced with insurmountable fiscal
difficulties, local administrations are putting ever more
pressure on enterprises in their communities to make up
for budget shortfalls.
115
CSR INDEX
In 2004 the first CSR index in Russia was launched in
collaboration with the Russian managers’ Association and
under the aegis of the government of the Russian
Federation. The index is based on a field survey of a
representative sample of 1,000 large and medium-sized
Russian companies operating in various branches of
industry. The key components of the CSR index include
investments in human resources, health and safety,
environment and local communities.
The publication of the Report on Social Investments in
Russia prepared by the Russian Managers Association
together with the UN Development Programme (UNDP)
was another significant event of 2004. The main focus of
the Report was on analyzing the role of businesses in social
development. The Report became one of the first analytic
publications on corporate responsibility.
In 2006 the International Design Bureau “Delovaya
kultura” (Business Culture) published the first Russian
“Rating of Corporate Responsibility” based on the
methodology of one of the world’s leading experts in CSR
- the British institute AccountAbility. Following are the top
five ranked Russian companies:
1. OJSC Norilsk Nickel
2. OJSC Lukoil
3. OJSC UES of Russia
4. SeverStal-Group
5. OJSC Novolipetsk Steel (NLMK)
CSR SURVEY
In 2008 memorandum about the mutual understanding
between Russia and the Global Compact office in New
York was signed. The same year the UNDP conducted a
survey commissioned by UC RUSAL from the Economist
Intelligence
Unit
and
supported
by
PricewaterhouseCoopers in Russia. The survey aimed to
shed light on how Russian companies compared with other
multinationals elsewhere, evaluate how mature Russian
CSR practices are and what role they play in companies’
strategic development. Here are some of the findings:
stimulus for the sustainable and continuous CSR is the
strengthening of the public image and corporate brand.
They believe that this will result in competitive
international brand for the company;
ñ 31% named global competitiveness as a reason for
adopting the sustainable development policy for the
company;
ñ 21% think that the regulation from government and
other overseeing bodies led to their efforts in CSR.
In 2009 UNDP launched a five-year project with the
ministry of economic development to promote private
sector engagement in addressing Russia’s development
challenges through engaging Russian business in the
UNGC. The project “engaging Russian business in global
Compact driven Sustainable development (2009-2014)” is
focused on social and economic issues and joint
implementation of related projects with companies and
sub-national governments. Before only governmentmandated data on social and environment activity was
published. Now Russian companies began to provide
regular updates on their activities of sustainable social and
environmental initiatives.
CONCLUSIONS
At the beginning of 2010 the CSR system and sustainable
reporting became a part of business practice of more than
204 Russian companies. 77 of them featured such reports
as a separate section in their annual reports, while 116
produced social reports, 55 reported on sustainable
development and the remaining 4 issued environmental
reports. Most of these documents were prepared on the
basis of methodology and indicators of international
standards GRI and AA1000S. Figure 1 shows distribution
by industry of non-financial reporting as of May 2010.
Energy sector is leading by far.
Russian corporations are on their way to adopt
international CSR standards.
ñ 70% of companies in Russia mentioned that CSR
Russian government has many important opportunities that
could greatly contribute to the development of CSR and
non-financial reporting in Russia:
enables business development in emerging markets,
which is higher than global average of 60%;
ñ focus on formulating national agenda and “managing”
ñ Over 60% of Russian responders discuss how main
CSR and non-financial accounting at the level of a
federal minister
116
ñ annual
forums on social and environmental
responsibility of the business and forms of its
interaction with the state;
ñ involvement of non-government organizations in the
implementation of joint social programs launched by
the government and businesses with a view to increase
their efficiency and guarantee transparency
CSR in Russia is increasingly becoming an integral part of
social forecasting, risk management, and value adding for
shareholders. Leading Russian corporations are actively
involved in this process of sharing experiences and
competing for the best system of CSR and sustainable
development within the framework of the Global Compact.
This is a clear indication that CSR in Russia is gradually
becoming the basic ideology of corporate governance and
management, as it happened in many developed countries.
ñ budgetary support and selection through tender of
projects in the field of CSR, sustainable development
and environmental reporting
ñ involvement of small and medium-size enterprises
(SMEs) introduction of small and medium-size
enterprises (SMEs) to non-financial reporting.
1 The Russian Union of Industrialists and Entrepreneurs (RSPP) is one
of the largest Russian participants in the Global Contact. The Union, with
over 300 thousand of its members representing large, medium-sized and
small businesses under various forms of ownership, joined the initiative
in 2004. The Union has branches in all regions of the Russian Federation.
Experts estimate that RSPP members contribute 85% of the GDP and the
majority of tax revenues.
Figure 1. Non-financial reporting among Russian companies by industry (May 2010)
Non-commercial companies
Other Services
Education & Health Care
Utilities
Transport
Telecommunications
Food production
Chemicals & Petrocemicals industry
Wood processing, Pulp & Paper industry
Finance & Insurance
Metals & Mining industry
Oil & Gas industry
Energy
Number of companies with non-financial reports
Source: Russian Corporate Governance practice in 2009. Rating Agency Expert RA Report 2010 www.raexpert.ru
117
Rent to buy
Good news for property buyers - rent to buy
- new method to finance
a loan from the bank.
property was announced last
week - “Rent to Buy”.
