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February 2012 Issue 6099 Uncertainty remains Experts at our round table debate the next
February 2012 Issue 6099
February 2012
Issue 6099
February 2012 Issue 6099 Uncertainty remains Experts at our round table debate the next
February 2012 Issue 6099 Uncertainty remains Experts at our round table debate the next

February 2012 Issue 6099 Uncertainty remains Experts at our round table debate the next
February 2012 Issue 6099 Uncertainty remains Experts at our round table debate the next
February 2012 Issue 6099 Uncertainty remains Experts at our round table debate the next

Uncertainty remains

Issue 6099 Uncertainty remains Experts at our round table debate the next stage of EC
Issue 6099 Uncertainty remains Experts at our round table debate the next stage of EC
Issue 6099 Uncertainty remains Experts at our round table debate the next stage of EC
Issue 6099 Uncertainty remains Experts at our round table debate the next stage of EC
Issue 6099 Uncertainty remains Experts at our round table debate the next stage of EC

Experts at our round table debate the

Uncertainty remains Experts at our round table debate the next stage of EC audit proposals ●
Uncertainty remains Experts at our round table debate the next stage of EC audit proposals ●
Uncertainty remains Experts at our round table debate the next stage of EC audit proposals ●
Uncertainty remains Experts at our round table debate the next stage of EC audit proposals ●

next stage of

remains Experts at our round table debate the next stage of EC audit proposals ● IFRS
remains Experts at our round table debate the next stage of EC audit proposals ● IFRS
remains Experts at our round table debate the next stage of EC audit proposals ● IFRS
remains Experts at our round table debate the next stage of EC audit proposals ● IFRS

EC audit proposals

● IFRS convergence is not a substitute for adoption ● Feature: government accounting takes centre stage ● In focus: Thai accounting profession steps up support after floods ● France survey: French profession unites against EC audit proposals

accounting profession steps up support after floods ● France survey: French profession unites against EC audit
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The Accountant





news Round-up

• SECcommissioner




• SECIFRSendorsementa



• ICAIelectspresidentand




Comment: InteGRAted












FeAtuRe: GoVeRnment


Whileitiswidelyacknowledged thatgovernmentswould benefitfromimproved accountingpractices,there islessaccordontheroleof accrual-basedaccounting. paul Goldenreports



In FoCus: tHAI ACCountInG pRoFessIon












Comment: eC AudIt ReFoRm pRoposALs


ThemajorityoftheEC’saudit reformproposalshavesparked globaldebate,asmuchof themarketbelievestheyare likelytohinderauditquality. TheCharteredInstituteof ManagementAccountantsCEO Charles tilleyshareshisviews


CoVeR stoRY: Round tABLe:

eC AudIt ReFoRm pRoposALs














CountRY suRVeY: FRAnCe















edItoR’s LetteR

The build up

O ver the past few weeks, the build up towards the US’s decision to adopt

IFRS has intensified. This decision has been

a long-time coming and while the US Secu-

rities and Exchange Commission (SEC) has said it needs a few more months to finish off its assessment, particularly in this time

of financial austerity, there have been some clues cropping up leading us to believe that international accounting standards will be adopted in the country in the not too distant future. Earlier in the month, the monitoring body of the IFRS Foundation took a much tougher stance on convergence in its strate- gic review report underpinning that “con- vergence is not a substitute for adoption of IFRS” in the push towards one set of global accounting standards (Turn to page 3 for full article). This declaration is a poignant one espe- cially because one of the main focuses in the first decade of the International Accounting Standards Board (IASB) was convergence, particularly with US GAAP. The US decision has a knock-on effect with many other countries around the world choosing to take a wait-and-see approach to IFRS adoption on the back of this, which in turn has meant the IASB’s goal of a global harmony in financial accounting standards

is also somewhat delayed.

The Trustees have said that they are confident there will be a positive adoption response from the US, as well as other eco- nomic powerhouses such as China, India and Japan, but it also warned that “failure to make such commitments” may result in these countries losing their sovereign right to evaluate future global rules. It looks like the SEC has taken heed and, in a recent meeting with the IFRS advisory panel, chief accountant James Kroeker allud- ed to a positive decision from the regulator towards endorsing IFRS in Spring.

from the regulator towards endorsing IFRS in Spring. The ‘endorse- ment’ is one of the four

The ‘endorse- ment’ is one of the four discussed approaches for IFRS adoption so far and would see the US formally endorsing new or amended IFRS before they become legally binding. IASB chairman Hans Hoogervorst also said he is optimistic that international accounting standards will soon be adopted in the US with Japan and India not being far behind. We all know that a positive decision from the US is of great importance to the global economy and this is reflected in the opinion of the majority of people, but we mustn’t dis- regard the fact that the transition from very detailed rules-based US GAAP to the broad principles and little guidance of IFRS is no easy task.

not ‘if’ but ‘when’

The issue it seems is perhaps not if the US will adopt IFRS, but when. The first step after the decision is for the SEC to issue a road-map, but confidence is waning as to how quickly the US is likely to make the transition from GAAP to IFRS, with some saying there may be no hard deadline given. To me, and I’m sure many others, this would essentially be just as bad as not mak- ing a decision at all so I hope that the SEC makes a decision not only based on the needs of US markets and investors but considers the many companies around the world and the global economy that will also benefit from a positive decision and realistic implementa- tion deadlines.<

Nicola Maher

February 2012



news: dIGest

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February 2012

n us

SEC commissioner opposes PCAOB’s Franzel appointment

A commissioner of the US Securities and

Exchange Commission (SEC) has objected

to the appointment of a new member of

the Public Company Accounting Oversight Board (PCAOB). In an unusual public spat, Luis Aguilar has spoken out against the appointment of Government Accountability Office man- aging director Jeanette Franzel, who will replace founding member Daniel Goelzer. “My objection to this appointment is based on the fact that the commission must appoint individuals who have ‘dem- onstrated commitment to the interests of investors’,” Aguilar said. “This is not the case here.” The SEC oversees the PCAOB and appoints its members. Aguilar said Fran-

zel’s appoint- ment to the five- member board is at a critical juncture for the PCAOB, which will vote on important audit proposals aimed to enhance the transparency and independence of audits. It is predicted Franzel could have a casting vote on the proposals. According to Aguilar, the success of these projects will require “a board fully commit- ted to investors” and after speaking with stakeholders the main support was for the appointment of an investor advocate. <

investors” and after speaking with stakeholders the main support was for the appointment of an investor


China tightens audit regulations

The Chinese finance minis- try and security watchdogs have introduced new regula- tions for firms auditing listed companies. The new rules require auditing firms to have at least CYN80m ($13m) annual revenue, up from 16m, and a minimum of 200 certified accountants to serve publicly traded companies. The Chinese Ministry of Finance said the rules are aimed at protecting inves- tor interests and improving audit quality for listed firms following the accounting fraud scandals in 2010 and 2011, in which many Chi- nese firms traded in Canada and US had their shares sus- pended. At the moment China has 53 accounting firms qualified to audit listed firms, accord- ing to the China Securities Regulatory Commission website. Auditors must meet the new regulations by the end of 2013.



endorsement a


US Securities and Exchange Commission (SEC) chief accountant James Kroeker has suggested that the regu- lator may be edging its way towards endorsing IFRS. Kroeker made the com- ments in a meeting with the IFRS advisory panel in Lon- don this month. The ‘endorsement’ is one of the four discussed approaches for IFRS adoption so far and would see the US formally endorsing new or amended IFRS before they become legally binding. IFRS endorsement would also mean that SEC will retain its sovereign right to evaluate future global rules something that the US could loose if it fails to make such a commitment. After a strategic review of the IFRS Foundation early this month, the IFRS Trustees took a more hard line view on convergence. It stated that while it assumes there will be a positive response on adop-

tion from the US and other large economies such as Japan soon, ‘failure to make such commitments’ may result in the strategy being re- reviewed subsequently lead- ing to changes to the Trus- tees and the International Accounting Standards Board composition. This is likely to be one of the main reasons for Kroek- er’s recent comments. The SEC said that it will need a few more months to make its final position clear.


ICAI elects president and vice-president

The Institute of Chartered Accountants of India (ICAI) has appointed Jaydeep Narendra Shah as its new president for the period from 2012 to 2013. Subodh Kumar Agrawal has also been appointed as his vice-president successor for the same term. Shah has been member of the ICAI for more than 24 years and was also elected as a central council member for the third term. <

The Accountant

news: dIGest


IFRS convergence is not a substitute for adoption

The monitoring body of the IFRS Founda- tion has said convergence must not be a substitute for adoption of IFRS in the push towards one set of global accounting stand- ards. In its strategic review of the IFRS Foun- dation, the IFRS Trustees reaffirmed the commitment to their vision of IFRSs, as developed by the International Accounting Standards Board (IASB), saying the stand- ards should be adopted in their “entirety and without modification”. This affirmation is poignant because one of the main focuses in the first decade of the IASB has been convergence, particu- larly with US GAAP, although the Trustees assume there will be a positive response on adoption from the US and other large econ- omies such as Japan soon. The Trustees state that “failure to make such commitments” may result in the strat- egy being reviewed again, subsequently leading to changes to the Trustees and the IASB composition. Another important recommendation is for the Foundation to work with national and international market and audit regula- tors, accounting standard-setters, regional bodies and accountancy bodies to find out “where adoption of IFRSs is incomplete or

where there is divergence from the full set of IFRSs as issued by the IASB”. The Trustees also called for the Foun- dation to work towards gaining a better understanding of how standards are being implemented around the world to improve the quality of the IFRSs.


The IFRS Foundation Monitoring Board then underlined the importance of the stand- ard setter’s independence, with regards to accounting standard-setting and the selec- tion of board membership, especially on the back of much political pressure in the years since the financial crisis, in its governance review. However, the Monitoring Board said there was opportunity for “improved com- munications and procedures in relation to the IASB agenda and chairmanship without infringing on its independence” to ensure selections will position the IASB to fulfil capital markets’ demands for high-quality standards. The two monitoring bodies reaffirmed their commitment to continue to work closely “for a full implementation of the ideas contained in this joint package”. < Nicola Maher


PwC consults on apprenticeship route into profession

PwC UK has launched a consultation with employers in the accountancy, tax and con- sulting sectors to develop the first Higher Apprenticeship for Professional Services (HAPS). The consultation aims to create distinct routes into the taxation, accountancy and management consultancy professions, devel- oped in partnership with the Institute of Chartered Accountants (ICAEW), Associa- tion of Taxation Technicians (ATT) and the Management Consultancies Association. The plan is for the HAPS to be closely aligned with the requirements of the exist- ing ATT and ICAEW professional qualifica- tions at that level. Employers can support the apprentice-

ships by contributing to its development and/or providing training places. PwC UK head of people Gaenor Bagley explained due to the hugely competitive recruitment market for business employ- ers and despite the recession the firm felt “there is a huge prize to be gained for the industry from going beyond the tried and tested routes”. “We can attract new people, new views, and new experiences,” Bagley said. According to the ICAEW, one in five take a non-university route to become a CA. The deadline to respond to the consulta- tion is May, with the full framework to be released in autumn and the first students beginning in September this year. <

news BRIeFs


Bpp launches business apprenticeships

BPPhaslaunchednewapprenticeshipsin payroll,teamleadingandmanagement, businessandadministration,andcustomer serviceaspartofitsnewvocational programme. Theapprenticeshipsaretargetedatschool leaversandnongraduateswhoarein


hoursofonlinetrainingandtasksperweek ataworkplacewithvisitsfromwork-based



eC adopts less onerous micro-entity reporting rules


requirementswhichallowforalessonerous reportingregimeformicro-enterprises. ThemovefollowstheEUparliamentvotein



























pCAoB considers proposed auditing standards















dealerfinancialreportingrule. <

Comment: InteGRAted RepoRtInG

The Accountant

Rowing upstream

Integratedreportingisoftenreferredtoasthe‘nextevolutionincorporatereporting’and,throughthe emergenceoftheInternationalIntegratedReportingCommittee,thesubjectisbeinghotlydebatedacross theglobe.InstituteofManagementAccountantsXBRLcommitteechairBrad monterio shareshisviews

A Chinese proverb says: “Learning is like rowing upstream; not to advance is to drop back.” Around the world, accountants are faced with a situa-

tion where either they will advance by learn- ing new skills, or they will lose professional ground to others who are more skilled. What

area am I talking about? Integrated reporting – the next stage in the evolution of corporate reporting. The International Integrated Reporting Council (IIRC) defines integrated reporting as ‘…a new approach to corporate report- ing that demonstrates the linkages between an organisation’s strategy, governance and financial performance and the social, envi- ronmental and economic context within which it operates. “By reinforcing these connections, inte- grated reporting can help business to take more sustainable decisions and enable inves- tors and other stakeholders to understand how an organisation is really performing.” Investors, analysts, regulators, community groups, ‘watchdog’ organisations, lawmakers and the media are paying increased attention to non-financials – environmental, social and governance (ESG) information about organi- sations to better understand their perform- ance, value and reputation.

out with the old, in with the new

Previously, historical, backward-looking financial reports were widely used and relied upon for decision-making among executives, analysts, investors and regulators. However, financial information alone is not the only indicator of a company’s true performance, as we have come to see with the increasing reliance on non-financial metrics as well as the rise of technologies such as XBRL (eXtensible Business Reporting Lan- guage) that help us access reliable informa- tion more easily over the internet. Current reporting models that focus on a single entity, short time-frames and histori- cal cost accounting do not effectively define, capture or enable linkages to ESG business practices and, ultimately, financial value. Additionally, because a portion of a com- pany’s value is not reflected in their finan-



February 2012

cial disclosures we face situations in which incomplete information is being used for decision making. Integrated reporting empowered through XBRL-tagged data, helps us solve these prob- lems and serves as an opportunity to modern- ise corporate reporting, strengthen corporate culture and gives a more thorough view of an organisation’s true performance. It also allows the unlocking of data from corporate silos and unusable presentation formats as well as linking of operational and ESG practices to financial performance and economic value of a company. Lastly it can improve communication and engagement with all stakeholders to better understand and mitigate risk while making more information relevant, machine-reada- ble, meaningful and reliable for management and all stakeholders.

new thinking and skills required

The new approach to corporate reporting requires that accountants, as key stakeholders – chief financial officers, controllers, finance professionals, external auditors and public accountants – adapt to new thinking and learn new skills in order to add value to inte- grated reporting. At a high level, this new approach to cor- porate reporting flows first out of integrated thinking such as through culture and the tone at the top of an organisation, to integrated management so collaborative versus silo-ori- ented and then to integrated processes such as the supply chains, controls, methodologies and communication with stakeholders. This collective process will produce a series of interlinked or interconnected reports. The idea of a single integrated report vis-à- vis an annual report is not realistic given that information flow for financial, operational, environmental, social and governance prac- tices will, in reality, have varying periods and measurement points. As a result, companies will rely on a series of interlinked reports from which they can make decisions, manage the supply chain, engage with stakeholders and report externally to regulators, analysts and investors. An organisation that is fully integrated in its

investors. An organisation that is fully integrated in its Brad Monterio, Institute of Management Accountants thinking,

Brad Monterio, Institute of Management Accountants

thinking, management, processes and report- ing will produce valuable, usable information for internal and external stakeholders.

