business

Satyam: A warning to IT outsourcers everywhere

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Well holidays are nearly over.  The beard lasted two weeks or so before I decided to go back to my good old cleanshaven self.  At least I know now that I’m about two weeks from a dreadful beard and three weeks from a really bad one.

First topic that catches my eye at the moment is the Satyam issue.  I nearly choked on my weet bix the other day reading about the absolute gall of the Satyam conglomerate by basically making up 90% of their cash reserves.  I think it may be a lesson for people that outsourcing to another country may seem good on paper (that is, cheaper), but when its entire governance regime is completely different there are going to be some hurdles that just can’t be met.

It will be interesting to see if this becomes a house of cards and all the other IT outsourcers out there are doing pretty much the same thing.  I noticed incidentally that the auditors, PWC, are suddenly distancing themselves from their Indian affiliate.  It will highlight the role of the auditors, once again, as watchdogs not bloodhounds, and further that it is virtually impossible for an auditor to find out something if a Director is looking to hide facts and lie.

Still I’ll not be surprised to discover that there is a major case to answer at PWC for an audit that clearly missed something. And of course Ernst & Young gave this bald-faced liar an award as entrepreneur of the year not all that long ago.  I have a theory that it is incompatible to have an audit and assurance role and to hold that role at the whim of the very people who can cause such an audit to be based upon a pack of lies – it isn’t going to be helpful to hide behind standards and process reviews when a bad outcome like this happens.

And still, I wouldn’t be an audit partner under the current regime for quids.

As for people who are IT outsourcing as well as offshoring, I’m sure they’ve got a bit of a tight knot where their stomach used to be hoping that their IT outsourcer is not doing the same thing (or, if they are with Satyam, how the hell they’re going to extract themselves from the mess).

Image from Flickr User jill – glossy veneer.  Some Rights Reserved.

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Season’s greetings from Micheal Axelsen & applied insight pty ltd

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Click here for a full screen version of the eCard.

Just for you, I’ve created my very own Australian-themed Christmas card this year, complete with the Kingswood I had in 1992.  We’d gone on a trip to Northern New South Wales, mis-read a Refidex, and what can I say – apparently Kingswoods aren’t four-wheel drives, but I do like the photo.

applied insight pty ltd specialises in working with clients to deliver significant improvements in the governance, management and development of their business information and data.

applied insight pty ltd’s consulting services are all about using business information better –building good and useful databases, using social networking and online sharing tools for business results, and helping users create and retrieve documents and information more powerfully.

applied insight pty ltd increases the maturity of the client’s enterprise governance of information.

But maybe I’m a knowledge labourer after all

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For some time I’ve been one of those accounting/ICT people who delves into the world of knowledge management every now and then.  This is an area of practice where buzz words abound – communities of practice, centres of excellence, and the venerable ‘knowledge worker’ to name a few.

In the past week I’ve had cause to think of these terms, particularly ‘knowledge worker’.  It sounds like a good thing, doesn’t it?  After all, you work with knowledge to create all sorts of good things of value for the business.  However recently I’ve been swotting up on the ‘theory of technology dominance’ and a presentation by Steve Sutton in 2006 implied another term for when you work with ephemeral ‘knowledge-based’ stuff but with little latitude for exercising professional judgment due to the constraints of technology:  ‘knowledge labourer’.

And then there was the video recently relating to the ‘mother of all demos’ where Doug Engelbart referred to ‘intellectual workers’ in 1968.  Clearly that term didn’t much catch on – possibly there are elitist overtones.

It seems that we have as a result three terms here that apply – I’ve tried to put my twist into the definition:

  • knowledge labourer:  works to rule creating and storing information and data within the rules set by an information system, and as a result getting little opportunity to develop or exercise professional judgment.  Such people can be recognised by a bureaucratic insistence upon rules and an oft-stated desire to unplug the computer.
  • knowledge worker:  has more freedom to create ‘knowledge’ such as documents, strategies, and developed information, but in response to a business need and with a commercial imperative.  These people spend a great deal of time trying to explain the value they provide to the business, and generally look nervous in recessions.
  • intellectual worker:  tends to be working on several high-brow things at once, mainly because it interests them rather than out of any commercial necessity.  These people use their intellectual smarts to advance the body of knowledge rather than their bank balance.  Such people can usually be recognised as frustrated PhD students who used to have higher-paying jobs as knowledge labourers or workers before becoming ‘bored’.