The advantages for the buyer:
For Cyprus this is a breakthrough, a breakthrough that
certainly includes many
advantages and we believe
will boost the problematic
construction industry today.
By George Mouskides
Chairman Association
for the Promotion of
Property Development
Manager FOX Smart Estate
Agency
- For the rental period, that is to say the first 5 years, he
does not need to get a loan from the bank. The loan has
indirectly been granted to him by the seller with more
favourable terms.
- With a small down-payment (5%-10%) he moves into his
new apartment.
It is common knowledge that
one of the problems that
many buyers face today is
the ability to secure a loan in
order to buy their own
property; whether it be an
apartment or a house.
Even those that are able to get a loan will have a hard time
coping in the current economic climate (high interest-rates
etc.).
The new “Rent to Buy” method will surely mainly benefit
those that are not able to obtain a loan as well as those that
can, as it is also to their benefit, since the terms are much
better than those when applying for a loan.
At the same time, it is also to the benefit of the seller,
especially during this crisis period that we are presently
experiencing.
- Part of the rent pays off the value of the property.
- The terms for the financing are more favourable than
those of the bank (lower interest, no expenses etc)
- During the rental period, the buyer pays off part of the
value of the property, thus more easily guaranteeing a loan
from bank, when he needs it.
The example that follows is indicative of the new financing
method. The seller agrees to sell the buyer a new onebedroomed apartment for 100.000 Euros. He puts a downpayment of 5.000 Euro and takes possession of the
apartment, paying a monthly rent of 620 Euros for 5 years.
At the end of the five-year period he pays the balance of
77.134 Euros and the apartment is transferred into his
name.
If the buyer can afford to pay a higher monthly rent, then
HOW DOES THIS PARTICULAR METHOD
WORK?
his balance at the end of the five-year period will be lower.
As an example, if he then pays 720 Euros, instead of 620
After the buyer and the seller agree on the price of the
property, the buyer gives a small down-payment. At the
same time, he signs a rental agreement for 5 years and
takes possession of the property. At the end of the rental
period, the buyer pays the remaining amount, usually with
Euros, at the end of the five-year period his balance will be
70.395 instead of 77.134 Euros.
Thus, the news for property buyers is good, since this
particular method offers a way out and the opportunity to
acquire their own home.
118
The Cyprus Economy
Economic Bulletin
THE BANK OF CYPRUS GROUP ECONOMIC RESEARCH DIVISION PUBLICATION
Edited by Elena Triantafyllou
THE CYPRUS ECONOMY
GDP growth rate in 2010 as shown in the table above, is
expected to have been marginal at +0,4% (as per the
International Monetary Fund’s projections). The relevant
projections by the Ministry of Economics and Finance,
also point towards a marginal growth of +0,5% for the
whole of 2010. Over the first quarter of the year, the
Cyprus economy shrunk by -1,3% on an annual basis,
while over the second quarter it grew by +0,5% on an
annual basis. In the third quarter, growth accelerated and
reached 1,8% compared to the corresponding quarter of
2009. This was the result of the improvement exhibited in
the tourist sector, the trade and transport sectors, as well as
the banking sector. The service sector (public
administration, education, health, other services) continues
on a positive path, while the construction sector is still in
the doldrums.
The Harmonised Index of Consumer Prices (HICP) for the
period January - December 2010, registered an increase of
2,6% over the corresponding period of 2009. For the same
12-month period of 2010, the Consumer Price Index (CPI)
registered an increase of 2,4%, compared to an inflation
rate of 0,3% for the whole of 2009.
The number of registered unemployed persons at the end
of December 2010 rose to 25.693, registering an increase
of 4.163 persons or 19,3% compared to December 2009.
The average number of registered unemployed persons for
the whole of 2010 rose to 22.842 persons, compared to
17.505 persons for the whole of 2009, ie. an increase of
30,5%.
The government’s fiscal balance was by the end of
November 2010 in deficit of -2,4% of GDP, compared to a
deficit of -3,0% of GDP for the same 11-month period of
2009. Due to the fact that a large amount of public
expenditure falls due at the end of the year, the fiscal
balance for the whole year is expected to have remained in
deficit which will have risen to around -6,0% of GDP (it
should be noted that the European Commission in its
Autumn Forecast Report projected a deficit in the region of
-5,9% of GDP for the whole of 2010).
Public debt was at 56,2% of GDP at the end of 2009, from
48,4% of GDP at the end of 2008. Based on the above
projections relating to the fiscal deficit, public debt as a
percentage of GDP, is estimated to have risen further and
have reached 62,2% by the end of 2010.
For the period January - December 2010 tourist arrivals
rose to 2.172.998 compared to 2.141.193 over the
corresponding 2009 period, marking an increase of +1,5%.
