The private sector’s ability to prosper is imperative to job creation and investments necessary for human security. Armed conflict and post-conflict situations constitute severe constraints on economic life and present a hostile environment to business and investments. Economic analysts, however, seriously argued that the positive connections between the role and needs of the private sector and peaceful development are however still less explored.
Considering the multiple risks and associated high costs of violence, a peaceful development and improved socio-economic conditions typically converge with the self-interest of businesses with a long-term objective. The private sector, international and local, has the ability to contribute in at least two rather different ways: by conducting its core business and by actively promoting certain elements of peace-building.
Taking years of practical experience from private sector development in complex environments as point of departure, Sofia Svingby, a private sector development specialist at Stockholm University argue that through conscious engagement and active dialogue promotion business can and does take on an important role for both economic development and peace-building in fragile contexts.
While potentially highly profitable, fragile or complex environments present a multitude of challenges for an international company. According to Sofia Svingby, this risk-opportunity balance must be carefully managed to cater for long-term success. Weak formal institutions, opaque power structures, commercial and political interdependencies and ethnic tension are some examples of particular challenges of the fragile context any business company needs to navigate.
The private sector’s main contribution to developing economies and societies stems from its core activity of its ability to offer products and services meeting local demand, and the related effects on job creation and economic growth. Brian Ganson, Associate Professor at the Business School of Stellenbosch University stated that in their interaction with suppliers, consumers, employees and governments and institutions, companies may transfer know-how, promote peaceful tools of conflict management and good governance through their core business conduct. Herein lie both the inherent challenge and opportunity. According to him a company’s ability to steer towards sustainably successful business models rather than short-sighted and exploitative practices is pivotal.
Brian Ganson, however, argued that in order to be successful, companies cannot go about doing ‘business as usual’. In complex or fragile environments, operations and products need to contribute to a virtuous rather than vicious circle of economic and societal development. If implementing conflict sensitive approaches in strategies and operations, companies can facilitate economic development while also contributing to establishing essential conditions for peace-building.
Brian Ganson further noted that a context-sensitive governance model, including means of ensuring local compliance with the corporate code of conduct, is required, but key to implementing such approaches is leadership. Leaders’ ability to navigate complex environments which is harvesting opportunity and managing risk determines if a business can successfully provide benefit to stakeholders, employees and society. In order to do this, leaders need to incorporate an attitude of attentiveness to any aspects in the local context that may influence the company’s operations. According to Sofia Svingby, the key attribute of such an attitude is inquisitiveness, continuously striving to understand the environment in which the company operates.
Joanna Buckley, development economists at Oxford Policy Management Consultancy on her part argued that this approach helps business leaders anticipate and manage the way the company influences the local context, positively or negatively. Moreover, and equally important, it supports the management’s grasp on how the local context, for instance its conflict dynamics, affects the company and its ability to meet the financial, reputational, legal, and other requirements placed on international firms.
Joanna Buckley explained that in addition to conducting business sustainably and responsibly, private sector actors such as individual companies, multinational or local, as well as organised business, may offer channels and methods for trust-building outside the traditional arenas. This potential can be manifested by a well-functioning labour market dialogue or improved interaction between private sector and policymakers. The ability of individual employers or that of business organisations to contribute to conflict resolution, either at the workplace level or in society at large, may be decisive in establishing a dialogue-centred rather than conflict-oriented interaction.
The fact that companies often have an acute awareness of the challenges facing citizens in local communities is sometimes overlooked. Organised business on local and national level, meanwhile, can have an important role to play in holding governments and public institutions accountable. The achievements of the 2015 Nobel Peace Prize laureates, the Tunisian Quartet, clearly demonstrate how business and labour market parties, when engaged in broad cooperation, were able to provide an alternative, peaceful political process at a time when the country was on the brink of civil war.
Jonas Borglin, a known Swedish private sector and industrial analyst argued that business should be viewed and view itself as a stakeholder in sustainable development, even though a company’s status as a commercial entity may render it difficult to engage in far-reaching development work as such. The interests, capacity and mandate of companies and business associations need to be acknowledged if business actors’ potential in building resilient, prosperous societies is to be efficiently utilised.
According to Jonas Borglin, sustainable, responsible business practices and values are not complementary features of long-term successful business, but a pre-requisite. As such, the core business and the way it is conducted is the major contribution of a company not only as a source of financing, innovation, job creation and growth, but through its impact on stability and governance issues, including anti-corruption, peace and security and the rule of law.
Economic Development and Peace Building
Eng. Terefe Raswork’s legacy gets cemented through new award
The pioneering work of Eng. Terefe Raswork lives on as the first-year commemoration of the telecommunications trailblazer are recalled on Saturday, May 5, 2023, at the Science Museum.