By my definition I’m at risk of being an ‘intellectual worker’.  Although @sjjoyner probably put it best when describing a ‘knowledge labourer’: "@maxelsen Here I was thinking you were being witty. Now it sounds serious and a deeply awful occupational class."

I wonder how many people are more knowledge labourers than knowledge workers…

The second of three types of ambiguity: actual ambiguity

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Actual ambiguity refers to ambiguity that occurs in the act of speaking.  It arises when a word or phrase, without variation either in itself or in the way the word is put forward, has different meanings.  The statement does not contain adequate information to resolve the ambiguity, resulting in a number of legitimate interpretations.  Two distinct types of ambiguity are categorised as actual ambiguity:  pragmatic and extraneous. 

Pragmatic Ambiguity

Pragmatic ambiguity arises when the statement is not specific, and the context does not provide the information needed to clarify the statement.  Information is missing, and must be inferred.  An example of pragmatic ambiguity is the story of King Croesus and the Oracle of Delphi (adapted from Copi and Cohen 1990):

"King Croesus consulted the Oracle of Delphi before warring with Cyrus of Persia.  The Oracle replied that, "If Croesus went to war with Cyrus, he would destroy a mighty kingdom".  Delighted, Croesus attacked Persia, and Croesus’ army and kingdom were crushed.  Croesus complained bitterly to the Oracle’s priests, who replied that the Oracle had been entirely right.  By going to war with Persia, Croesus had destroyed a mighty kingdom – his own."

Pragmatic ambiguity arises when the statement is not specific, and the context does not provide the information needed to clarify the statement (Walton 1996).  The information necessary to clearly understand the message is omitted.  Due to the need to infer the missing information, pragmatically ambiguous statements have multiple possible interpretations (Walton 1996).  Croesus interpreted the Oracle’s statement as indicating his success in battle – the response he desired.  As noted by Hamblin (1970), Croesus’ logical response to the oracular reply would have been to immediately ask the Oracle, "Which kingdom?"  Further information is needed to resolve pragmatic ambiguity. 

In the case of an information request, pragmatic ambiguity exists in the request for "A report of all the clients for a department."  The ambiguity is that the request does not refer to a specific department.  The end user could legitimately prepare a report for any department.  Further information is needed to resolve this actual ambiguity in this case.

Extraneous Ambiguity

In contrast to pragmatic ambiguity, in which information necessary to clearly understand the message is omitted, extraneous ambiguity arises from an excess of information.  Clearer communication arises where the minimally sufficient words needed to convey the message of the statement are used (Fowler and Aaron 1998).  Where more words are used than necessary, or where unnecessary detail is provided in the communication that is not part of the message, ambiguity arises.  The excess detail obscures the essential message and contributes to different emphases or interpretations.

The use of passive voice, vacuous words, or the repetition of phrases with the same meaning all contribute to lack of clarity (Fowler and Aaron 1998).  The use of clichés and the over-use of figures of speech add volume to the statement, but add little or no meaning.  Pretentious and indirect writing also adds to the bulk of the statement, but without adding meaning.  Fowler and Aaron (1998) provide the following comparative example:

  • Pretentious:    To perpetuate our endeavour of providing funds for our elderly citizens as we do at the present moment, we will face the exigency of enhanced contributions from all our citizens.
  • Revised:    We cannot continue to fund Social Security and Medicare for the elderly unless we raise taxes. 

The extra volume contributes to vagueness in the first statement, and adds to the multiplicity of legitimate interpretations of the statement.  The first statement exhibits extraneous ambiguity.  The second statement communicates forcefully and concisely. 