Impact on accountants

Integrated reporting is here now – it’s not a question of if integrated reporting will impact accountants, but when, so it’s important they master the new skills needed to help compa- nies evolve. Accountants have a significant opportunity to learn more about integrated reporting and the new skills they need to become experts and trusted advisers in this area. Some accounting firms are already hiring domain experts, including scientists, geologists, academics and researchers knowledgeable in ESG practices. They’re not accountants, however, and they cannot fill the account- ant’s role. Accountants should learn about frame- works in development, XBRL and keep up to date with professional bodies’ education and training in this field, respond to IIRC drafts, study the benefits of integrated reporting as well as talk to management of companies about it. So, if the Chinese proverb holds true, will you grab your paddle and learn about inte- grated reporting and XBRL, or will you drop back? <

The Accountant

FeAtuRe: GoVeRnment ACCountInG

Change needed sooner rather than later

Whileitiswidelyacknowledgedthatgovernmentswouldbenefitfromimprovedaccountingpractices, thereislessaccordonhowsuchimprovementsshouldbeeffectedand,inparticular,theroleof accrual-basedaccounting.paul Goldenreports

S tate accounting practices have come

under increased scrutiny since the mis-

leading financial reporting produced

by substandard accounting, auditing

and financial management in Greece set off a chain of events that exposed financial fragility across the European public sector. One of the leading advocates of reform is International Federation of Accountants (IFAC) chief executive Ian Ball. Ball claims the current crises have made it clear that governments in general account poorly for their financial performance and position and those improvements can only be achieved by having a set of financial report- ing standards that are independently set and of high quality. “Logically, financial reporting failure and fraud should lead to significant changes, yet there appears to be a lack of political drive for sound, transparent reporting on the part of governments,” Ball says. “The sovereign debt crisis should motivate us to achieve real reform and it is critical that leaders take steps now to establish greater trust between themselves and their constitu- ents.” Jesse Hughes, a professor emeritus of accounting at Old Dominion University in Norfolk, Virginia, and a member of the Inter- national Consortium on Governmental Finan- cial Management (ICGFM), agrees there is a critical need for major reform of government accounting processes worldwide and believes there has been too little attention paid to accounting practices in the public sector. “Funding of accounting systems does not carry much weight among voters when they see a greater need for funding of infrastruc- ture and social needs,” Hughes says, adding that, while most countries have good systems in place to address fiscal discipline, many have failed to address the issue of fiscal sustainabil- ity. Hughes thinks professional accounting bod- ies and universities could do more to encour- age governments to improve their accounting processes but funding is generally not readily available for those pursuits. It is much easier to get funding for private sector endeavours, he explains, before refer-

n CoRpoRAte GoVeRnAnCe

Creating a public sector governance framework

The International Federation of Account- ants (IFAC) and the Chartered Institute of Public Finance and Accountancy (CIPFA) are working toward establishing a govern- ance framework for public sector organi- sations. IFAC chief executive Ian Ball describes the framework as having the potential to be both a “catalyst for action” by the pro- fession and a basis on which governance arrangements in specific organisations or jurisdictions can be evaluated. “The governance arrangements should align the interests of politicians (and public servants) with those of the public at large – the public interest,” Ball says. “There is no universally agreed definition for the term public sector governance and what is defined appears to vary consider- ably between jurisdictions.” IFAC’s initial work uses the following definition: “The arrangements in place ensure that a public sector organisation

fulfils its overall purpose, achieves its intended outcomes for citizens and serv- ice users and operates in a manner that is transparent and accountable, efficient and effective and ethical and sustainable.” The project will draw on previous work that the two organisations have under- taken, namely IFAC’s report Governance in the Public Sector: A Governing Body Perspective and CIPFA’s whole system approach to public financial management, which proposes an integrated approach to the design and improvement of public financial management. “Both organisations believe that a principles-based international public sec- tor governance framework or standard is essential to enable the development of robust country public financial manage- ment systems,” concludes Ball. “It will emphasise the need for a high quality and integrated system of financial management and reporting.” <

ring to Australia and New Zealand as being at the leading edge of implementing forward thinking accounting practices.

Improvements crucial

An international survey, Public Financial Management Responses to an Economically Challenging World, of government financial executives conducted by Grant Thornton in early 2011 on behalf of the ICGFM found the adoption of international public sector accounting standards was a popular method for introducing greater accountability and vis- ibility into public financial management. According to Grant Thornton public sec- tor global advisory service line manager Jason Levergood, better use of accounting infor- mation is crucial to improving government accounting processes. “To some extent, these processes can be improved to provide consistent and under- standable information on the financial impli-

cations of decisions made today, especially in the area of capturing contingent liabilities,” Levergood says. “But the greater need is for this informa- tion to become part of the public dialogue on public finance.” ICGFM vice-president of programmes David Nummy refers to a growing trend toward adopting independent fiscal bodies – such as the US Congressional Budget Office – to provide reliable information on the costs associated with government policies and says these bodies have great potential to improve the reliability of financial information. Nummy, who is also a Grant Thornton con- sultant, credits professional accounting bodies for their work in promoting sound account- ing processes and points to Australia and New Zealand as two countries that have committed to improved accounting. Both are regarded as leaders in the provi- sion of financial information, and Nummy4

February 2012



FeAtuRe: GoVeRnment ACCountInG

The Accountant

4 adds that the US “has made great strides in utilising technology to provide transparency into current spending”. Ball is critical of governments who require private sector companies to report high qual- ity financial information on an accrual basis to their investors and stakeholders but don’t follow these same standards in their own accounting practices. This is despite the fact that their securities represent a large propor- tion of global capital markets and affect pri- vate citizens around the world.

Accrual accounting the key

According to Ball, accrual-based account- ing practices improve the quality of financial information for all stakeholders along with the quality of financial management. “They reinforce the principles of transpar- ency and accountability,” Ball explains. “The also provide an accurate and com- prehensive picture of fiscal performance and position – including full details of debt, other liabilities, contingent liabilities and guarantees and future expenditures and the resources needed to support them – and reduce the risk of financial reporting fraud.” Ball refers to New Zealand as an example of the benefits of accrual accounting. “It is nearly 20 years since the New Zealand government produced its first set of financial statements on an accrual basis, revealing that the government’s negative equity was equiva- lent to about 10% of GDP,” he says. “In the intervening period, the government’s net worth climbed steadily to just below 60% of GDP immediately prior to the financial cri- sis and is still over 50%. While good account- ing and financial management were by no means the only causes for this, it could not have happened without them.”

Hughes is concerned that few legislators understand the differences between cash based financial statements and those state- ments based on accrual accounting and end up concentrating on establishing tax rates to meet immediate needs as represented in a cash (or near cash) based budget. “Accrual-based accounting is the key to bet- ter financial reporting by governments, but legislators and the public will need to be better educated to interpret the results,” he says. “Taxpayers should pay for the services that they receive today and not pass those costs on to their children and grandchildren and only accrual-based accounting will provide that information.”

not a walk in the park

Levergood feels that both policy makers and the public pay too little attention to the finan- cial positions of government and the sustain- ability of future commitments and too much attention to an immediate cash position. As a result, accurate information was not being provided in countries such as Greece, while in Ireland and elsewhere the potential future financial liability on government has not been properly presented. However, he warns that accrual accounting for government remains complex and tech- nically challenging to implement, given that government is not intended as a profit making entity. “Certain accrual concepts, such as con- tingent financial liabilities, need to be better developed for the public sector,” Levergood says. Colin Talbot, a professor of government and public administration at the University of Manchester Business School and author of the book Theories of Performance, is less criti-

cal of government accounting practices. He suggests they are reasonably robust in most developed democratic (OECD) countries and that there have been steady if not spectacular improvements over recent decades. “There are only a few places where this is not true for specific historical reasons. Accounting failures fuelled the financial crisis in Greece, which had two problems,” Talbot says. “Firstly, a basic failure of public administra- tion, including tax and financial administra- tion, which is a historical issue [the history of occupation, civil war and then dictatorship]. “Secondly, development of clientalist poli- tics and deliberate manipulation of public finance data to gain entry to the euro.” Talbot, who is an advocate of subjecting government accounting processes to inde- pendent scrutiny, is also less well-disposed to the notion that governments need to move to accrual based accounting. “I think this is over-hyped,” he says. “Gov- ernments don’t trade or [mostly] invest in huge assets relative to their cash spending. Cash accounting is okay for most of their activities.” When asked which countries are perform- ing their accounting functions particularly well, Talbot turned the question around and criticised the UK “in the sense that reporting of public financial information is not inac- curate but it is impenetrable and inconsist- ent, making it hard to make informed policy choices or analyses”. The government sovereign debt crisis is some would say ‘the futures fuel for another financial crisis’, with this in mind it is clear there is a real need for many governments cur- rently not using accrual-based accounting to do so and sooner rather then later. <

n CAse studIes: GeRmAnY And IReLAnd

Accounting errors behind government debt increases

Glaring errors in government accounting practices rarely come to light, which made the events of late October, early Novem- ber 2011 all the more notable when within the space of a week, the Irish and German governments admitted mistakes that had added more than €59bn ($77bn) to their combined national debt. Ireland’s minister for finance admitted to parliament that his department was informed about a €3.6bn accounting error in August 2010 in the form of an email from the National Treasury Management Agency (NTMA), which manages assets and liabilities on behalf of the Irish Gov- ernment.

However, “the significance was not appreciated at the time” and the email was never acted upon. The mistake was only spotted when the NTMA sent a second email to a different official when preliminary discussions were underway for the December 2011 budget. Minister Michael Noonan said he had ordered a report by the secretary general of the department of finance into how the mistake was made and also announced an external review of how the systems failure took place within that particular section of the department. When asked how he could justify nomi- nating the department’s secretary general

Kevin Cardiff to Ireland’s seat on the Euro- pean Court of Auditors after the error came to light, Taoiseach (prime minister) Enda Kenny said: “This is not the first occasion where double accounting took place dur- ing audits – not just in Ireland but also abroad.” Perhaps happily for Kenny, within days it emerged there had been a €55.5bn account- ing error at FMS Wertmanagement, the ‘bad bank’ for Hypo Real Estate Holding. Germany’s finance minister put the mis- take down to a ‘balancing glitch’ and said the Bundesbank had been charged with investigating the procedural details sur- rounding the error. <



February 2012

The Accountant

In FoCus: tHAI ACCountInG pRoFessIon

Working through flood water

DisastrousfloodingacrossThailandinthepastyearhasmeanttheaccountingprofessionhashadtostep uptosupportbusinesseswhilethecountryalsocontinuedplanstolaunchstandardsmoresuitabletothe needsofitslargeSMEcommunity.david Hayesreports

T hailand’s accounting profession has faced unprecedented operational cir- cumstances over the past year, with the launch of new Non-Public Enterprise

Accounting (NEAP) standards early in 2011 creating demand for advisory services. In complete contrast, later in the year there was growing client requests for assistance in accounting for damage to inventories, plant, factories and office equipment due to heavy flooding in the South-East Asian kingdom’s central region and Bangkok suburbs. The situation has improved since mid- December 2011, with flood waters continu- ing to recede as the great volume of water moves south from central Thailand flowing out to sea through the Chao Phraya River that crosses Bangkok and other rivers pass- ing either side of the capital. For Thailand’s Federation of Accounting Professions (FAP), the sole authority that regulates the accounting profession and sets accounting and auditing standards, account- ing for flood damage has been one of the major topics that practicing members have sought advice on since flooding started five months ago. Although the extent of flood damage was beyond the experience of most federation staff, a number of seminars and other advice have been provided using the international experience of Big Four firm members who have been advised by international part- ner firms in Japan and New Zealand where similar client support in accounting for earth- quake and tsunami damage has been needed recently. Thailand’s situation differs to Japan and New Zealand in one respect, however, which is that flooding continued over a period of three months and so damage calculations could only begin once the floodwaters reced- ed while the disasters in Japan and New Zea- land occurred within a matter of hours or minutes.

the aftermath

FAP vice-president and executive chairman of PwC Thailand Prasarn Chanphanich tells The Accountant that both PwC and FAP held conferences on the back of the flood.

