Archives For Big Four

By Aidan Clifford, FCCA, advisory services manager, ACCA Ireland 

The accountancy profession is fond of using Lord Justice Tope’s assertion that ‘the auditor is a watchdog not a bloodhound’. Whatever the characteristic of the animal, the European Commission has decided that audit in Europe is not fit for purpose and has set out on a torturous road of taking it to hell.

eu flags

As part of our EU presidency obligations, it now falls to Irish ministers and civil servants to lead the debate with their EU colleagues on the Commissions proposals.

In properly functioning business environments, audit is good for business, good for jobs, and yes, even good for small to medium-sized enterprises. However, we recognise that we don’t live in a perfect world, and that parts of the model could be improved. In this context, the Irish presidency starts with a flawed set of proposals, built on flawed judgement rather than business reality and, because of this, has a real challenge ahead.

Brussels, among a number of other proposals, wants to place restrictions on the provision of additional non-audit services; provide for audit only firms; require audit firm rotation after a fixed period; and encourage more cross border audit firms. Some proposals are more laudable than others, but they are all lacking empirical evidence supporting how much they might contribute to audit quality.

The proposals from the EU would change the role of the auditor from watchdog to something of a watchdog/bloodhound cross, but ACCA argues this in not enough. In many of the high-profile failures of late, there have been marked deficiencies in the operation of the audit committee and directors. Any new proposals would need to task the audit committee with communicating with the auditors on areas of audit risk, attach more responsibility to report directly to shareholders on the performance of the audit, and to assist in the appointment of the auditors. this is something ACCA strongly supports and is something that is happening in well-governed companies already.

ACCA would like to see the directors and audit committees fully trained up and competent to discharge their side of the audit function, with both the legal empowerment to perform the function and legal responsibility for failure to perform. The European Commission is attempting to retrain the dog, when in fact, at least some of the focus should be on retraining the owner.

The article first appeared in Accounting and Business, June 2013

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Sustainability

By Gordon Hewitt, sustainability advisor, ACCA

During April and May, ACCA held a series of six focus groups that sought to gather the views and opinions of experts in corporate sustainability reporting around the world. The focus groups took place in Australia, Canada, Hong Kong, South Africa,  the UAE and the UK.

The discussions centred on the corporate sustainability reporting outcomes of the Rio+20 Earth Summit, known as paragraph 47, that took place in Brazil last year. ACCA has been involved in the debate around paragraph 47 since 2011, mainly through the Corporate Sustainability Reporting Coalition, which is a coalition of financial institutions, professional bodies, NGOs and investors that is being convened by Aviva. In May 2012, ACCA published the policy paper Making a Difference at Rio.

The focus group brought together 49 high level delegates representing the business, accounting, sustainability, investment and NGO communities. Organisations represented included all of the Big 4 accounting firms, NGOs such as WWF and Save the Children, investment banks such as Credit Suisse and research organisations such as EIRIS and Corporate Knights.

Delegates were asked their opinions on the content of paragraph 47, and whether or not the agreement made at the Rio conference was strong enough to change corporate behaviour; what the key challenges and opportunities were to implement paragraph 47 in each respective country; how the needs of developing countries can be considered; and which current models and sustainability reporting frameworks represent best practice.

Feedback from the focus groups has been written up into a paper, one year on from Rio+20. Specific recommendations to governments looking to implement paragraph 47 include a focus on materiality when developing sustainability reporting frameworks, the importance of collaborations and consultation with key stakeholders and that reporting frameworks should be adaptable to national and sectoral needs, among others. This paper will help ensure that the momentum generated in Rio is maintained; ensure that ACCA’s stakeholders remain informed about international initiatives that are actively promoting and advancing corporate sustainability reporting; and feed into the various working groups that ACCA is involved with.

Read our report, Paragraph 47 – International perspectives one year on, here.

Keep up-to-date with ACCA’s thinking on sustainability issues by following the @ACCASustain Twitterfeed.

By Cesar Bacani, editor in chief of CFO Innovation Asia

Having already made basic post-financial crisis cuts in headcounts, procurement and discretionary spend, companies are now coming under pressure to take more radical approaches.

vietnam-manufacturing

In economically trying or uncertain times, the default response is to cut costs. We saw this happen in 1997, during the Asian financial crisis, and in the 2008 global financial crisis.

You would think that by this time, as the European crisis and uncertainty in the US continue to threaten Asia, business would have done all the cost-cutting they could absorb. Apparently you would be wrong.

‘A lot of the low hanging fruits are already gone,’ Nigel Knight, managing partner at Ernst & Young’s Advisory Services in Asia, recently told me. These include basic headcount management, working capital improvement around purchasing and procurement, and slashing discretionary spend such as travel and expenses (T&E).