Government officials, notable professors, religious leaders, friends and relatives of the late engineer attended the event organized by his children in partnership with Tewedaj Media and Communication. As part of the event, a biographical book of the late Terefe, titled “Man of Ankoboru in Geneva” was prepared by journalist Ezra Ejigu, CEO of Tewedaj Media and Communication, depicting research and the life of the engineer since 2013.
Eng. Terefe is renowned for his development of technology such as the Amharic tele-printer in Ethiopia, which he created at the age of 25 under the reign of King Haile Selassie to which he travelled to Germany and obtained an intellectual property patent for his new invention.
The dynamic Engineer served on the Telecommunications Board for ten years; and was in charge of the African affairs at the International Telecommunication Union for more than 40 years and had also preserved the country’s heritage by rebuilding the Ankober Palace Lodge, Menelik’s palace; without leaving its former possession.
At his first year’s commemoration event, the Terefe Raswork Technology Award was also announced. Through this award, each year scientists and researchers who have made a significant contribution to technology and communication are said to receive a financial award of up to 500,000 birr.
On the day, the Amharic tele-printer invented by Eng. Terefe Raswork 55 years back was handed to the Ethiopian Heritage Authority for conservation.
AFRICA OPPORTUNITY: Investment into Africa’s Water and Sanitation Sector
Africa’s need for increased Water and Sanitation Infrastructure Investments
Water is an essential human need, and access to clean water and proper sanitation is a fundamental human right. Yet, millions of people in Africa lack access to these basic services. In 2020, the World Bank reported that over 300 million Africans do not have access to clean drinking water, over 700 million live without good sanitation, and more than 800 million lack or have limited access to basic hygiene services.
Africa’s already limited water infrastructure will likely face increased strain as the continent experiences rapid urbanisation. By 2030, more than 350 million Africans will be living in cities, yet currently, cities are already running dry, with the liveability of major cities compromised as bulk water supply runs short. Water insecurity is a major developmental challenge in Africa, exacerbated by the climate emergency and the lack of infrastructure development. For Africa to achieve its Sustainable Development Goals for water and sanitation (which means universal access to safe and affordable drinking water, and equitable sanitation and hygiene, by 2030), it will require improved operations and maintenance, efficient management of water resources, strengthened policy and regulatory frameworks and most importantly, consistent investment into water infrastructure.
The investment gap for water and sanitation infrastructure to achieve water security and sustainable sanitation by 2030 is estimated to be about US$ 50 billion annually. However, the current foreign direct investment (FDI) inflow for water and sanitation ranges between US$ 10 billion and US$ 19 billion a year, well below the amount needed, leaving financial deficits between US$ 11 billion and US$20 billion annually. This deficit has caused significant economic and human development costs, resulting in sub-Saharan Africa losing an estimated 5% of its GDP annually due to water shortages or poor sanitation. If this trend continues, African nations could lose up to US$ 50 billion annually due to climate effects caused by water-related hazards.
As governments play an integral role in repositioning the region’s water security and sanitation, a cross-sectoral political leadership at the highest level of governance should be created with a commitment to increase budgetary allocations for water and sanitation activities. Government funding remains the chief and most important source of funding for these projects and, therefore should be centred around efficient sector management. Therefore, governments will need to establish national investment programs which mobilise domestic resources and create predictable and transparent revenues that are backed by strong and credible institutions. By leveraging private and partner financing, governments can further attract private sector capital where opportunities exist to bridge the accessibility gap.
Additional strategic actions to close the funding gap include exploring innovative financing mechanisms that support climate resilience, impact investing and social impact bonds, and blended public-private financing options to attract private capital. Stronger institutional regulations for water investment will also trigger more incentives besides outlining penalties which will boost water efficiency across various industries. Investment programs should be based on solid institutional policies and regulatory frameworks whereby national investment programs can be effective vehicles to scale up accessibility. These programs can be built if anchored in a stable institutional framework with strong government participation, improved intergovernmental coordination, and strengthened oversight, regulation, and reporting.
With a renewed commitment to water and sanitation, the outlook for infrastructure investment in this sector is positive, with an increase in large-scale private investment expected in the next 2 years. Ultimately, development partners, donors, and the private sector have a unique opportunity to provide technical and long-term financial commitments through public-private partnerships and innovative co-financing mechanisms that support sustainable water and sanitation investments. By working together to transform the investment outlook and improve water and sanitation throughout the continent, there is an opportunity to ensure a peaceful, prosperous, stronger, and equitable Africa, now and in the future.
With a positive outlook on investment trends in water and sanitation, Frost & Sullivan Africa tracks major infrastructure investments throughout the continent.