“Some 400 [FAP] members attended and we went through the same thing for account- ing, tax and Board of Investment tax incen- tive investment issues,” Chanphanich says. “Our Accounting Standards Committee is coming up with guidelines on, for example, insurance claims accounting; also, how to account for losses. Also, some businesses are asking if they could use asset impairment this year or waive this year.” Established as an independent legal organi- sation under Thailand’s Accounting Profes- sions Act, passed on 23 October 2004, FAP’s authority and responsibility covers six areas – auditing, financial accounting, managerial accounting, tax accounting, accounting sys- tems, accounting education and the use of technology in accounting. Unusually in the accounting world, in addi- tion to CPAs, the federation’s membership also includes bookkeepers and accounting technicians who form the largest section of members by number. The federation independently controls and regulates accounting with standards also being one of FAP’s responsibilities. This scope of authority is wide by standards elsewhere in Asia where few governments have awarded such a high degree of control and authority for accountancy and auditing to one body. Although independent, FAP is answer- able to Thailand’s Oversight Committee on Accounting Professions which is chaired by the permanent secretary of the Ministry of Commerce and is the same as the Public Company Accounting Oversight Board in the US. Corporate governance oversight is the responsibility of several bodies in Thailand. The governance of listed companies, for example, is overseen by the Stock Exchange Commission (SEC), the Stock Exchange of Thailand (SET) and FAP within interna- tional standards and ethics that Thailand has adopted. Statutory audit is required for listed com- panies, limited companies of all sizes and banks. SET and SEC require listed companies to have audit committees with independent directors. Enforcement of auditing standards, mean-

directors. Enforcement of auditing standards, mean- Prasarn Chanphanich, FAP vice-president and executive

Prasarn Chanphanich, FAP vice-president and executive chairman of PwC Thailand

while, is the responsibility of the Bank of Thailand, the Stock Exchange Commission, the Revenue Department of the Ministry of Finance, and the Business Development Department of the Ministry of Commerce. State-owned enterprises in which the government owns more than a 50% inter- est, including listed entities, require annual auditing by the government Auditor General. Thailand’s 76 provincial governments are also audited by the Auditor General.

IFRs carve outs cater for smes

Thailand has adopted IFRS for listed compa- nies and which public invested SME compa- nies are also currently required to use. However, new simpler accounting methods have recently been introduced for Thailand’s estimated 400,000 private companies includ- ing small family businesses. Early in 2011 FAP launched NPEA stand- ards under authority granted by the 2004 Accounting Act which states that companies outside the stock market should use account- ing standards set by the Federation. “These are NPEA standards based on accounting principles and standards under International Accounting Standards Board [IASB] as they are not complicated. SMEs used IASB standards before,” explains emeri- tus professor and former FAP president Kes- ree Narongdej. “We set up these FAP NPEA standards by

February 2012




In FoCus: tHAI ACCountInG pRoFessIon

The Accountant

4 using IASB 2004 standards as the guideline. We use the articles that the SMEs have used without a problem. As they are small com- panies they do not have complicated trans- actions like consolidation data. They do not have joint ventures or subsidiary companies. “We can leave out these items as they are not applicable to them. The basic principle is IASB; only that those transactions which are not applicable we do not use.” Additional costs in applying IFRS are a major reason the Federation decided against making IFRS the standard for non-public interest SME companies. FAP identified the IFRS principle as a problem for SMEs as they are required to use independent appraisal which involves expense. “This is a burden to SMEs so we use the cost concept like US GAAP for the majority for fair value,” Kesree says. “In cases where not many costs are involved we require fair value to be used like stocks, bonds and securities where fair value is easy to obtain.” While non-public interest SME companies are required to use FAD’s NPEA standards, SME companies with public investors cur- rently required to use IFRS, while FAP contin- ues with work to draft IASB SME standards. Public invested SMEs will be required to use IFRS for SMEs once FAP completes work on the standard, which is expected later this year. However, those planning substantial business growth are encouraged to use full IFRS. “Implementation of the new standards is going well. We have sorted out fair value, cur- rent value and appraised value of transactions and dropped these,” Kesree notes. “Our NPEA accounting standard is a great relief for the majority of companies in Thai- land with the principle of using costs and fair value only when it is easy to obtain a fair value cost calculation. “This is because it coincides with Thai tax law as this relies on supporting evidence of transaction on a cost basis. Not much adjust- ment is needed by SME companies when they complete their tax forms.” FAP is a member of IFAC and has adopted IFRS and International Standards on Audit- ing (IAS) along with the International Federa- tion of Accountants Code of Ethics.

Growing in numbers

FAP has a large membership compared with most other professional accounting bodies in Asia due to its wide area responsibility cover- ing all sectors of accounting and auditing. In December 2011, FAP had an estimated 50,000 members of which about 39,000 were book keepers and 1,000 cost accountants. Of the 10,000 CPA members about half are



February 2012

in full time practice. Others work for com- mercial enterprises and the government while around 500 teach accountancy. The majority of CPAs, possibly more than 80%, work in Bangkok which is Thailand’s political and business centre. Accountants intending to qualify as a CPA member of FAP require a BA accounting degree from an approved university in Thai- land or overseas. Trainees are then required to pass six extra exam papers issued by FAP during a two year training period with an accounting firm. Qualification as an auditor requires 2,000 hours audit practice with an audit firm. Exams are held three times a year for all six subjects. There are about 2,000 applicants for each exam of which about 100 candidates pass. The 300 new CPAs qualifying in Thai- land each year is about the same number retiring from the profession. Continuing Professional Education (CPE) requirements are being increased for CPA members in 2012. Currently qualified CPAs have a minimum CPE requirement of 12 hours per year. This is being increased to 24 hours annually from 2012 onwards for both accountants and auditors.

english language challenge

Meanwhile, the opening of the professional services market in 2015 for the Association of South-East Asian Nations’ (ASEAN) econom- ic and trade bloc member countries including Thailand poses a challenge to the accounting and other professions across it as well as to the nine other ASEAN member countries. “In Thailand we use Thai language and translate standards into Thai,” Prasarn says. “In three years’ time, in 2015, we need to open our market. The issue for Thai account- ants is how to compete with neighbouring countries to practice in each others countries. “Our federation policy is to move Thai accountants into the international arena. The issue is for members to learn English. Many Thais are not fluent in speaking or reading English. We must prepare for this if we want to grow our accounting business and to com- pete.” FAB believes improved language skills are necessary for new CPAs entering the profes- sion and has discussed English language needs with Thai universities teaching accountancy so accounting students can be better pre- pared. Larger numbers of accounting students speaking Mandarin Chinese also are needed as Thailand’s trade links grow with China in future. “Another issue is how Thai accounting firms can grow their practices and compete,” Prasarn says. “For the past 20 years they have been


Thailand accounting profession

thailand Federation of Accounting professions (FAp)

• Inmid-December2011,FAPhadan





• Ofthe10,000CPAmembers,abouthalf areinfull-wtimepractice.Otherswork forcommercialenterprisesandthe



• Ofthe10,000CPAmembers,6,500are


• ThemajorityofCPAs,possiblymore




Source:The Accountant

comfortable in Thailand and did not go overseas to practice because of staff lan- guage limitations. But if you go to Cambo- dia, for example, a lot of accountants there speak English and in Vietnam they study accountancy in English.” Future development of the accounting profession in Thailand is likely to be influ- enced by the opening of the ASEAN profes- sional services market as well as the ongoing trend to increase audit quality and improve corporate governance. Big four firms which control an estimat- ed 80% share of the Thai audit market are expected to retain their dominant position though future prospects for medium and small accounting practices are less clear. “I see the big four still playing a big part in the audit market here as when clients expand they need advice to go to new mar- kets and local accounting firms could find this advice difficult to provide,” Prasarn says. “For the next five years the Big Four should continue to dominate the market but then it depends on how local firms per- form.” “ASEAN will start to be effective in 2015 and the professional services market will open. Local accounting firms will need to look how to expand. “Because of audit standard quality con- trol single audit person firms may not sur- vive, so they may need to merge to become bigger and then they might increase their market share,” Prasarn concludes. <

The Accountant

Comment: eC AudIt ReFoRm pRoposALs

More bad than good

ThemajorityoftheEuropeanCommission’sauditreformproposalshavesparkeddebatefarandwidearound theworld,asmuchofthemarketbelievestheyarelikelytohinderauditqualityratherthanenhanceit.The CharteredInstituteofManagementAccountantschiefexecutiveCharles tilley shareshisviews

B ig corporate scandals come along at a woefully predictable pace. And when they do, the role of both the company’s audit and auditors under-

standably comes under scrutiny. European Internal Markets Commissioner Michel Barnier has claimed recent failures at Anglo Irish and Lehman Brothers banks, BAE Systems and Olympus “would strongly sug- gest that audit is not working as it should”. The systemic impact of some recent fail- ures, notably among the banks, is a particu- lar worry. People would justifiably like to get more out of audits, making them less a qual- ity check on past financial figures and more

of a test of future resilience of the business. Nonetheless the comments of Barnier and his proposed reforms remain wide of the mark. The vast majority of Chartered Insti- tute of Management Accountants (CIMA) members work in businesses, none work as auditors, and hence are well place to inde- pendently gauge the impact of the European Commission’s (EC) reforms. Our view is that the proposals would be bad for business and, worse, would represent

a missed opportunity to enhance the public

interest value of audit. Specifically, it is most unlikely the EC pro- posals for change could have prevented any of these failures or the more widespread glo- bal financial crisis. Take for example, the recommendation that a company be required to change its auditors every six years on the assumption that this will increase the independence and objectivity with which an audit is conduct- ed. This proposal is founded on the assump- tion, to my mind stunningly naive, that the new auditor will be as well informed as the previous auditor and, therefore, will imme- diately be able to do its work as comprehen- sively. On the contrary, the new auditor will have so much less specific, in depth experience and knowledge about the company that it will take years for the new auditor to duplicate the understanding that previously existed. As

a result, investors and the public will be less rather than more protected.

A significant cost increase

On top of this, the changes threaten signifi- cantly increased costs if the business has to implement a time-consuming and expensive search for a new auditor every few years. That is time and money that all stakeholders should see as far better devoted to activities that will keep an organisation sound and monitor risk. The same is true of the EC’s proposal to prevent audit firms from providing non- audit services. There certainly are conflict- of-interest concerns that should limit what in addition to an audit a firm provides to an individual client. But the proposal to prevent an auditor from providing non-audit consulting services to any corporate entity regardless of whether or not it undertakes the firm’s audit makes little sense from any perspective. Not only will the not inconsiderable costs of audits increase if the EC plan is approved, but it also will seriously limit an audit firm’s information and experience in an industry or sector. Certain sectors require specialist auditing skills and experience and these are built up over a number of years of working in a particular industry. Mandatory rotation is likely to deter audit firms from making this investment. This makes no sense when increased rather than decreased insight is what’s needed to understand the business and financial com- plexity inherent in today’s economic environ- ment. In CIMA’s view, the commission’s proposal should be moving the auditing profession in the opposite direction from what it is sug- gesting. Instead of recommending something that will decrease the quality of the work, we need to be doing everything possible to increase the proficiency of those designing and doing an audit. Limiting an audit firm’s knowledge base as the EC’s proposes will not make audits better or more informed. This debate is doubly important as busi- nesses from outside the EU are not immune from the effects of the proposed changes. Globalisation is widening the impact of national and regional legislation and, like

the impact of national and regional legislation and, like Charles Tilley, CIMA the US Foreign Corrupt

Charles Tilley, CIMA

the US Foreign Corrupt Practices Act; the EU proposals could have global reach. The Big Four audit firms are likely to have to re-organise their businesses to separate their audit and non-audit businesses; this is unlikely to happen just in Europe. Organi- sations from non-EU countries are likely to be affected from this re-organisation and re- alignment of the global audit sector. This is not to say that no changes are need- ed. On the contrary, as CIMA has consistent- ly suggested, independent assurance of non- financial data, narrative reporting (including the going concern section), and the internal processes that produce the data used by boards in their decision-making would have a significantly positive impact. Similarly, allowing auditors to relay force- fully a message directly to boards that may be more sceptical than before will also pay huge dividends even if those concerns are only expressed behind closed doors. The proposals now move to the EU Par- liament for debate and EU member states should take the opportunity to rebalance the commission’s proposals in favour of high quality audits that help to promote sustain- able businesses and so enhance the public interest value of audit. <

Round tABLe: eC AudIt ReFoRm pRoposALs

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs The Accountant Uncertainty remains

Uncertainty remains




A fter a year of deliberation and con-

sultation, the European Commission

(EC) has unveiled its final proposals

on audit market reform. There is a

growing number of voices of dissent in the profession with many claiming viewpoints put forward during the consultation process have not been considered. Fierce lobbying from accounting firms and the business com- munity is expected to continue in the coming year as the EC Council and Parliament make their assessments. The International Accounting Bulletin and The Accountant invited a group of account- ing leaders to discuss some of the key propos- als, particularly the more contentious ones, including mandatory rotation of audit firms, the banning of some non-audit services, ‘Big Four only’ clauses, an EU audit passport and joint audits. The panel features leaders and public pol- icy experts from the Big Four and mid-tier accounting networks, as well as a technical director from the professional accounting body, Association of Chartered Certified Accountants (ACCA).



February 2012

Arvind Hickman, International Accounting Bulletin, editor: tracy, what are your thoughts on the consultation process? do you believe that the views from various stakeholders, especially in industry and other investors have been taken into consideration? Also, what are your thoughts on the general consultation process?

Tracy Gordon, Deloitte UK, public pol- icy director: We and others were given the opportunity to respond. However many stakeholders have objected to elements of the proposals which have remained. All in all, there’s still a long way to go and we hope that as the process continues some of these thoughts that have been fed in already will be reflected.