But the pressure to cut remains intense. Resources firms in Australia, for example, and many enterprises in China face regulatory headwinds and slowing economic growth. With the top line stalling, companies must improve their bottom line to keep shareholders happy.

What consultants like Ernst & Young are seeing, says Knight, are companies moving to a new ‘level of sophistication’ in cutting costs. ‘For example, T&E spend was traditionally just putting arbitrary controls on travel,’ he notes. ‘Now the initiatives that are taking place are much more analytics-based’.

The Big Four firm is working with a large pharmaceutical firm to harness analytics, and track and analyse T&E spending in all business units across the region to find a way to leverage on total spending to maximise discounts on hotel nights, for example, flights and telecom expenses.

A similar approach is being applied to shared services. The first round of cost-cutting involved outsourcing basic finance and procurement activities. ‘Now we’re seeing another round’, says Knight, ‘which is extending the scope,and also using the information to generate further reductions.’

Another effort focuses on the supply chain. ‘There’s a lot of fat to take out’, says Knight, ‘just in the way in which companies globalise spending between countries and also in manufacturing strategies. There’s quite a push even in China, which is becoming more expensive, to move manufacturing capability to Vietnam, Laos and so on’.

‘Multinationals are also looking at their processes much more from an end-to-end perspective, looking to simplify and standardise core processes – procure-to-pay, order-to-cash, and so on – right across the business. They are trying to take advantage of savings not generated in individual business units or countries, but across geographies and business units’.

At this point, I could almost expect cloud computing services providers to chime in, software-as-a-service purveyors, managed IT services guys, teleconferencing providers, business intelligence and analytics software makers…

For plucking the cost-cutting fruits higher up on the tree can mean spending money first for new infrastructure, software and expertise – which may end up costing more if the implementation is not done right. The consultants will be there to help, but they, too, will require paying.

‘You need to spend to save,’ argues Knight. Maybe. The business will be depending on finance professionals to make sure the more sophisticated ways of cost management do not use more money and other resources than the savings they will bring in.

This article first appeared in Accounting and Business magazine, May edition, 2013.

By Manos Schizas, senior economic analyst, ACCA

The future certainly looks bright for alternative finance providers. The last three years have seen the birth of a plethora of new online (and some offline) platforms allowing businesses to bypass traditional banks and venture capitalists and source various forms of peer-to-peer funding instead. A business can now get peer-to-peer loans, equity, donations, and even fx hedging and insurance online, and who can say what will become available next?

It’s certainly encouraging to see the UK at the forefront of this innovative industry. The typical alternative finance provider (if such a thing exists) is born when some bright sparks, boasting a pool of tremendous and diverse tech and financial know-how between them, decide to leave the world of investment banking or the Big Four behind and pour their life savings into a new way of funding businesses.

It’s heart-warming stuff, but for the industry as a whole there are growing pains as well. The dynamism and diversity of these new industries has caught regulators around the world by surprise and the regulatory reaction could be equally clumsy following a high-profile failure. No two platforms are regulated in exactly the same way, and it’s hard to know how one would be regulated just by looking at their business model. Once you try to think beyond the UK border, the situation becomes almost hopeless.

Then there is uncertainty about the future. For now, for example, the FSA may believe that crowdfunding should be a sophisticated investor’s game, but it’s unlikely to step in to stop Joe Public from investing £10 or even £1,000 in a startup. This could change.

Peer-to-peer and crowdfunding platforms are particularly worth watching. These are industries with relatively low barriers to entry and they’ve been benefitting from the best possible climate over the last three years: mistrust of the banks and the financial system, rock-bottom interest rates, interest from venture capitalists and now government support too. If a recovery finally materialises in a couple of years, not all business models will remain viable. Take p2p loans for instance – like microfinance intermediaries before them, some lenders are boasting relatively low default rates, but this partly reflects the fact that they are young, their market is still unsaturated, and credit takes time to turn sour. Some are preparing for the end of the honeymoon period by providing a level of insurance for participating savers. Others are not.

Other developments are afoot that could change the landscape dramatically. Consider invoice auctioning sites, for instance, such as Marketinvoice or Platform Black. They are innovative, effective and a resounding success overall. Fast forward to ten years from now, when the majority of businesses in the UK will e-invoice each other and consumers, and it may be possible to set up an invoice auction on eBay, or any number of other platforms in seconds. Some invoice auctioning platform will thrive in this new world, but others may not be able to handle the competition.

My point is that sooner or later, the UK will see one of many high-profile failures among the alternative finance providers. This is normal and will probably lead to a healthy shakeout; but the way in which regulators and investors react could define the fortunes of these industries for years to come.