Accounting and Auditing
Hikmet Abdella was appointed as Director-General to the Accounting and Auditing Board of Ethiopia in November 2019. She is widely known for her work as the founding Country Head of ACCA Ethiopia from 2004 to 2013.
Hikmet sits on The Board of Trustees of The Center for Dialogue, Research and Cooperation (CDRC) which is an independent Ethiopia based non-profit think tank, as well as a member of the Board of Directors on the Ethiopian Red Cross.
In 2022 she took part as one of the 50 members of the Destiny Ethiopia Initiative, to envision scenarios of four possible futures for Ethiopia in 2040. Now she is a member of the Women Caucus within the Ethiopian Inclusive Dialogue (EID), hosted in CDRC. Capital’s Groum Abate sits with Hikmet for an insight of the role and works of the Accounting and Auditing Board of Ethiopia. Excerpts;
Capital: What is the main role of the Accounting and Audit Board of Ethiopia (AABE)?
Hikmet Abdella: This is a very important question as I feel the role of AABE is not very clear in the market.
Ethiopia has no specific reporting framework before establishment of AABE. Most entities prepare their financial statements based on tax laws and/or USA/UK GAAP partly. To alleviate the problem, International Financial Reporting Standards (IFRS) were enacted via Proclamation number 847/2014 as financial reporting framework for Ethiopia. AABE was established by the regulation number 332/2014 with a mission to oversee the accountancy profession in Ethiopia.
AABE is established with the following roles and duties: issue standards and directives relating to financial reporting and auditing and ensure compliance therewith; register and license auditors and authorized accountants; receive and register financial statements of reporting entities; review and monitor the accuracy and fairness of financial statement to enforce compliance with the reporting standards; conduct quality assurance reviews of audit firms to determine whether they have complied with the applicable auditing standards; among others.
Capital: What are the challenges of accounting and auditing practices in Ethiopia?
Hikmet Abdella: To improve the accountancy profession in Ethiopia to the level it reached in some African countries in particular and to the global level in general, much should be done by all the stakeholders. The major challenge is the absence of adequate number of professional accountants in the country. The number of professional accountants is not greater than 600 for a country with over 120 million populations. This has negative impact on the quality of financial statements prepared by reporting entities and on the quality of audit. In addition AABE has limited professional so that it monitors quality of financial statements and assure the quality of audit via reviews.
To overcome the capacity challenge, trainings have been provided both for the reporting entities and auditors. However, in the long run, AABE has been working on a law to establish – Ethiopian Institute of Certified Public Accountants (ETICPA) and will be presented to Cabinet to produce professional accountants locally. As Professional Accountancy Organization (PAO) to be recognized by International Federation of Accountants (IFAC), it is believed that the institute will help to reduce the shortage of professional accountants and play dominant role in improving the quality of financial reports and audit.
In addition, there is lack of professionals in asset valuation and actuary science. The inputs from these professions are paramount for improvement of the quality of financial information. We are working with World Bank to provide trainings as short term solution and discussions are undergoing with stakeholders on how to develop the professions in the country in the long run.
Capital: What are the major milestones that you have delivered since you joined the organization?
Hikmet Abdella: Even though there is much to be done,, we have made some progress so far. The road map for adoption of IFRS is revised and a good number of companies have adopted IFRS. As per the revised roadmap; adoption of full IFRS is up-to June/July 2023 and June/July 2024 for adopters of IFRS for SMEs. Review of Financial statements and audit quality assurance reviews have been started and progressing well, and review findings were communicated to the public to take lesson out of it. Trainings were provided to AABE’s staff and consultants were hired to enhance the capacity of AABE. In collaboration with World Bank; trainings were provided for federal and regional Government owned Enterprises on IFRS. In addition, training on new insurance standard (IFRS 17) to be applied from 1st January 2023 was provided for insurance companies and auditors. Master audit manual was prepared by international consultant for auditors, so that they can customize to their own context and assure the quality of audit.
We are working with regional and continental accounting organizations and support our accountants and auditors to involve in different training, discussion and experience sharing forums. For example we actively work with Pan Africa Federation of Accountants (PAFA) which is established with aim to enhance the quality of professional accountancy services in Africa. In addition Ethiopia has been chosen to be the vice Chair of African Forum for Independent Accounting and Auditing Regulators (AFIAAR).
Capital: What is the purpose of good corporate governance and how are the standards of governance enforced?
Hikmet Abdella: The purpose of good corporate governance practice is to increase investor confidence by giving assurance that companies are both ethically and effectively run. The standards of governance are enforced:
Capital: What is the role of audit Committee in the establishment of good corporate governance?