Arvind Hickman: Andrew, you represent the european Group of International Accounting networks and Associations (eGIAn), and you probably have a lot of experience dealing with such consultations and putting forward certain views. How do you feel the consultation process has panned out? How

well has it been run and do you think the eC is listening to what people are saying?

Andrew Nicholl, EGIAN, secretary: Not being Brussels-based, I haven’t been as involved actually at the coalface of the EC consultation. But from the meetings that I’ve attended, I gained the firm personal impression that this commenced with Michelle Barnier’s view that “I’ve made up my mind and don’t confuse me with inconvenient facts” and that’s com- ing out of the very early consultative confer- ences, where comments were being made and nothing was taken on board. The other impression I had – and I’ve had more of an involvement possibly on the detailed nuts and bolts of the proposals so how it might work in practice – is the poor quality of drafting. Some areas don’t join up, some of them are not easy to understand, the mention of new words that people don’t understand to replace established professional terms. Indica- tions that some politicians don’t understand what a joint audit is as opposed to a group

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs

audit as well as some of the other things such as the consortium audit confusion. It would appear to be that it was drafted from a position of lacking of understanding of practical points. The whole process could have been significantly improved initially with more focus on practical application, which might have made for a more positive consultation process subsequently.

Arvind Hickman: does anyone else have any views about the consultation process? patrick, is that something you agree with?

Patrick de Cambourg: My view is the consul- tation process is a consultation process and that drafting a proposal becomes a political process so stakeholders have contributed. I would like to remind everybody that at the beginning of the consultation, some people were saying “No issue in our profession; nothing to worry about, nothing to consider seriously”. And for me, if the starting point is a pos- sible unbalance between the views of the stakeholders – or some of the stakeholders – and the people that represent the general interest of following democratic process, then I think what we are experiencing at the moment is the adjustment between the views from the profession, other stakeholders using the services of that profession, the general public represented by the appointed com- mission, the governments elected and the parliament-elected people. I think from a political standpoint it is somehow natural we are not in full agree- ment. In other words, if the stakeholders had to draft regulation by consensus, I think it would be an interesting process, but I don’t know what the outcome would be. So today, we are trying to address a public interest question by a democratic process.

Sue Almond, ACCA, technical director: We hosted an event only a few days after the proposals were introduced and three of the MEPs who had been very closely involved in the process were speaking at it. I think it’s probably not just the accountancy profession that have a degree of frustration about the way some of the responses have been fed in, because there were some quite unusual con- sultations that had gone on at the parliamen- tary level as well that were not then fed in to the final proposals. So I think there probably are issues that do need to be picked over in the final outcome.

Ed Nussbaum, Grant Thornton Internation- al, chief executive: The only thing I would add is it would have been nice to see more investors respond to the consultation and

give an investor perspective. Responses from investors were quite lim- ited, quite poor and it looks like the proc- ess would be improved by more outreach to investor groups. It’s pretty obvious where corporations are coming down on this but it is relevant because they’re our clients – the real issue is we need to think of the needs of investors.

Arvind Hickman: John, what are your thoughts on the overall package at this stage?

John Capper, RSM International, interna- tional regulation specialist: Our view is we very much welcome the proposals. We believe there is a widespread view across a range of stakeholders that some change is needed in terms of this high level of auditor concentration within the listed company markets in Europe, because it does represent a systemic risk to the functioning of the market. We work closely with Andrew Brown in the EGIAN Group and it’s interesting how EGIAN has gained a much higher level of profile because 20 networks have stuck together and said “We stand for these similar things between us”. A similar thing happened with Group A in the UK where the comments from it were sent to Vince Cable to explain what its view was. When this was widely distributed to MEPs and other stakeholders then those people realised that there were voices other than the ones they’d already been hearing. More people are now open to the idea that some change should happen and could happen. We don’t think any single measure on its own will solve the problem and we do think the changes will take quite a long period of time. Some of the talk within the EC about how fast these changes to market structure would take place is over-optimistic. It will take some time. We would be looking for effec- tive mechanisms to open up the market to new players and I’m not sure we’ve actually so far found all those mechanisms that will work, but it is important that we do so. And why is it important? Well, actually, most of the larger listed companies do not have a choice of four firms. They will have a choice much lower than that because of con- flicts of interest and avoiding competitor’s auditors. The market is very stagnant and needs to be changed in the interests of quality, inde- pendence and innovation.

Arvind Hickman: Andrew, do you have anything to add to that?

n eC AudIt ReFoRms Round tABLe

Attendees, in alphabetical order

sue Almond,AssociationofChartered CertifiedAccountants(ACCA),technical director

nigel Bostock,CroweHorwath International,partner

patrick de Cambourg,Mazars,president

John Capper,RSMInternational, internationalregulationspecialist

paul Ginman,BakerTillyInternational, chiefoperatingofficerandtechnical director

tracy Gordon,DeloitteUK,publicpolicy director

david Isherwood,BDOInternational, partner

Jon Lisby,KrestonInternational,chief executive

James mendelssohn,MSIGlobalAlliance, chiefexecutive

Andrew nicholl,EuropeanGroupof InternationalAccountingNetworksand Associations(EGIAN),secretary

ed nusbaum,GrantThornton International,chiefexecutive

nick tomkins,HLBInternational,quality assurancemanager

Andrew Nicholl: I support completely what John has just said, but there is also a big con- cern beginning to emerge with one or two of the firms I’ve talked to [about] watering down the proposals between the leaked ver- sion and the one that was officially issued by the EC. We may find the mix here ineffective – faced with retendering costs and a more fluid market there, but without any particular likelihood of gaining any degree of market penetration vis-à-vis the loss of the manda- tory joint audit proposals. You sort of feel maybe within the propos- als that have come out there are no real driv- ers for market change there. There’s some incentive, possibly with a longer period of appointment for joint audits, but the issue of having to do tenders, and to do a very proper tender is a seriously expen- sive process, you may suddenly find people are doing a lot more tender activity but with- out any return for [the increased] cost [they will incur].


Round tABLe: eC AudIt ReFoRm pRoposALs

The Accountant

4 Arvind Hickman: tracy, what are your thoughts representing a Big Four firm?

Tracy Gordon: Our over-riding concern is audit quality is the most important factor here, and we would completely take the point that four is not ideal and that because of con- flicts of interest it very often is less than four that corporates have to choose from. However, we do have concerns some of the proposals will have an adverse affect on audit quality because the concentration issues may not be properly addressed. Increased tender- ing doesn’t necessarily mean more audits would be given to the smaller firms. It just could be a lot more cost for the low and the mid-tier firms, but with no guarantee the audits will actually go to them.

John Capper: We were told at one of the EGIAN meetings by a commission official that they were also very worried about the lack of choice necessary to make mandatory rotation work. There will not be the scope to be able to rotate to one of the other Big Four because of the conflicts of interest. They want to open the markets up and that was the reasoning behind the idea of splitting up the Big Four. There will either be more players to choose from or non-audit services would be separated to eliminate the conflicts thereby leaving large Public Interest Entities (PIE) the choice of the three pure audit firms that might be left. This proposal is aggressive, but may solve the short term problem by creating eight firms out of four. That may or may not be what the market is looking for so then you get into the interest-

ing aspects of whether or not one of the non- Big Four players ought to be involved in the process either as mandatory shared or joint auditors or at least in a fair tender process.

Nigel Bostock, Crowe Horwath Internation- al, partner: I would echo what’s been said so far. My view on the proposals are that the removal of joint audits has really meant the emphasis of the proposals is now less direct- ed at market concentration and more focused on quality, independence and governance. Whilst some of the remaining proposals could potentially have some impact of reduc- ing market concentration, I think they’re more indirect consequences of other objec- tives now. The only exception is the audit only firm proposal although I think the general view

is the concern this would adversely impact

audit quality and I don’t think there’s gen- eral support anywhere for the audit only firm proposal. I think that’s going too far.

Arvind Hickman: patrick, when you look at the proposals holistically, do you believe they can reach Barnier’s original goal of when they first came out?

Patrick de Cambourg: I think it’s like a rugby game. We had the first half, now we are start- ing the second half and we don’t know what the outcome of the game will be because it’s

a serious game, it’s a topical game and it’s

public interest. Going back to the rugby comparison, I think we are probably at the beginning of the second half and quite frankly we all know that between the leaked version of the pro-

we all know that between the leaked version of the pro- Listening in (from left): Paul

Listening in (from left): Paul Ginman, Jon Lisby and James Mendelssohn



February 2012

n eC AudIt ReFoRm pRoposAL

Mandatory rotation of audit firms

The EC proposes audit firms be required to rotate after a maximum engagement period of six years. A cooling off period of four years is applicable before the audit firm can be engaged again by the same client. The period before which rotation is obligatory can be extended to nine years if joint audits are performed, ie, if the entity being audited appoints more than one audit firm to carry out its audit. Pre- viously, it was thought joint audits would be mandatory. <

posals and the version finally released a lot of discussions have taken place. But I think that from the point of view the commission and also from the point of view of the MEPs and governments, it’s not final. Today I think we have all the ingredients in the proposals the problem is the pendulum is on one side at the moment – on the pure audit firms. If you seriously consider that point, is it viable long term for the reasons that John explained? I’m not sure. Would it

be possible to implement? I don’t know. If it

is a market cap, then say it.

So the pendulum on this is, for me, some- thing that has to be considered again. The rotation per se is a system that has not been extremely successful in the countries that have implemented it and six years is a very short period. You were talking about the cost of tendering, but the cost of rotating is also significant. The joint audit has been watered down and transformed into an option with an element

of incentive… I think it would be in the inter- est of the profession to reconsider the proper balance of those ingredients in the interest of all parties because if the diagnosis is the one that Tracy shared with us, then we should as

a profession say “Yes, we want to diversify

that part of the market”. We also want to be able to add value to our clients via consulting services because that’s key for the European economy and therefore on the rebalancing of the panel.

Arvind Hickman: Focusing on the proposals, mandatory audit firm rotation after six years was rather controversial because when it originally came out in green paper form it was nine years but this has been shortened by three years. sue, do you think there is currently a problem in terms of how long certain pIe engagements are? do you think there is a problem with independence?

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs

Sue Almond: Whether we see there’s a prob- lem independence-wise or not is a different thing, but there is definitely a perception problem and there is an issue about the length of engagement. Some of the figures quoted when you’ve had an incumbent auditor in place for more

than 100 years or whatever, and the average figures that are quoted are 50 years for UK listed companies, it’s a long time and we can quite understand why people might perceive that as an independence issue.

I think we certainly agree there is move-

ment that needs to take place in that arena. If you come to specifics, then our view is these things should be driven by the companies, by the board and investors, not by arbitrary time limits that may or may not take account of the issues of the business at the time. So certainly I would echo what was said about six years; it is effectively quite a short period for not just the audit firms but for the businesses as well.

for not just the audit firms but for the businesses as well. Holding court: Grant Thornton

Holding court: Grant Thornton chief executive Ed Nusbaum (right) gets his point across

Arvind Hickman: From a practical perspective, ple in the profession – our own people.

if you’re an auditor of a big firm and you have

a client for a very long period of time such

as 30, 40 or 50 years – how does that affect

your mindset? does that actually have a

material difference on how you approach that dering and rotation.

engagement? Is it a perception or is there an element of truth to that perception that it’s a problem?

So I think possibly there’s more transpar- ency needed on how long somebody has been in position, how long they have been the auditor and then using that to drive ten-

Now, should there be some safeguards with that stop, they probably should be back stops both in tendering and rotation, but six years or nine years sounds ridiculous.

Tracy Gordon: There are extensive ethical rules that say one partner cannot do an audit for 30 years, so there’s a regular cycle of part- ner rotation. Yes it’s the same firm, but you have to change the key audit personnel every certain number of years. So the perception is not played out in prac- tice and audit firms are heavily regulated [in terms of the conduct of our audit] and I think all these issues are being looked at incredibly carefully. The ethical standards are getting stricter all the time.

Arvind Hickman: How about 20 years?

Jon Lisby, Kreston International, chief execu- tive: I think the profession generally shares the view that six years is too short. The important issue is the investors become more participative in future and the whole proc- ess of auditor selection becomes more trans- parent and there should be informed choice about the audit firm appointment.

David Isherwood, BDO International, part- ner: I think it’s perception versus reality. At

the end of the day, quality will gain you trust and the company has got to trust you. So to a certain extent the difference between reality and perception is one of academic interest is not one we should put complete trust in the audit product we deliver.

I echo what people said, six years manda-

tory rotation is very short, and the intended consequences of mandatory timing are quite severe. Nevertheless, being at the same firm

for 70 years doesn’t seem… right. One of the most common things I’ve found is the num- bers coming out of the debate over the past 18 months have been a surprise to many peo-

John Capper: I think part of the concern over the length of audit tenure in the largest PIEs isn’t just whether it changes the mindset of the audit team within the audit; it’s what the outside world thinks. There is a danger that if it’s 40 or 50 years, it’s actually because the firm hasn’t got any effective choice of where else to go and that is a really difficult systemic risk issue. Based on the current market structure, if some of the largest PIEs globally could not find another auditor if they had to move from the one they’ve got then that is shocking even with four firms, let alone if four became three. Clearly new entrants are needed in the mar- ket place. Of course there were a lot of the comments

to say there was no systemic risk, maybe as part of the debate now we need to uncover the reality of the level of true risk.

Arvind Hickman: ed, six years sounds a bit of a short cycle, but is there a period of time where it’s sensible to do this or do you think rotation should come from other mechanisms and not regulation?