The incumbents know this and are already organising themselves into associations. Their main concern is regulation of the sector – partly out of a genuine concern for their industry’s continued viability and partly, the cynic within me thinks, in order to keep newcomers out. Others will also be watching; if I were in charge of a high-street bank, I’d be waiting for the shakeout so I could buy the surviving platforms from their founders and VC investors for pennies.

In the end, everything will hinge on how these platforms add value. Information, collateral, control and risk – these are the raw materials of access to finance; are the new funding providers sourcing, using or combining them in an innovative way?  If they are, then although individual platforms may perish their industries will live on.

By Ian Welch, head of policy, ACCA

Last week's conference on audit policy organised by FEE, the European accounting federation, gave the profession the first chance to hear from EC Financial Services Commissioner Michel Barnier since his 'the status quo is not an option' speech in February.

Surely, we thought, things must have moved on in the intervening five months?

After all, since Barnier's tough talking in February, European parliamentarians have put forward a series of amendments which ACCA largely welcomes. The MEPs' legal affairs committee issued a report which included:

  • Calling for an extension of the scope of audit, namely to risk, which ACCA has argued for over the past three years.
  • Clear demarcation of audit and non-audit services provided to the same client rather than a ban on the latter.
  • Strengthening the role of the audit committee, which would be responsible for permitting the provision of those non-audit services, and have a crucial role to play in the tendering process
  • No compulsory rotation of external auditors

But observers last week could have been forgiven for thinking that none of this had happened. Barnier confirmed that the EC would be putting out legislation in November, despite rumours that it would be delayed. To remove any doubts, the Commissioner spelled it out: "you might think I'm being too severe – but as I said in February, the status quo is not an option".

Barnier said 'the key word for the profession is independence'. Shareholders and others have lost confidence in corporate reports because they doubt the independence of auditors. 'We see auditors who are too closely linked to clients.' So, contrary to the MEPs' report, the Commissioner went back to firm rotation and non-audit services.

On rotation of firms, he said there needed to be ‘a balance between too much, which would damage quality, and too little, which would harm independence'.

On non-audit services: 'too many are given to audit clients. They will often be higher fee than the audit.'

And then the big one: 'How can you be wholly independent? We have to limit or even prohibit non-audit services for audit clients'. The Commissioner went on to float the idea that 'strictly auditing firms' would open up the market to smaller competitors, though later backtracked on that option – viewed by ACCA as extremely damaging to the profession – in the Q&A session.

On competition or 'diversity' of firms, he insisted that he was 'not crusading against Big Four' although he added: 'we do not believe we should have only four.'

So what was an answer? Another standby from February: 'We are considering joint audits and regular tendering'. At the February event, joint audits clearly divided the delegates along national lines – the French profession was largely in favour while the other states saw them as costly and ineffective. Little had changed except, it seemed, a hardening of the EC's position. Stephen Haddrill, CEO of UK regulator the FRC, had earlier criticised joint audits as being 'an iconic issue within the EU – but not a good issue'. And a UK accounting academic questioned why such ideas from the past were being wheeled out again as an answer to the crisis now.

Nathalie de Basaldua, EC's head of audit unit, who after pointing to the House of Lords Economic Affairs Committee's criticisms of the UK audit profession, insisted that in France joint audits 'have been a way of showing that there are other important players in the market.' So it seems pretty clear that joint audits are still the way the EC is determined to go.

The most persuasive argument was put forward by Wouter Bos, now KPMG partner but formerly Finance Minister of the Netherlands, who said the profession must not react defensively to proposed changes and hide behind standards but must engage with the wider debate and accept that its response to date had been inadequate. In the age of reduced deference to professions, there is no future in just dismissing criticisms as ill-informed, he argued. The audit role must evolve to meet public expectations and even if proposals ultimately come up which we disagree with, this may be the cost we have to bear as a way of rebuilding trust among wider society. In our recent paper 'Audit under fire: a review of the post financial crisis inquiries', we’ve also argued that constructive proposals for audit reform should be welcomed.

To end the day on a wider global perspective, James Doty, CEO of the US regulator, the PCAOB, went through the options laid out in its recent 'concept release'. One of the interesting possibilities floated in that paper is for an Auditors Discussion and Analysis (AD+A), a freeform report which gives the auditors the opportunity to go into greater detail on their findings, mirroring the Management Discussion and Analysis narrative report by the company. This is also one of the suggestions put forward by an ACCA-commissioned paper on extending audit reports, which will be out very soon.

A less welcome area of interest from PCAOB has been on mandatory rotation of firms, which Doty argued might be more effective than lead partner rotation within the same firm. The US audit debate has been slower to get going but PCAOB has been undertaking extensive outreach among investors and other stakeholders during 2011 and Doty is clearly determined to make his mark. ACCA has been active in that debate and will continue to keep you informed.