An example of extraneous ambiguity in an information request is "A report of all clients (and their names and addresses only) for the Tax and Business Services department.  Some of those clients are our biggest earners, you know".  The last sentence is extraneous, and contains detail that is redundant, uninformative, or misleading relative to the fundamental message.  In information theoretic terms, extraneous ambiguity is "noise" in the communication (Axley 1984; Eisenberg and Phillips 1991; Severin and Tankard 1997). 

Image from Flickr User tsmyther.  Some Rights Reserved.

An introduction to the Carbon Emissions Reporting regime in Australia

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This is a blog post from a CPA Australia Carbon Emissions Reporting Discussion Group meeting – the inaugural meeting – that I attended on 18th November 2008.  Danny Power from PwC is the convenor. 

There will be an election of office-bearers at the end of the next meeting.  The topics under discussion are going to be quite broad-ranging.  Danny is linking it to the sustainability reporting issues, and Danny seems to think the label might change later.  However, Carbon Emissions Reporting is the current label for the group – thinks we might need to break into several discussion groups at some point (I’m not sure about that – see how popular it is).  There were about 40 people in attendance at this first meeting, though, which is always a good sign. 

Why did Danny set up the discussion group?

  • Compliance issues
  • The accountant’s role as a business advisor and in managing the reporting systems
  • Impacts for all organisations whether direct or indirect
  • “The Science” – still seems controversial, and if you’re going to report on it you need a working knowledge of what the processes are and how it works. 
  • Possibly the most important – to create a support and peer group for each other.

Schemes, coverage, compliance and impacts

This section of the presentation was given by Mick Zeljko of the Climate Change Team of PricewaterhouseCoopers. 

The finance function of most companies will be generally involved it seems in managing the reporting process, which is a substantial – very substantial – part of the new CPRS. 
Emissions Schemes

Current programs:

  • Mandatory Renewable Energy Target (MRET)
  • NSW Greenhouse Gas Abatement Scheme (GGAS)
  • Qld Gas Electricity Scheme (GECS)
  • Greenhouse Challenge Plus
  • Energy Efficiency Opportunities

The scope of these current programs is fairly limited and tend to be industry-specific.  There is a general feeling that perhaps people have been a little bit lax about the current programs, and it’s been pretty relaxed with the result that there has not been a lot of accuracy in the numbers that are currently being reported.  Probably a lot of companies don’t really have a lot of confidence in their reporting schemes. 

New Schemes:

  • National Greenhouse and Energy Reporting System (NGERS)
  • Carbon Pollution Reduction Scheme (CPRS)

NGERS will cover a lot less companies than those that are affected by ETS.  Types of gasses – six Kyoto gasses – CO2 and Methane and so on.  All measured in terms of CO2 equivalency – for example, methane is 20 times stronger than CO2, so 1 tonne of emitted methane is 20 CO2 Tonne Equivalents.

The NGERS does get down to 200 terajoules and 50 kilotonnes in 2010.  ETS will require only 25KT in 2010 so it is a little disconnected from NGERS – you can probably expect that the two programs will come into alignment. 

The Emission Trading Scheme (ETS) is now officially called CPRS – Carbon Pollution Reduction Scheme.  The feeling is that it sounds better to be reducing carbon pollution than trading the rights to emit pollution.  The scheme generally caps Australia’s emissions, and then identifies industries subject to the cap.  These industries are then allocated permits and at the end of the year have to have permits to cover what they emitted or pay a substantive fine.  If you don’t have the permits, you have to go buy them from someone who does.  This is the essence of the ‘cap and trade’ system.  

Under the scheme:

  • Government allocates or auctions permits up to the cap annually.
  • Companies compete on the market to acquire required permits.
  • Permits can be traded at market prices between firms and third parties.
  • Scheme requires robust monitoring, reporting and assurance of data.
  • Transitional assistance measures are included
  • A number of elements are yet to be finalised
    • Including emissions target trajectories, penalties for non-compliance and complementary measures for non-covered sectors. 

A green paper was released in July.  Everyone affected is throwing a submission at the government.  The government is aiming to have draft legislation ready by the end of the year.  There remains a whole bunch of stuff that is yet to be finalised, particularly emissions trajectories.  We don’t know what the limits will be yet though – what the targets will be. 