Ed Nussbaum: Six years as everyone’s say- ing puts a lot of stress on the system and I think if every company’s got to change in that short period of time, to find other firms for its audit would be difficult; so a longer peri- od is critical. I think all of us would survive mandatory rotation. It could work, certainly. None of us want to lose our clients and our firm like every other firm would simply lose clients. As part of the rotation you’d hopefully win as many as you lose, maybe more, maybe less. So, it’s the fear of the unknown, I think, that scares a lot of people. Companies are quite happy with their relationships with their auditors, or they wouldn’t keep them – nobody’s forcing them to keep those relationships – so it’s no sur- prise that companies don’t want to push for mandatory firm rotation if they like the one they’ve got. And I don’t think they do it because of cost misdirection’s because history has shown that when you do force rotation, costs actu- ally go down, not up. I think the arguments for quality are pretty weak as well – if the auditors tell you you’re doing a good job and yet many companies like Apple have switched auditors – I suspect the new audi-


Round tABLe: eC AudIt ReFoRm pRoposALs

The Accountant

4 tors are doing a very good job on the audit as well. I think it’s really a matter of percep- tion of the marketplace and perhaps the real- ity when you have a 50-year relationship is you do get too close to the company and too much associated with that company, which is not healthy for anyone involved much less the accountants. So, a mandatory firm rotation is not per- fect, but certainly one can see why regulators throughout the world are at least consider- ing it.

Arvind Hickman: would mandatory firm rotation actually improve choice and competition in the market?

Ed Nussbaum: Obviously it would improve competition. I’m not sure about choice, but it

would certainly improve competition. You’re forcing competition, but if it’s just amongst us it’s a relatively small group of firms. There are going to be some firms who will consider other alternatives.

I think the focus is on the FTSE 100 so

the very largest companies, but there are a lot more listed companies than just those… and for every firm around this table there are probably thousands of companies they cur- rently don’t audit.

I think it would increase competition and

would probably increase the market structur-


Arvind Hickman: Is there enough capacity amongst the Big Four to absorb all the different changes?

Ed Nussbaum: In my opinion, yes. There’s

no doubt there is a lot of capacity. Even if you look at them the Big Four firms have capacity to grow and expand, as do other mid-tier firms and certainly we have capac- ity. But could we take on all the FTSE 100? Of course not.

Andrew Nicholl: I think there’s a danger to the profession as a whole in assuming what level of capacity there is, a lot of us say that it’s quite difficult to retain senior people within audit. People wish to do other things; some people move to areas of professional activity that aren’t as tightly regulated and don’t carry the vicarious liability which audit does.

“the very strong preference would be to take an awful lot of that detail away, preferably to leave it to the IAAsB to set the standards for audit reports globally and to have a broader debate with people like investors to really understand what it is that’s wanted out of the content of the audit report”


We need to be rather careful saying what capacity we have overall, because we need the right people. We need to remember the quality of service is delivered by the peo- ple, not a firm – the firm doesn’t deliver any

the peo- ple, not a firm – the firm doesn’t deliver any Having his say: Mazars

Having his say: Mazars president Patrick de Cambourg (centre) takes the floor



February 2012

services; the people within it do the service delivery.

Arvind Hickman: picking up on sue’s point before that perhaps mandatory rotation – or forced rotation – isn’t the best mechanism we’ve got. does anyone have any other suggestions of how else we could try to divide the work up more?

Ed Nussbaum: I come from America and there’s always this dislike of more regula- tion, so I think if there’s any way to do it through market forces it would certainly be more advantageous. However, it’s extremely difficult to accom- plish through market forces. When I was growing up there were three major auto- motive companies in the US and now one of those is owned by Italians and the other two are by the Japanese. No one would have thought the three companies in the US would be the three major automotive companies. So there is an evolution that occurs through market forces, but in this case mar- ket forces probably are not enough. You could look again at mandatory tendering, look at mandatory rotation and I don’t think there’s a silver bullet; I don’t think there’s a simple answer that’s going to solve all the problems.

Sue Almond: I think it was David who made the point about people not knowing some of the figures that have been out and I think if this exercise has done something, it has pub- licised what the current position is. I think

that in itself will drive a certain amount of activity. You could get to a state where, for exam- ple, in some of the governance code you need to comply and explain. You could pick

a number out of the air – whether it’s 10, 15,

20 or something like that – but maybe you could get to a stage where there’s a presump- tion independence might be impaired, and so you could ask for explanation from the audit committee, from the people who’ve made the decision that this is the right thing for that business. There are other options around.

David Isherwood: It’s mounting to be

a combination. We’ve tried market forces

before, In the UK we have a market partici-

pants group which many of us are part of.

It didn’t bring about new change, but things

like transparency if market-led will work. We think with a certain amount of intervention leading that, it can spark change because the

market is not getting there by itself.

Tracy Gordon: It comes back down to what Ed was talking about and the lack of investor participation in this.

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs

The Guidance on audit committees rec- ommends that companies disclose how long they’ve had their auditors, but unfortunately not many of them actually do that, based on the results of a survey we’ve done. And yet there doesn’t appear to be a huge amount of shareholder push back as to why that information isn’t there.

Patrick de Cambourg: I think the key is to get to a proper balanced reform package because

with the pure regulation side, where you set barriers like rotation, it might be a solution but that’s a rather extreme one. So if you want to anchor it, market forces, I think the idea first of all of transparency and proper governance – comply or explain – maybe with a mandatory rotation of a certain period of time, if nothing else happened. Mandatory tendering is one way to instil market force corporate governance. We are firm believers that joint audits or shared audits are also a good solution. And frankly,

if we want a better profession, a more diver-

sified profession, this is probably one of the

other mechanisms to consider very seriously

because it has demonstrated its capacity, if

it was extended, would certainly play a sig-

nificant role.

Arvind Hickman: Joint audits were included in the draft document but removed as mandatory and used as an incentive in the final process. what are your thoughts about that change?

Nigel Bostock: I think it is very disappoint- ing the proposals diluted the joint audit solu-

tion. I believe the reason for that was the case wasn’t persuasively put across that joint audit was a solution and the decision was made it was not appropriate. However, any solution needs to be evi- dence based and I am not sure either argu- ment has been fully explored. I don’t think joint audit is totally off the table, because there is still scope within the regulations for

a joint audit. For example, going back to the point of

mandatory rotation, I think the difficulty at the moment is the draft regulation suggests six and nine years depending on whether or not you have a single or joint auditor. My sense is if you have a greater differen- tial between the two, it would actually create wider choice which would potentially help to provide a more balanced reform package and

a better solution. So, as a suggestion, if you had nine and

fifteen years mandatory rotation depending on whether you had a single or joint audit

it would potentially incentivise businesses to

actually look at if the right solution for them

to actually look at if the right solution for them Point to make: RSM International, international

Point to make: RSM International, international regulation specialist John Capper

is either a single audit or a joint audit.

I also think there’s a sense of disappoint-

ment at the lack of attention for the concept of a shared audit as well. It wasn’t really explored sufficiently in the regulations.

I think there’s a clear distinction between,

say, the following three scenarios: scenario one, where you have a global, multi-national group audit that’s just done by one player; scenario two, a global multi-national audit that’s done by joint auditors; and scenario three, a global multi-national audit that might be being done by a Big Four firm at the group level but actually has a number of

subsidiaries that are audited by one or more different players.

I see the latter (a shared audit concept) as

a viable balanced reform solution as it pro-

vides potentially greater challenge through- out the group audit process, protects quality and helps partly address independence and market concentration.

I share Patrick’s thoughts there was a lot

more that could be done to actually give a balanced reform, and I don’t think it’s an either/or option. I think there are a number of alternatives that can be put forward.

Patrick de Cambourg: I think in the proc- ess the difference between the initial version and the final version of the proposal is prob- ably a lack of perception, and by criticising too much, having not considered the joint audit enough, which operates in one coun- try between large and smaller firms, then the commission took a stance, a rather extreme stance, on other points of the regulation. Therefore… I have reservations on the shared audit but from a technical stand-

point but rebalancing is possibly the way forward.

John Capper: I think what’s interesting is the possibility of a longer mandatory rotation period based on a number of incentives that open up the markets. At the moment the debate is rather nar- row where only joint audit extends the rota- tion period. I agree with the idea that if you allow a longer initial period than six years, and then a longer extension other than three years, you could give the large PIEs more incentive to open up the market in a number of ways. There are other areas that might open up the market and help create new market entrants. If you allowed extended rotation not just for joint audits but maybe also for shared audits and other things that help to open up the market then somebody may need to make a judgment about whether that PIE has done enough to help to open up of the market. A combination of incentives might have more effect than only the one provision cur- rently in there, which is the joint audit. One of the difficulties, in all the political process, when talking to the politicians, is we were always advised by their officials not to complicate the thing by trying to explain the difference between joint or shared, and that you only need to talk about one of those things. From that point of view, there is a lack of understanding about what shared and joint auditing is. Hopefully in the greater debate that will take place now, there will be a wider understanding of the benefit of both.


Round tABLe: eC AudIt ReFoRm pRoposALs

The Accountant

4 Andrew Nicholl: I also think, the propos- als for joint audit contained a fundamental flaw that there should have been a disconnect between the two firms’ period of appoint- ment because there were certainly indica- tions being received that approaches were made to mid-tier firms on a country level by Big Four firms in that country as to whether they would like to enter into an informal arrangement, you know, going together into that tender. A different period of appointment between the two players creates a degree of independ- ence, oversight and eases transition between firms. To deliver what the proposals are sup- posed to deliver; it needs this extra step if it were to go ahead.

the cracks. I think there’s a view it increases cost, having two firms doing one audit and another view is joint audits have not been forbidden here and yet hardly anybody actu- ally does them, so that must say something in itself; that there’s always been a possibility to have a joint audit, but why if it’s so good don’t more people do it?

Patrick de Cambourg: Oh, it works very well. It’s very good for quality. You know, the two pairs of eyes concept is excellent in terms of governance, in terms of even opening up to non-audit services to a certain extent because you always have someone overlooking the other. The degree of misperception decreased a lot in a year and a half or a year, but not enough and therefore, I think a number of people have shot at the wrong target. Possibly they are getting somehow the extreme counterpart in order to solve the problem. If we share the diagnosis the market is too concentrated and the quality of auditing needs to be considered, by shooting at the wrong target then you unbalance the pro- posal and I think that’s what happened.

Andrew Nicholl: I’m showing my age, but

I can remember when I started in the pro-

fession joint audits were not uncommon in the UK. That’s going back to the late ‘70s/ early ‘80s. I worked on a job where we were working with one of the Big Four and some- thing quite large nearly did fall down the crack. It was very reliant on the top end view to notice that having sliced and diced the finan-

John Capper: And greater continuity as well, because one of the shared or joint auditors will then be continuing whilst the other changes.

cial statements, and the two firms doing the segments, something new arising didn’t fit into any of the allocated categories and near- ly didn’t get audited. But I’ve also worked on joint audits where I think they did improve quality, which was actually fielding mixed teams from the two firms. So, an audit was tackled by staff from both firms rather than putting rigid walls round.

Andrew Nicholl: That’s right. It builds that continuity with a transition between the other firms. But that was missing from the leaked proposals and I think that’s fairly fundamental if it was to deliver benefits to a greater extent.

I think slicing and dicing the financials poses

significant risks to quality; mixed teams from both firms, I think, has the potential to increase quality and transfer of expertise. Both carry liability issues. The liability environment was very different in the late ‘70s/early ‘80s in the UK and I don’t think the implications of professional liability in this context are actually being explored well.

Arvind Hickman: do you think joint audits were removed purely because they were leaked and that people knew what was coming coupled with intense lobbying? or do you think there’s an element of politics going on with what ended up in the document?

Tracy Gordon: I’ve definitely heard the argu- ment that there is an issue that you’ve got to be very careful as to who’s doing what and making sure things don’t fall through

Patrick de Cambourg: Personally, I think it’s a controlled misunderstanding. People were considering that it was considered one of

David Isherwood: I think it’s more about application. There are a lot of intelligent peo-

ple in the profession and we have the ability to conduct something like a joint audit in an efficient and cost-effective manner or an inef- ficient, expensive manner. We have the ability of culture one which adds to the quality and one which actually detracts from the quality. It’s up to the profes- sion to refine that and define what we’re able to do. But one thing I do think, we too are slightly disappointed with the way they watered down the joint audits in the papers that came out of the proposals, because I think we could really think about the choice issue, and to really try to give people choice in the upper market. You’re going to really need an incentive to get another player into the market and joint audit would seem to be the way, but the bal- ance of the market needs us to do more and might be an extension of rotation times with balance and regulation identified. Somewhere in there is an incentive to actually bring anoth- Up for discussion: Deloitte UK’s Tracy Gordon and Sue Almond of ACCA er player into the top end of the market.

those strange French features when frankly; I am personally convinced as a professional that there is significant merit in such a system.

Arvind Hickman: patrick, what’s your experience with mandatory joint audits?

Arvind Hickman: I have spoken to different people at various Big Four firms and they’re quite adamant joint audit actually decreases quality and causes a lot of problems because of the things that get through the cracks. tracy, what is your personal perspective on joint audit – how they will function and how effective they might be?

– how they will function and how effective they might be? 1 6 y F e



February 2012

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs

Arvind Hickman: what are your thoughts, sue? obviously with your previous roles you have been inspecting the quality of those around the audits. How do you think this will work practically?