Hikmet Abdella: The role of the Audit committee is:
- To increase public confidence in credibility and objectivity of published financial information
- To assist directors in their responsibilities in respect of financial reporting
- To strengthen the independent position of company’s external auditors
Composed of individuals who serve on an organization’s board, an audit committee is responsible for ensuring an organization operates in an ethical environment and complies with laws and regulations.
Charged with oversight of financial reporting, risk management and internal controls, audit committees also are responsible for selecting the accounting firms that serve as their organizations’ external auditors as well as for maintaining relationships with their organization’s own internal audit team.
The essential nature of corporate governance and audit committee responsibilities normally be reinforced by low in many countries where Ethiopia currently does not have such enforcement. The luck of such codes is affecting the country in terms of attracting more investors and their confidence to invest for long term.
Capital: What are the impacts of the establishment of Capital Market on the development of accountancy profession?
Hikmet Abdella: The operation of capital market requires quality financial information. We consider this progress as opportunity for the development of accountancy profession. As and Ex-Offico board member of Ethiopian Capital Market Authority, we will work together to prepare professional accountants including auditors for such endeavors. For example, AABE is working with IFC to write Corporate Governance codes which will improve quality of financial reports and audit.
In order to play some role in attract foreign direct investment and for sustainable development, AABE will adopt International Sustainability Standards as issued by International Sustainability Standards Board (ISSB) in the near future. The standards deal with Environmental (e.g. climate), Social and Governance (ESG) disclosures.
Capital: You mentioned that Auditors are reviewed as per its regulatory mandate to monitor the External Auditors work in Ethiopia? What is the process to do so?
Hikmet Abdella: AABE is responsible to review the quality of the work of external auditors in Ethiopia and enhance the quality of financial reporting to protect the public interest. AABE, in its structure has well trained Audit quality Review team responsible to plan and execute the audit quality review as per the international standards for audit.
AABE had developed manuals and procedures for reviewing the work of the auditors. Those manuals are developed based on the requirement of the international standards and are amended when there are changes in the international standards. The standard is used to evaluate the quality of the auditors at the overall firm level and at each engagement level. The former criteria are used to evaluate the auditors in the area of leadership, Ethics, human resource, procedure to acceptance new client, Engagement performance and monitoring the audit firm as a whole. The later criteria are used to evaluate engagement of the auditor on each audit work as selected for the review.
The audit process from audit planning to the audit reporting stages will be reviewed as per each international standard on auditing relevant to sections of the working papers including each financial statement sections. If there are significant deficiencies in the working papers under review, the reviewer is required to summaries those deficiencies with standard template for further discussion with the auditor and other reviewers. Once all deficiencies are discussed and agreed with the auditor, draft report is prepared. The draft report will be sent to the auditor with action plan templet guiding the auditor on the improvement areas. Report will be finalized when the auditor replies the action plans for improvement.
The International standard on quality control (ISQC1) and international standard on auditing (ISA 220) have been used as a criterion for reviewing the quality of auditor’s work. Since 15th December 2022, The International standards are revised and updated by the new versions of international standards on quality management (ISQM 1 and ISQM 2) where there is a significant shift from ‘’quality control’’ to ‘’quality management.’’ AABE is currently working to update its manual with changes in the standards.
Capital: Can you walk me through the process of selecting Audit firms for review?
Hikmet Abdella: Audit firms are selected for quality review based on pre visit assessment questionnaires and available data on the size of the audit firm in terms of number of clients, nature and size of their audit clients and other information available at the time of selection.
The selected audit firms will be allocated into the quarterly plan for each reviewer in AABE. Each reviewer is required to plan the review process and officially agree and confirm dates with the auditor selected for review. The Reviewer communicates clearly all the required information including sample client working papers and audit reports to be ready in advance. The Reviewers required select at least two audit client’s files per audit partners. The selection of audit files considers the legal form of the client, client’s annual revenue, audit fee charged for the audit and other available information to the reviewer. I would like to highlight here that this is the first time since the private audit forms have been established in Ethiopia, that reviews are taking place so you can imagine the positive impact it is having in the market.
Capital: How do you ensure that the audit process remains independent and objective?
Hikmet Abdella: Independence is one of critical essentials to ensure the quality of any audit. In the audit quality review, independence of the auditor is reviewed under ethics section. Requirement of the ethical standards such as independence declaration by each staff and partners will be checked with documentation at the firm level and engagement level. Partners or staff members should not be involved with audits where there is conflict of interest which can impair their independence or objectivity. Auditors are expected to have policies and procedures to maintain their independence and objectivity. They have to adhere the ethical standards to identify and mitigate ethical threats to independence and objectivity. If deficiencies found in the review are related with independence, the outcome of the review will be ‘’unsatisfactory’’ with a follow up investigation by the legal department of AABE.