Covered sectors:

  • Stationary energy
  • Industrial processes
  • Fugitive emissions (e.g. mining and landfill)
  • Waste
  • Transport
  • Reforestation (opt-in – gets you credits)
  • Agriculture may come in later, around 2015.

Liability generally relies upon the emitter.  Generally it is upstream supply liability.

Emissions covered include:  Scope 1 (i.e. direct for example emissions from a generator) emissions only.  Contrast with NGERS which includes Scope 2 (e.g. indirect such as a factory’s use of electricity) across all 6 Kyoto Greenhouses. 

Threshold

  • Direct emissions of 25,000 tonnes of CO2e (Carbon Equivalents). 

The affected businesses will need to be collecting up systems, processes and governance to get NGERS into place. 

I wonder what the definition of an entity (i.e. a ‘business’ will be in the covered industry?). 

The first NGERS reporting period has commenced, those these systems etc will need to be in place from the point of view of affected NGERS entities.  CPRS Green Paper submissions are now closed.  The draft legislation is due out in early September, and they seem to want to have the legislation in place by the end of the year.  The Government wants to set medium-term national trajectories soon, and are aiming for a 1 July 2010 start.  These trajectories will affect how many permits are available – they will not determine who is affected by CPRS. 
We in Australia will have two full reporting periods and  given thethen full trading will commence under CPRS.  Unless it doesn’t  current financial crisis. 

Under NGERS – compliance is about registering and reporting.  Penalties apply for corporations and CEOs.

Project Definition

There are a a whole lot of rules and legislation around wh`o effectively owns the emissions.  A big mining site will have a lot of issues just working out what are we reporting on.

Systems Implementation

  • Collect greenhouse and energy data
  • Calculate greenhouse and energy data – there is a measurement determination that tells you how you work out how much CO2 you emit.  There are proxy things in place. 
  • Got to have good storage of records for any audit down the track.

Maybe I have a large IT bent, but I can see that this is going to be a problem for anybody seeking to implement Greenhouse Gas Reporting Systems and implement it through the accounting information system.  Or even if they don’t. 

Clearly it will have an impact upon reporting processes, and who does it – and I suspect this job will often fall to the finance function. 

Reporting

  • Register with GEDO
  • Prepare and submit data using OSCAR.  (See Greenhouse Challenge Plus).
  • There will be a lot of internal reporting as well particularly for companies that are CPRS-liable. 

Governance

  • Need a whole lot of things covering all of this to make sure it keeps ticking along. 

Companies will have to be NGERS compliance at a minimum. 

Assurance – large emitters (>125KT CO2) will require third party assurance of the information prior to submission.  Beyond these core issues we don’t know much around how it is taxed and so on.  The draft legislation hasn’t come out yet.  There are thousands of submissions being put in place.

If you are liable there are serious financial implications and also some compliance costs.  Indirect impacts will result in price increases it seems – which will be the main issue for SME’s. 
Indirect impacts are going to be increasing on just about everyone.  Transport and logistics – may see a complete change in the competitive position between transport for example.  For instance you will need to reconsider where you get your services from e.g. road vs rail.

Need to do a risk assessment now.  Carbon due diligence.  Green paper submissions were a big thing a little while ago.

Strategic Response – can do a lot of stuff now.  There are opportunities for new services and products – carbon market planning and financial advice.

CPRS Accounting Issues:

  • Permits acquired to satisfy obligation = intangibles
  • Permits acquired for trading = inventory
  • Measurement choices available
  • Impact of CPRS on impairment calculations
  • Accounting disclosures which may be required.
  • How to account for forward purchase agreements of carbon pollution permits
  • Broadly – what impact will the acquisition, trading, hedging and surrender of carbon plollution permits on reporting.
  • Tax treatment?  Still yet to be decided. 

We also noted in the presentation that cashflow issues exist potentially for people that have to buy permits up front. 

There will be another meeting in February, probably, of the Discussion Group.  It was a very interesting discussion and it will be interesting to see where these compliance issues around the Carbon Emission Emissions Reporting processes take us.  And as we can see above – there are assurance implications (although supposedly only for >125KT emitters?).

More notices as events warrant.