Sue Almond: If I come to it from the ACCA’s perspective, I think David raises a really important point, that this has been described as being a measure to improve quality. I’m not sure there’s evidence as to whether it improves quality or how it can impact qual- ity. I guess our frustration is the joint audit, and other suggestions, are not based on evi- dence. When we hold investor forums and things like that, there really isn’t much appetite from investors for joint audits. They actually take quality as a given from whichever audit firm it is, and so there’s clearly not a demand from that end. If, as Andrew and David would suggest, joint audit is a way of invigorating the market, then that’s a completely different proposition and it should be presented as such rather than being presented as a quality measure. I think from a practical point of view, there hasn’t been a lot of work done into how these things operate effectively. I think there are a whole range of different models you could put and there’s been an awful lot of focus on just one very narrow definition of joint audit. When you get into the other arrangements, it would be really interesting to actually explore how some of these things work in practice at the detail level and professionally we can get on and make these things work.

n eC AudIt ReFoRm pRoposAL

Non-audit services

Audit firms will be prohibited from pro- viding some non-audit services to their audit clients if non-audit fees exceed 10% of audit fees. Large audit firms will be obliged to separate audit activities from non-audit activities in order to avoid all risks of conflict of interest, thus creating audit- only firms. Banned non-audit services include bookkeeping and preparing accounting records and financial statements, inter- nal control or risk management services, valuation services and providing fairness opinions, actuarial and legal services, implementing IT systems, internal audit services for audit clients and broker/deal- er/investment adviser services. <

and broker/deal- er/investment adviser services. < Point of view: Paul Ginman, Baker Tilly International COO

Point of view: Paul Ginman, Baker Tilly International COO and technical director

Arvind Hickman: Is it the general consensus that not enough groundwork was done on that particular proposal to begin with to produce something that covered all these bases? the definition you see for the joint audit is quite narrow and there are many different variations. do you think that perhaps if they’d thought it through more thoroughly then it would still be on the table?

Patrick de Cambourg: I think that it’s still on the table. It would be wise to consider it and explore it further. With regards to the costs we communicated, we did of course get deeply involved. We have conducted a survey on a number of key clients for us which we have shared with some of the firms around the table, where we perceived the cost is extremely acceptable if you compare to mandatory rotation or to other means to protect independence or to improve quality. So we’re talking about less than 5%. That’s our vision demonstrated on cases between a Big Four firm and ourselves in any case. As regards to cracks, as David said, you know you are not obliged to be stupid; in other words, you can structure an audit. If you’re a good professional, you can structure an audit properly and even if you split the sections, the global conclusion has to be conducted jointly. And there needs to be a cost review. Turning to technicalities, but it’s important – I need to ask whether it’s well organised.

Ed Nussbaum: I think that’s the problem Patrick its not well organised.

Arvind Hickman: moving on to the restriction on non-audit services. perhaps you can share a few insights on which services in particular Barnier is referring to and then your thoughts about what would be the sensible restrictions or not?

David Isherwood: I think it’s too general. It means related audit services and the reason why they’re consultancy and the ones they share audit data on. He hasn’t bothered separating the two, giving 10% on the audit related and then another amount on the other ones. I guess our thoughts are the restriction of non-audit services is a threat to your inde- pendence that is well recognised by the IFAC Code which all the firms at the table signed up to. And the IFAC Code laid the founda- tion to actually protecting auditor independ- ence. My view is that such a blunt instrument as banning all non-audit services is probably not the right time to serve the company, the investor or the auditor. It’s too blunt, and it might not always result in independence.

Arvind Hickman: does anyone else have any views on non-audit services?

Ed Nussbaum: I think the 10% limit on audit-related services is totally inappropriate.


Round tABLe: eC AudIt ReFoRm pRoposALs

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs The Accountant From left: EGIAN’s Andrew Nicholl, David Isherwood of
Round tABLe: eC AudIt ReFoRm pRoposALs The Accountant From left: EGIAN’s Andrew Nicholl, David Isherwood of

From left: EGIAN’s Andrew Nicholl, David Isherwood of BDO, Grant Thornton’s Ed Nusbaum and James Mendelssohn of MSI

4 The audit-related services that we view in the proposals particularly for a listed company, could easily amount to double or triple or quadruple of that restriction.

Arvind Hickman: which services are you alluding to?

Ed Nussbaum: Anything related to the audit; particularly things related to the comfort levers.

Tracy Gordon: The interim review.

Ed Nussbaum: The interim review, exactly, could easily beat that 10%. If you’re going to do an audit, you want to do more with that interim review, not less and you want to move toward the audit. The last thing you want is to spend less time on the interim review and then find the problem at the end of the year. That would be a disaster for the company and a disaster for the auditors.

Patrick de Cambourg: Transparency on those services is the way forward, if you disclose very precisely first of all to the governance of the company and then to the public what is being done, precisely, and without being hypocritical in the description of what you do.

Ed Nussbaum: I think the restriction at 10% is really primarily because people are under- informed.

David Isherwood: If you look at the figures in the UK and if you look back to the year 2000 when ratios of credit, the top compa- nies we’re talking about, to the ratio of their audit fees and to their non-audit fees was actually quite high, it was several multiples. If you look at those figures now globally they are less than what was the norm. So



February 2012

clearly I think the independence rules and principles of the past few years have sig- nificantly impacted the ethical standards of this country and the ethical practices world- wide. The fact we are rebalancing all the accept- able amounts of non-audit services, but to put a complete ban on them would push it towards the other end of the spectrum, which is just not appropriate.

Sue Almond: I think this is another place where audit committee rules come into play as well because that’s their role. Part of that is to challenge whether this is the right pro- vision, and the auditors are likely to do it. I think that is a more appropriate mechanism than an arbitrary percentage.

Ed Nussbaum: It is a different system… there is a provision there. Somebody earlier in the session said how complicated the rules are and this is one area where I’ve read it a cou- ple of times and then had some experts read it and I still don’t understand it. So, for example, there’s a restriction on due diligence for mergers that says you have to get the approval of the regulators. I have no clue what that means, it’s like I’m starting anew. It’s what that means and how it will work in practice. So, the point I think, whatever they do, it would be really nice for it to be simplified and clear so there’s not all that debate as to what’s allowed and what’s not allowed. I do think, though, that as a profession, restriction on some of our non-audit services – we already have some in the IFAC Code – is not a bad thing. It does help improve objectivity, I think it sends the right message to the marketplace, and I don’t think we as a profession should be afraid of some restrictions on non-audit services. Yes, we will lose some work for our listed clients, but presumably we’ll pick up work from other clients.

I think it sends the right message to the marketplace. Whatever the relationship is between audit and non-audit fees, I don’t think that’s really the critical issue; it’s really about the perception of our independence and you’re going to have to have rules to judge that. There’s some advantage of banning some other services. I personally would support it, simply because it sends the right message about the profession to investors; that we are objective, we’re not trying to do an audit just so that we can do additional consulting work. We do an audit because the audit’s important; we value the importance of the audit.

Arvind Hickman: nick, would you query ed’s assessment that he would support some restrictions in the sense of improving the independence of the sector?

Nick Tomkins, HLB International, qual- ity assurance manager: Yes, I think I would because I think it’s more a perception. In Europe, it’s a heavily regulated environment and when I read reports I don’t see lack of independence coming out as a major issue from regulators. Audit firms that are members of the Forum of Firms all follow the IFAC Code of Eth- ics and have strong safeguards in place. I think independence safeguards are work- ing in practice, but it’s the public perception of independence that’s critical here. And to some extent I would support Ed in saying that perhaps restricting some more non-audit services, if that helps with public perception and the public confidence in audit, would be a good thing. It just needs to be carefully balanced in terms of the things that it really makes sense for the auditors and no-one else to do, like interim reviews and so on; we don’t want to restrict those. So, yes I would support some

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs

The Accountant Round tABLe: eC AudIt ReFoRm pRoposALs From left: John Capper of RSM, Kreston’s Jon

From left: John Capper of RSM, Kreston’s Jon Lisby, Nick Tomkins of HLB International and Crowe Horwath’s Nigel Bostock

of Ethics. The mid-tier and the Big Four all follow the same independence rules. We do not want change just in Europe.

Arvind Hickman: paul, what’s your knowledge Europe adopts and seeks to influence the

of the new independence requirements and how they vary across europe? the uK is well known for its independence. I’m just wondering if that’s the case in other countries and whether there is actually a sense of having a hard-line system.

restrictions to enhance public confidence on large PIEs.

global standards if they feel that they need to be change. For most of us, it makes it more difficult having a different set of regulations in Europe than we are using in the rest of the world. So everyone around the table follows the same sets of independence rules already.

Paul Ginman, Baker Tilly International, chief operating officer and technical director: All EU countries have an independence code. They differ from those countries that have taken the IFAC Code as it stands, to others such as the UK which has its own code, and which in some ways is tougher and more restrictive. The French code, again, is different; it’s

much tougher on non-audit services. So there are differences and I think that level playing field hasn’t sufficiently been addressed in the proposals as they stand, which gives rise to some difficulties.

I believe it would be better if the propos-

als were clearer on what is meant by related and truly non-related audit services so there

is a clear position that everybody can under- stand rather than these artificial boundaries that have been set.

I can only echo this concern about the

10% for related audit services: it’s nonsensi- cal. You would have auditors having to give up parts of what are clearly integral to the audit, such as the interim review. Are they seriously saying you have to get a separate firm to come and do the interim review? That may be good for opening up the market, but really not commercially logical.

John Capper: The other thing not to lose sight over is when you ask about other countries is that there are 24 networks in the world that have adopted the IFAC International Code

Arvind Hickman: It’s an interesting point you raised and one I’ve discussed with a few other global leaders. In terms of global harmonisation across the world, you’ve got europe coming out with these proposals – some of them quite radical – and you might have China or Australia or other countries having completely different proposals. this must prove to be a headache for global networks and associations. How do you get around that?

Ed Nussbaum: Life would be beautiful if there was a global audit regulator, but there isn’t. We would love to have a global audit regulator to standardise rules around the world; but that doesn’t exist. We have the Sarbanes-Oxley Act (SOX) in the US that already puts restrictions on non-audit serv- ices, and additional services far beyond the standard you’re talking about. We deal with them – it’s a pretty tough, but we deal with it. And if you have a US-based client, you have to adhere to those SOX rules throughout the world. When SOX was adopted, I recall hav- ing discussions with people throughout the world about how it hit their companies and subsidiaries throughout the world; there’s nothing we can do about that. And then China imposes different regulations; India has proposals; other countries have different regulation and we deal with that now. In Italy you’ve got very different rules on

the separation of audit and tax. If we’re hop- ing for a global set of standards, that would be nice but I don’t see that happening any time too soon. Europe working together actually makes it, from that perspective, a lot easier than having separate rules in each member state.

Patrick de Cambourg: First of all, that’s one of the points in the proposal, promoting the EU domestic market, with harmonised rules… in the minimum standard approach is excellent. The second point is where we struggle, when you want to apply in Europe the US rules or in the US the French rules, because our professionals are in China. I think if the regulators were able to say people have to comply with the rules of the polls – European poll, American poll, Chi- nese poll and not bother to have a global approach for a global business, it would sim- plify a little bit.

Andrew Nicholl: The factor that has impeded the mid-tier to the greatest extent is that there is not a best single infrastructure that applies worldwide for regulation and rules. That possibly could offer the greatest incentive for the mid-tier to get more involved in the mar- ket – if there was greater consistency.

Arvind Hickman: so the cost of verdict is what you believe to be the biggest barrier?

Andrew Nicholl: It gives you economies of scale. You’ve only got the (resource develop- ment) cost once and you can spread it over your entire organisation, which makes it much more attractive to make the greater investment that’s needed for more participa- tion with public interest entities, etc.

Arvind Hickman: we’ve already heard quite a few with the view that audit only firms aren’t the greatest proposal that’s ever graced the


Round tABLe: eC AudIt ReFoRm pRoposALs

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs The Accountant From left: Patrick de Cambourg of Mazars, Baker

From left: Patrick de Cambourg of Mazars, Baker Tilly’s Paul Ginman, Sue Almond of ACCA and Deloitte UK’s Tracy Gordon

4 accounting industry. I’m interested because obviously if audit only becomes a reality, and it’s generally aimed at the larger firms like the deloitte’s, it would threaten the business model of the professional services code. tracy, what are your thoughts about the proposal and how would you manage if something like this did come into play?

Tracy Gordon: Operating as a single pro- fessional services firm gives us the ability to bring a range of different skills and experi- ence to our clients, as well as better training and experience for our people, particularly graduates. Audit quality would suffer if spe- cialist expertise was unable to contribute to complex audits, and audit firms’ ability to hire and retain high quality people would be adversely affected.

Patrick de Cambourg: So you’re at the threshold?

Tracy Gordon: It’s a national threshold for the one third of audit revenues.

Arvind Hickman: Is that right?

Sue Almond: That’s what was said, yes.

Tracy Gordon: That is true, if one firm in the network goes over the one third limit (on a national basis) then that precludes the whole network from performing non-audit services. But if that part of the network was to exit the network then the rest of it would be alright [and would be able to carry on].

Ed Nussbaum: It’s a pretty big difference. But I think it’s safe to say, although obvious- ly the impact hurts a part of the profession, it creates havoc, it makes it more difficult to recruit people, quality of service, the clients … it really hurts the needs of the smaller cli- ents, because it’s not just listed companies,



February 2012

there are private companies and those com- panies the smaller can’t afford, and it really creates a lot of damage to the profession, but also to the needs of companies.

Arvind Hickman: do you think there is any case for audit only firms?

Jon Lisby: We can’t see any sense in audit only firms and believe it would be likely to cause significant problems. One issue would be where the brightest brains might ema- nate; it is not difficult to imagine whether the brightest brains would go to an audit firm or to a non-audit firm. We suspect they might go to the non-audit firm, so it would seem unlikely such a proposal would increase audit quality. We see this as being a poten- tially disastrous move.