Over the eleven months from January - November 2010,
income from tourism is estimated at m1.508,9 million
compared to m1.450,6 million over the corresponding
period of 2009, rising by 4,0%. It should also be noted that
for the same 11 months of 2010, per capita tourist income
rose to m714,5 compared to m699,1 over the
corresponding period of 2009, exhibiting an increase by
2,2%.
OUTLOOK
The economy of Cyprus emerged from recession within
2010, as suggested by the quarter-on-quarter timid growth
that was exhibited. Despite the marginal economic
recovery, year 2010 was another challenging year for two
of the most vital sectors of the economy, namely the tourist
and construction sectors. Long standing and deep seeded
structural problems such as the eroded competitiveness of
the island’s tourist product, as well as its over-dependence
on specific markets such as that of Britain, were
exacerbated at the wake of the world financial crisis.
Public finances also received a definitive blow over the
course of 2010, and based on a relevant report published by
the IMF (immediately after the submission of the State
Budget for 2011), over the next 5 year horizon (20102015), it is projected that the fiscal deficit is to remain at
around 5%-6% of GDP, while the public debt is to rise
further to 72,5% of GDP by 2015. The said projections
were based on the fact that the Cypriot government had not
adopted fiscal disciplinary actions and policies at the time.
In mid-July 2010, it was announced by the EU Economic
and Financial Affairs Council (ECOFIN), that Cyprus,
Finland, Bulgaria and Denmark were placed under the
excessive deficit procedure. The ECOFIN, announced that
the Cyprus government is given a grace period until the
end of 2012 in order to bring the deficit below 3% of GDP.
The target, according to the Council, is to gradually reduce
119
The Cyprus Economy
the deficit, to 6% of GDP by the end of 2010, and by 1,5%
of GDP per annum for the following two years 2011-2012.
The Cyprus government and the various political parties
agreed in early December to a fiscal tightening package of
policies, involving - inter alia - the imposition of additional
VAT on groceries and medicine (in effect from January
2011), a rise in the price of water, the imposition of a
special levy of 0,05% on banks’ liabilities over the next
two years, relating to the deposits over m100.000, which
are not covered by the deposit guarantee scheme and
excluding own capital and an increase in the duties on
smoke products. The package of policies is estimated to
accumulate income in the region of m250 million, while
attempts to curtail public expenditure by m40 million are
also being made.
By mid-January 2010, Moody’s Investors Service
announced that it placed Cyprus’s Aa3 local and foreign
currency government bond ratings on review for possible
downgrade. Cyprus’s rating could be adjusted downwards
by more than one notch, even though the rating is likely to
remain in the investment-grade A category. Moody’s
decision to initiate the review was prompted by concerns
over:
ñ the recent deterioration in the country’s public
finances, with a special mention that the reason
behind this fact is owed to structural inadequacies;
ñ competitiveness issues; and
ñ banking sector’s exposure to macroeconomic stress in
Greece.
Cyprus’s eroding competitiveness has also been confirmed
by the recently released ‘Global Competitiveness Report
2010-2011’ (published by the World Economic Forum),
where Cyprus retreated in the 40th place (from the 34th
place held a year before). Among the EU27 countries,
Cyprus ranks 15th (from 14th a year earlier). The Global
Competitiveness Index is compiled based on 12 pillars of
competitiveness, one of them relating to ‘Financial market
development’. Cyprus’ improved its position in the specific
pillar, ranking in the 15th position (from the 18th held a
year earlier).
MAIN ECONOMIC INDICATORS
2006
2007
2008
2009
20101
G.D.P. (real growth - %)
4,1
5,1
3,6
-1,7
+0,5
Unemployment (%)
4,5
3,9
3,7
5,3
6,8
Inflation (Consumer Price Index - %)
2,5
2,4
4,7
0,3
2,4
Harmonised Index of Consumer Prices - %
2,2
2,2
4,4
0,2
2,6
Fiscal balance (% GDP)
-1,2
+3,4
+0,9
-6,4
-6,0
Public debt (% GDP))
64,6
58,3
48,4
56,2
62,2
Current Account Balance (% GDP)
-7,0
-11,7
-17,7
-8,5
-6,1
Repo rate* (31 Dec.-%)
4,25
4,00
3,00
1,75
1,75**
* As of 1st September 2006, the main refinancing operations rate (repo) replaced the marginal lending facility rate (Lombard) for the
purpose of pricing local currency bank loans. It is also noted that as of 1st January 2008, Cyprus joined the eurozone and therefore, interest
rates shall be set by the European Central Bank.
**ECB marginal lending facility
Sources of statistical data for Cyprus’ economy: Ministry of Finance, Central Bank of Cyprus & Statistical Service
According to an announcement by the Finance Minister at the end of January 2011, based on preliminary estimates, the Cypriot economy
grew by +0,8% for 2010 (from +0,5 previously estimated). Furthermore, it was announced that the fiscal deficit by the end of 2010 was at
-5,3% of GDP (from -6% of GDP previously estimated), and the public debt was at 60,6% of GDP (from 62,2% of GDP based on previous
estimates).
Note: Above report takes into consideration facts and data valid as of 31 January 2011.
120

Institute News

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