Zimbabwe is grappling with deep-seated economic problems, and one of them is the currency conundrum which has presented its own peculiar challenges in the accounting and auditing practices. On Wednesday this week, the Reserve Bank of Zimbabwe (RBZ) governor John Mangudya presented a monetary policy statement which sought to address the currency issue by including in the basket of multi-currencies a denomination called the "RTGS dollar" and restoring the inter-bank market. It remains to be seen what impact this will have on the economy, but the process could unfold at a slow pace, with regards to implementation in books of accounts. Business reporter Melody Chikono (MC) spoke to Institute of Internal Auditors of Zimbabwe (IIAZ) president Barnabas Vera (BV, pictured) to gain insights into the impact of economic turmoil on the profession. Find excerpts of the interview below:
MC: What have been the main issues affecting the practice of accounting principles in Zimbabwe?
BV: In Zimbabwe, the small and medium enterprise (SME) and informal sectors contribute over 80% in employment and over 60% of gross domestic product. Coupled with the economic environment which has seen established corporates shutting down operations, the SME and informal sectors' contribution to the economy has increased substantially.
Established and regulated organisations are mandated by regulation to comply with accounting principles. Being equipped with financial muscle, they have adequate support from the accountants they employ and/or hire. This is not the case with the SME and informal sector which now commands a significant share of the economy.
Most SME and informal sector players are vaguely aware of general accounting principles, let alone IFRS (International Financial Reporting Standards). If aware, to an extent, they probably do not have the resources to be equipped with proper financial record-keeping mechanisms in order to adopt IFRS. Accounting on a cash receipt and payment basis becomes adequate for their purposes. Even if they were to be induced into compliance, the costs of IFRS training would probably be out of reach for many players.
MC: There has been debate on the appropriate classification of Treasury Bills (TBs) under accounting standards, more so the treatment of discounted bills. What is the best way of accounting for such?
BV: The main challenge on discounted TBs is not on treatment of income, but on impairment, as there is no active market for such trades to benchmark with. Each institution has its own discount rate, hence no consistency in treatment. IFRS 9 is providing the general way to treat impairment of sovereign debt, but in our market there is no active agreed or market rate to discount the TBs.
IFRS 9 (Financial Instruments), does not provide prescriptive guidance on disclosure requirements. The accounting profession exercises judgement in most cases and guidance on disclosure has been provided by some regulators. IFRS 9 became effective for reporting periods beginning on or after January 1 2018.
MC: Many organisations are struggling with how to report cash and cash equivalents, especially in an environment where companies have money in the banks are but failing to pay their creditors due to unfunded nostro accounts. From an accounting perspective, what do you think should be done to address the challenge in a professional way?
BV: The official position was that the local currency ranks at par with the United States dollar (the position changed on Wednesday this week).This offered a simplistic option of retaining the status quo in financial reporting. Financial institutions have been offering multi-currency accounts, including nostro accounts.
The creation of RTGS balances had caused a mismatch between nostro balances and RTGS balances. Detailed reconciliations of customer accounts should be performed to determine actual nostro account balances. Bank nostro reserves should be matched with the anticipated customer balances, resulting in an official position to impair variances not supported by US dollar reserves with the impairment loss being made good in local currency. The second option is a promulgation of a new currency and debasing all balances into the new currency.
MC: How have the economic challenges, including the currency crisis, affected accounting methods and standards in the country?
BV: Accounting methods and standards remain operational and effective regardless of economic challenges. This is especially so for both public and registered organisations. Where there is no direct guidance on the policy front, organisations tend to take the expediency route in dealing with these challenges by resorting to short cuts that are a semblance of creative accounting.
With the decline in the value of the local currency and with business increasing, the demand of trading solely in the US dollar, a form of hyperinflation grows in the economy. The local currency loses its role both as a medium of exchange and store of value. It becomes increasingly difficult to measure value without the necessary monetary stability.
Organisations resort to value-maintaining modes of transaction that would include barter, or ultimately close shop. Where compliance is not monitored and reporting is not enforced, proprietors ordinarily would opt for cash accounting.
MC: What are the challenges being faced by auditing practitioners in the country?
BV: Lack of regulation of the internal audit function. Among the biggest challenges that the internal audit profession has faced, chief is the lack of regulation of the internal audit function.
Whilst most statutes promulgated in the country realise the importance of internal auditing, the lack of legislation portrays internal audit as a luxury only common with large organisations.
Lack of management support. There is generally a perceived lack of support for the internal audit function from those charged with governance. This adversely affects the effectiveness and value addition role of the internal audit function.
Corruption. Corruption has created major challenges for internal auditors. This has crippled the effectiveness of traditional audits and more time is now invested into forensic auditing and investigations.
MC: What is the board's outlook for 2019?
BV: Zimbabwe has been through major challenges in the past decade. What the profession faces now is not any Goliath compared to what has been and all the current problems and challenge are not insurmountable, with the correct and timely fiscal and monetary interventions.
MC: What you will do differently as the Institute of Internal Auditors?
BV: IIAZ, is an affiliate chapter to the global Institute of Internal Auditors, US. IIA is the internal audit profession's global voice, recognised authority, acknowledged leader, chief advocate, and principal educator worldwide.
The world's leader in certification, education, research, and technological guidance for the profession, the Institute sets the international standards for the professional practice of internal auditing and provides various levels of accompanying guidance; certifies professionals through the globally recognised certified internal auditor and specialty certifications in government, control self-assessment, and financial services; presents leading-edge conferences, seminars for professional development; produces forward-looking educational products; offers quality assurance reviews, benchmarking, and consulting services; and creates growth and networking opportunities for specialty groups.
The IIA intends to continue to provide internal audit practitioners, executive management, boards of directors, and audit committees with guidance for internal auditing and governance best practices.
IIA and its members will continue to add value to organisations and the country through regular audits, inquiries, and performance audits. The profession will focus on improving reporting and its effectiveness and efficiency.
IIA is currently working with the public sector in facilitating the effectiveness of audit committees to increase their oversight on public accountability in order to enhance the relevance and reliability of reporting in public enterprises.