John Capper: I think the difficulty is that it’s hard for the profession to be seen to be argu- ing in favour of its existing business model when the regulators strongly believe that it operates against the public interest.

Ed Nussbaum: It restricts the business model, but I think it goes deeper than that. It is a problem because you can’t attract the best people, it’ll hurt quality, and if it’s bad for the company, it’s bad for the market. It does hurt the business model, but I think it also hurts the quality of the audit and it has a nega- tive impact on corporate governance in the company.

Sue Almond: I think somebody said earlier it’s about the people. Audit quality is about people in their work; and if you have people who are growing up in a narrow silo, then they’re not going to have the kind of broad, questioning, sceptical attitude about the whole range of business activities that they would do if they’d come through a broader- based profession.

David Isherwood: And that’s probably not just the accounting profession. I think in the UK the accounting profession is one of the larger employers of undergraduates, and so if you consider the impact on that body of people, if it’s fundamentally changing that layer under the new auditor then that needs thinking through.

Arvind Hickman: do you think by its very nature it might also change the role of the auditor? Because if you have sole audit firms, their function might be slightly more targeted towards people in that broader revenue inspection role rather than what they currently do.

Sue Almond: I’m not convinced. I think the danger is they become too narrow and you lose some of that broader vision you get through being in a multi-disciplinary practice.

David Isherwood: And I think we need to look fairly hard to find a role that the auditor can take on and where the auditor’s going to be 10 years from now, 20 years from now. I think that question is a whole bigger question which deserves merit in its own right. It’s not just a by-product of some audit-only firm.

Patrick de Cambourg: You’re unable to deliver a proper audit if you don’t have the tax specialists. I’m not talking about the guys who are ticking the boxes and returns, I’m talking about the guys that have the advisory mentality, that can understand what’s wrong, what’s right; without actuaries, without com- puter specialists, IT specialists. Also, can you audit a bank without hav- ing the specialists for the very sophisticated markets? I doubt any firm here would be in a position to maintain teams in these areas and specialism’s without these people being able to nurture specialism outside the audit field. Maybe you can go to outside subcontrac-

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs

tors, but that’s not the right solution I think in terms of responsibility.

Nigel Bostock: I would agree exactly with Patrick’s point. One of the biggest challeng- es in the audit profession at the moment in implementing the regulations is the need for us to exercise more scepticism. It’s not always easy to demonstrate how you do that but a lot of audit focus is around estimates and judgments. Going forward there’s probably a greater need for the profession and audit firms to have an even wider breadth of skills and expertise that they can draw upon. And actu- ally, it breeds skills, experience, sharing and knowledge, but most importantly, the profes- sion is an extremely huge breeding ground for a lot of financial directors and business leaders of the future. It doesn’t just stop at the profession, but actually gives breadth of experience which people then take on beyond the profession into industry. All that side of the model in terms of how the profession works is not broken, but there is a risk from these regula- tions that there could be an unintended con- sequence.

Patrick de Cambourg: You need a highly sophisticated and more complex environ- ment.

Arvind Hickman: moving onto re-tendering; do you support the concept?

James Mendelssohn: I think the answer to the question is yes but with a very big “but”.

I think Ed used the expression “there is no

silver bullet”, and that’s absolutely the case.

I think re-tendering is a good idea but the

whole process has to be transparent. For example, the new rules might, in certain cir- cumstances, require re-tenders to involve a non-Big Four firm. If there is a re-tender involving a non-Big Four firm, we need to see the tenders, the pub- lic needs to see the tenders and then the deci- sion needs to be based on objective criteria. If the most competitively priced bid hap- pens to come from a non-Big Four firm and the client decides not to go for that bid, then stakeholders need to know why. There needs to be that really sceptical, enquiring mind as to why that should happen. So I think the answer is undoubtedly yes. But the whole process has to change; there is not a single panacea. The best change hap- pens through managed evolution. We need a combination of regulation, transparency and good strong corporate governance. We need to anticipate where the profession should be in five years time and work care-

fully to achieve that because the best change happens by a series of smaller steps than one giant leap.

Arvind Hickman: what about in terms of the costs of re-tendering and how that might actually affect various firms? tracy, what’s your experience of the re-tendering cost process and do you believe there’s a need to improve the transparency and invite new entrants to the table?

Tracy Gordon: I think we do invest a lot in the tendering process and if you have to re- tender at regular intervals, clearly that’s going to increase costs. If we were doing it so more often we’d get more efficient at it, but you’ve still got to put a huge amount of investment into getting to know the company you’re ten- dering for if you’re new to the client. It is hugely expensive to invest real time and do the job properly. In terms of trans- parency, yes, I agree the audit committee’s decision at the end of the day should be very transparent and explained and followed up by real challenge from the shareholders.

James Mendelssohn: We have to get away from this market concentration and there’s

got to be sufficient transparency to encour- age the mid-tier to really invest in the tender- ing process; because it’s a huge investment. Clearly, there’s no obligation to tender whether you’re Big Four or whether you’re not and to a certain extent that will open up the market as well because there will be

a time when firms say “No, we don’t want

to tender” due to potential conflicts, or just because of the time and resource.

“Clearly the perception is it’s just the wrong thing to do. It will be interesting if this were to come through”



I think the worry for the mid-tier is there is

a significant cost to tendering and the whole

process can become a cosy club if either the client decides to use the process as a way of reducing the price with the incumbent audi- tor, or indeed the tendering process becomes something of a cartel with audits simply mov- ing from one of the Big Four to another. This is why I think we need a combina- tion of regulation and transparency. We need there to be regulation requiring the inclusion of non-Big Four firms in certain (but not all)

n eC AudIt ReFoRm pRoposALs

Mandatory retendering

Public-interest entities will be obliged to have an open and transparent tender pro- cedure when selecting a new auditor. The audit committee (of the audited entity) should be closely involved in the selec- tion procedure. EC said the audited entity will be free to invite any statutory auditors or audit firms to submit proposals for the provision of the statutory audit serv- ice on the condition that at least one of the invited auditors or firms is not one who received more than 15% of the total audit fees from large public-interest entities in the member state concerned.

EU audit passport

The Commission proposes the creation of a single market for statutory audits by introducing a European passport for the audit profession. To this end, the com- mission proposals will allow audit firms to provide services across the EU. <

audit tenders and we need there to be trans- parency in the review of the tendering proc- ess.

Ed Nussbaum: It’s not so much the proposal but what people think it is. The interesting part of the proposals is that the shareholders actually vote between the two recommenda- tions and management. It’s totally new to the whole auditor selec- tion process and nobody knows how it is going to pan out. I don’t know what the ramifications of that are, but I’m fascinated that some of the shareholders should actually vote between two firms. It does somehow feel that we’re in for a mixture of challenges, certainly we’ll have to make sure the shareholders will be put first and make sure management wants to be rec- ommending, but also gets votes.

Arvind Hickman: one of my questions was whether you thought that if it’s mandatory re-tendering every X amount of years then the system becomes open to abuse and clients will obviously want lower prices and lower fees, etc?

Patrick de Cambourg: But in fact, today, if you’re on an annual appointment basis, you are threatened as well, if I may. And on the cost side, also, if you increase the shareholder


Round tABLe: eC AudIt ReFoRm pRoposALs

The Accountant

4 rotation aspect, it’s an investment on how many years you can or cannot advertise it from a pure evaluation aspect. So it has to be an investment and a return.

John Capper: One of the things that I’m not sure has been thought through in the propos- als are some of the lengths of periods. For example, if it was a nine year appointment because you’ve got the joint audit taking place in your group and the partner has to

rotate after seven years, that’s very odd for the new partner to only be in place for two years. The reality for the proposed tendering is it will be done at the mandatory rotation period at six years. If the various proposed periods fitted together better there maybe tendering each five years and rotation after ten years, which could give scope for a 15 or

20 year extended mandatory rotation if the

large PIE has got the incentives in place for opening up the market.

Partner rotation within the firm can then be factored in as well. If there were 15 or

20 years on mandatory rotation, then you

do need one or two partner rotations some- time within that period to follow the global


Arvind Hickman: Going back to the period of partner rotation to re-tendering rotation is there a perfect amount of time do you think?

John Capper: I just don’t think it’s sensible to have the short period currently proposed. It might be easier to have two more equal periods of partner involvement rather than having seven and a two.

Andrew Nicholl: I think there’s another issue for all firms – potentially becoming extreme for the mid-tier – if you’re successful at get- ting a substantial number of listed clients… because of the concentration of timing of work on those particular clients, you’ll be faced with having to staff up to deal with that, and then trying to work out what you are going to do with those staff members when there isn’t the demand for listed com- pany work. The majority of listed entities tend to have December year ends, certainly in the UK. That drives when the audit work is being done and where the audit effort is being done and then potentially you’re going to have under-utilised staff at other times of the year.

Paul Ginman: There is no perfect period for rotation. It is easy to agree at either extreme of a short or long period but beyond that there is no consensus. However, if there is an increase in the restrictions on the provision of non-audit services, it will be harder to find firms in a position to tender.

Patrick de Cambourg: Except that the serv- ices will go elsewhere, as Ed was mentioning. It might be then the rotation of non-audit services.

David Isherwood: This becomes a particular problem with training your junior staff. It is not politically correct. It’s not the partners, the senior managers who there’s always a shortage of; it’s the people you’re trying to train where they’ll be quite difficult to deploy.

to train where they’ll be quite difficult to deploy. Weighing up the pros and cons: EGIAN

Weighing up the pros and cons: EGIAN secretary Andrew Nicholl



February 2012

n eC AudIt ReFoRm pRoposAL

Banning ‘Big Four-only’ clauses

The EC said that in order to facilitate an objective choice of an audit provider, con- tractual clauses limiting audit firm choice should be prohibited, the transparency on audit quality and on audit firms should be increased and an audit quality certifi- cation should be established. <

Arvind Hickman: the eu audit passport proposal seems to be a sensible proposal in theory, but in practice how can it become applied across so many countries with different jurisdictions?

Paul Ginman: The concept of a passport seems to assume that, in general, countries are homogenous and you can walk into any other European country and do an audit in exactly the same way and understand the business structures and the regulations of the enterprise as if you were doing an audit in your home country. Audit firms can operate across the EU by simply notifying the local authorities, but only on a so called temporary or occasional basis. If they want to establish a permanent presence an aptitude test will still be required. I’m not sure what this means with the pro- posals as they’re written. To make it work properly across Europe you need a lot more consistency. For example, compliance with tax law is an important part of auditing and yet even with the directives we have, there’s so much difference from country to country. How are we going to be able to audit that without sufficient expertise in those local rules? I think it’s just a bit naïve to say you can walk into another country and sign an audit. Yes you may go in and say “Well, I’m the partner, I can rely on a local team” but does this manage the risk?

Patrick de Cambourg: Maybe there is a need for fine tuning, but nevertheless, it’s a very good move.

David Isherwood: I think the aspiration is a good thing that Europe aims for being able to audit a European company. I think there have got to be checks, bal- ances and procedures to maintain audit qual- ity and I don’t think anyone around this table yet knows enough about it, or have thought enough about it to know whether that’s actu- ally doable or not. But you’ve got to applaud the aspiration.

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs

John Capper: The only thing I’d add to that

is in some of the discussions leading up to the

proposals, it was said this provision would enable a small audit firm to go and do audits anywhere in Europe. And I think it’s probably much more likely to be the opposite; that the larger firms are going to find that much eas- ier to use an EU passport. I don’t even know whether it benefits the mid-tier at all. But to me, I don’t understand the attempt to involve very small audit practitioners in the PIE market. It was the same with joint

audit, there was the idea that you could have

a very small audit practitioner who could be

the joint auditor of some of the largest listed

PIEs in Europe and that’s just nonsense.

Arvind Hickman: In terms of the audit report proposal, I’m a little bit unclear about how it will work and how people like Barnier are to determine what should be in an audit report. sue, can you shed some light?

Sue Almond: I guess there are some sensible things underpinning some of the objectives; there is obviously a need for auditors to say more about what they do, etc.

We touched earlier on whether legislation

is the right place for certain things and I think

this is very much an area where the format of the audit report just shouldn’t be written into law, particularly if you’re taking selected highlights from standards and dropping it in bits of legislation. I think the very strong preference would be to take an awful lot of that detail away, pref- erably to leave it to the International Audit- ing and Assurance Standards Board to set the standards for audit reports globally, to have a broader debate with people like investors to really understand what it is that’s wanted out of the content of the audit report. It seems to me that there are one or two things that are trying to address some of the things investors say about understanding risks and things, but they’re not captured correctly. They’re talking about audit risks; they’re not talking about risks to the business. Then

there are other things, I’ve no idea where the call came from to have the names of the audit team in the audit report or whatever and I’m not sure what it gains because you’re pro- viding quantity not quality of information to people.

Arvind Hickman: there’s a limit to the word count?

Sue Almond: Yes, 10,000 words.

a limit to the word count? Sue Almond: Yes, 10,000 words. “…the danger is they become

“…the danger is they become too narrow and you lose some of that broader vision you get through being in a multi-disciplinary practice”


is insufficient and doesn’t provide enough quality information for investors to make an informed decision?

Sue Almond: I think there’s an awful lot coming through from a lot of different par- ties about the fact the audit report needs to be more descriptive about what’s gone on in the company in the audit, and that you shouldn’t be able to sit there with a series of audit reports and not be able to tell which business they came out of. So yes, I think there’s definitely scope for improvement.

Patrick de Cambourg: John mentioned that we are moving into an area, into a world where judgment is very important and more important every day. So, I think that some- how the reporting should convey the sub- stance, the judgment of areas addressed, and how they’ve been addressed. That’s a very general statement, but I think at the moment, I don’t know if that happens in the UK, in France we read our reports in general meetings… We moved in a number of instances where we decided to say we don’t read it, we’re going to summarise, which is a bit dangerous. But in order to create the bond between the shareholders and the audit, because if you don’t do that then it becomes a formal exer- cise and if we have a formal exercise, then the cost is going to keep on going up.

Arvind Hickman: moving on to banning restriction on covenants or the Big Four

banning these or outlawing them in contracts or in other ways is actually going to have a material effect, or do you think it’s more of a perception thing? For example, I could write something down in a contract, but that’s not necessarily going to mean it’s my behaviour; there might be other ways for banks to get the message across.

Ed Nussbaum: Well, I think it’s real. We cer- tainly have experience of situations where banks have put these clauses in and we have lost an audit as a result of that. We actually had some success in convincing banks to list Grant Thornton as one of the firms they’re required to use. So I guess there’s success with it as well. But clearly, the perception is it’s just the wrong thing to do. It will be inter- esting if this were to come through.

Tracy Gordon: We support getting rid of it.

Arvind Hickman: do you think it will stop that type of behaviour from happening?

Ed Nussbaum: In itself, it’s not going to change concentration, but I think there are situations – very few situations – where we from the auditor company respond and finance with some of our bank clients and one of the bankers has inserted this clause and then we have to get rid of the audit. I don’t think the banker even gave it any thought. That day we withdrew millions of dollars worth of work. So I suspect in the mind… nobody even gave it any thought; it was a matter of put this clause in, and somebody discovers that six months or a year later all of a sudden you have to switch auditors. It is a very real problem. I don’t think it will totally change the profession in any shape or form, but it will certainly positively impact it… I think from a profession stand- point and a perception standpoint the banks are not pushing any mid-tier audit firm and the regulators are supporting this and it is supported by all the Big Four firms.

Sue Almond: I think this is one of the areas where certainly we’re going to be pushing for the drafting to be improved, because there is a real disconnect between what’s said in the explanation – which says they’re prohib- ited, which is what you just said – versus the actual draft legislation, which talks about it being null and void, which means you can have it. You can quite imagine a small business who has just gone through months of pain in getting financing, then seeing a clause that says you’ve got to have this firm as auditor.

Arvind Hickman: do you agree with the

underlying idea the report in the current form clause as it’s sometimes known – do you think It’s going to take an awful lot of, firstly, legal4

Round tABLe: eC AudIt ReFoRm pRoposALs

The Accountant

4 knowledge and secondly, gumption to get up and challenge that. So I think there’s still a way to go in terms of making the drafting effective, but it’s certainly the right way to go.

John Capper: The only thing I would add, is it’s not just in loan arrangements. These conversations take place when people go to float on the public stock markets as well even though the provisions may not end up in the final legal documentation. It can be at the time of the early conversation when the auditors are chosen, and then once they’re in place that it’s gone from the legal documents. So, it’s across a range of contractual arrange- ments or circumstances where you would not want there to be restrictive arrangements in place.

Nigel Bostock: I was going to say probably from the mid-tier perspective as it will cor- rectly create greater choice. Such clauses are uncompetitive and don’t need to be there because the Big Four should be engaged, where appropriate, based on their skills and capabilities relative to the circumstances and on merit but not because a clause indicates the business cannot select any other firm. How- ever, I don’t think you should just look at the Big Four clause in isolation. When you consider this together with the prohibition on non-audit services it starts to lead to a measure of balanced reforms, which encourage audit committees and management to actually look beyond a smaller number of larger firms for the provision of various serv- ices. Not just audit, which actually allows mid-

serv- ices. Not just audit, which actually allows mid- Arvind Hickman, editor of ‘International Accounting

Arvind Hickman, editor of ‘International Accounting Bulletin’



February 2012

tier firms to demonstrate their capabilities in certain areas. This should further lead to increased demand for various services from mid-tier firms and increased competition as it widens the horizon of firms considered by businesses and institutional buyers, not just for audit but for all services.

Arvind Hickman: Are there any other proposals, good or bad, that anyone would like to comment on?

Sue Almond: I think there are some issues in the regulatory area, the regulation not just of public interest audit firms but for all audit firms that are removing a lot of the powers of the public interest regulator, which cer- tainly is quite contrary to what people like the Financial Reporting Council in the UK are looking to do. And I’m not sure it’s going to enhance the quality of the regulation.

sure it’s going to enhance the quality of the regulation. Ana Gyorkos, reporter, ‘The Accountant’ Arvind

Ana Gyorkos, reporter, ‘The Accountant’

Arvind Hickman: my final questions are where to from here? And what does the future hold? obviously there’s a lot of lobbying going on from various different sources. we’ve got to a stage now where the proposals are part of this and there will be a lot of lobbying going on to various politicians in europe. what are

more input into the practicalities of how it’s intended to work. Get the wording cleaned up so it becomes much clearer and dealing with issues like the

your thoughts on what will happen from here: different year limits which doesn’t work. It’s

fairly apparent the drafting has been done by different teams and it’s not joined up. A number of those aspects need to be done. Hopefully we’ll manage to achieve that because maybe we’ll be seen as being less politically motivated than the Big Four; maybe our input will be more accepted. At EGIAN we will be getting together next month – people who are involved in the audit side of life more – to discuss some of the aspects and we will be doing our best.

what the different networks are doing, what predictions do you have at this stage, how optimistic are you of seeing regulations that you would be happy with?

Andrew Nicholl: That’s a really big question. I think at the moment the lobbying, etc, has delivered some benefits to the mid-tier by the fact we now have greater visibility. Although it’s been interesting there’s been some feed- back, from the politicians, as to why the mid-tier can’t speak with one voice like the Big Four do. So it almost seems quite per- verse they don’t like having a monolithic Big Four there, but they want the mid-tier to be equally monolithic. I think they need to get their minds round that and make us even more accepting that the mid-tier will have different views on dif- ferent aspects. There may be some items in the propos- als where we all agree and then there will be others where we have, for hopefully good commercial reasons, slightly different views. We’re going to see some very active lobbying in the near term. The mid-tier has been picked out as being the second half – they all say that it’s a game of two halves. I think that will be to deal with some of the more political issues, the propos- als to re-instate joint audit has been talked about, but also hopefully to try and get some

Arvind Hickman: why doesn’t the mid-tier get together like the Big Four does? wouldn’t that be more effective than having many different voices?

Andrew Nicholl: The mid-tier is made up of networks of independent firms. You have issues where component firms may have a dif- ferent commercial attitude. My network has a few component firms within it who will not do listed company work because they don’t like the costs of the risk profile of listed company work; the exposure to vicarious liability. So, people make commercial decisions. Now that can have an effect on your global reach. Talking to my equivalents at some of the other networks, most of those have got individual component firms that have differ- ent attitudes and it’s quite difficult to impose a single commercial model.

The Accountant

Round tABLe: eC AudIt ReFoRm pRoposALs

This may be an indication of, possibly, the different brand strength, who knows. But the reality is that not every firm within each of their networks conforms to a single template and as a consequence, they have their own rules – even leaving aside translation differ- ences.

Arvind Hickman: Has anyone got any thoughts about that?

Ed Nussbaum: I think how many firms here at the meeting, but at least there is a voice push- ing through that organisation, but we have 21 firms. It’s much harder to get 20 foreign firms to agree on anything, or a small number. I think there are a lot of common themes and comments coming around, but I don’t think that’s really an issue. I do think we’ll see some positive change. We’re already seeing the benefits, just the higher visibility provides some positive change if nothing else; the beginning or the eleva- tion of the covenants. And I think there’ll be other things in here that some of us and some around this table won’t like. But all in all, the process is an open process. Somebody earlier said quality of life has been changed through market forces. In this situation, market forces are unknown and additional regulation is needed. I’m optimis- tic, although I am concerned about the confu- sion with some of the wording and making sure that the time laws and rules are easy to understand.

Arvind Hickman: tracy, what are your thoughts on what happens next re the eC Green paper?

Tracy Gordon: Well, I just think there’s such a huge way to go yet. We’re trying in terms of the lobbying, we have to be thinking ahead to the next Presidency even, and the changes that that might bring about. I think at the moment the lobbying has to focus at high level issues, and when we possibly get fur- ther on where those are going, that’s when we have to get into the detail. There’s so much detail that needs serious adjustment, because of phrasing, the words that are used, the unintended consequences of putting it in the regulation as opposed to a directive. There’s just such a long way to go.

Arvind Hickman: does anyone else have any thoughts about where this debate will head?

Patrick de Cambourg: I don’t know where it will be heading, but I think it would be in the interest of the profession, the covenants, the largest ones, the mid-size ones, not to shoot at the wrong target again. Sorry to say that,

n eC AudIt ReFoRm pRoposAL

UK Lords sceptical over EC’s response on audit proposals

A European Commissioners (EC) response

to a House of Lords (HoL) committee inquest on audit reform proposals has been met with scepticism. Lord Lawson told the The Accountant certain EC proposals being defended by EC internal markets director general Jonathan Faull were “inadequate and present severe weaknesses”. The HoL committee was questioning Faull over the EC audit reform proposals in a follow up to its own report on the state of affairs in the UK audit market, which is cur- rently being investigated by the UK Compe- tition Commission. When asked by the Lords whether he expected any or all of the proposals to improve mid-market, market share, Faull responded saying he hoped once it becomes legislation then it will. “The proposals such as mandatory ten- dering and rotation, etc, all point in that direction and would enable that,” Faull

said. “What we have tried to do is for small-

er firms to get experience of auditing larger

companies and we hope the incentives cre- ated will be sufficient. However, it is not our role to change market structure.” On a number of the more contentious proposals, such as mandatory audit firm rotation every six years, Faull was asked if

it could lead to a company taking on less

good auditors, in which he replied, he did “not think it would”. “We think such rotation is necessary due

to the oligopoly nature of the market and

the negative effect of high concentration on

audit quality,” he explained. On joint audits and why they were

ditched, Faull said the EC took a view that

it was “not appropriate to propose it”. “We have the four-eyes principle and

based on the experience of some member states, it showed it might not be appropri- ate. Unsurprisingly, the Big Four did not like it, but we have heard the same from other players as well. The level of support for it at Green Paper stage was very limited,” he explained. Lawson, a former UK Chancellor, said Faull “did not answer a single question” and was disappointed that the EC propos- als did not contain a statutory obligation for regulators and bank auditors to improve communication lines. Faull said this was because “we found that the dialogue between auditor and regu- lator should be left to their discretion”. Lawson’s frosty feedback was shared by Lord Smith of Clifton who said Faull’s answers “are those you would expect from

a Eurocrat”. When asked whether he perceived a con- flict between UK audit market’s needs and the EU proposals, Smith said “at this time, European consensus is difficult to find any- way, because of the eurozone troubles”. Smith said the eurozone crisis has impact- ed on the audit reform discussion and “audit proposals are being watered down because the EU has now other priorities, although the proposals are linked [to the financial crisis]”.

Sara Perria

but I think a rebalanced package would be in the interest of all players. That may be a wish rather than a feeling about where it should be going, or where it should be going rather than where it will be heading; that I don’t know. And the public interest has to be taken into account as well, because we are not the only ones to decide.

Jon Lisby: There would appear to be a real- istic chance that Europe with so much hap- pening at present, chooses to put all of these proposals on the back burner and defer any decisions at this stage.

Patrick de Cambourg: I don’t think so.

Sue Almond: I think something we need to be very conscious of is this is an enormous

package of measures, and we’ve spent the vast majority of today really only talking

about three or four articles out of a big pack- age. I think the thing we all need to watch as

a profession is that things don’t get sneaked

through because attention has been diverted onto market structure things; there are much bigger things in there as well that need to be concentrated on.

Andrew Nicholl: I’ve got a hope for the future. One of the big influences on the market is if you want change, it’s the consumer of the goods or the services – here the audit services

– that causes change to happen. And I think if

the focus was moved more towards corporate governance, corporate code and moving the consumer – the demand side – of the equation of this, it would work far better. <

CountRY suRVeY: FRAnCe

The Accountant

CountRY suRVeY: FRAnCe The Accountant A united front

A united front

AccountantsandauditorsinFranceareunitingtocontestauditreformsintheECproposals.Formembers oftheCNCCandCSOEC,therecommendationswouldonlyservetoundermineandfundamentallylowerthe country’sexistingstandardsofauditing.The Accountantreports

T he French profession has joined together by fiercely lobbying the European Commission (EC) in the past year over the proposed reforms

to statutory audit in its Green Paper and final recommendations, especially on the issue of exemptions for small- and medium- sized enterprises. If the measures do go through unchanged, they could have explosive consequences. “All the French profession is concerned by the proposals for audit,” Gilles Vermer- en, a co-chair of the Délégation Internation- ale pour l’Audit et la Comptabilité (DIPAC), the joint directorate for International affairs of the two French Institutes, says.

n VItAL stAts

French accounting profession 2012

professional density: 0.05% Gdp/per prof:€54,165 Gender split: 20%F/80%M

Notes:Professionaldensity=professionalspercapitaand GDP/prof=GDPperprofessional.Source:The Accountant



February 2012

The profession in France is unique within the European Union as it is government- supervised and audit and accounting are treated as distinct legal entities through two professional bodies, the Compagnie Nation- ale des Commissairesaux Comptes (CNCC) and the Conseil Supérieur de l’Ordre des Experts Comptables (CSOEC). In practical terms, there could be a sig- nificant loss of business for auditors (mem- bers of the CNCC) and it is not clear how exemption or ‘simplification’ can adequate- ly be seen as enhancing the chart of accounts for companies and public bodies such as national and local municipal funds. “There is a political aspect to this,” Ver- meren comments. “The politicians want to give some help to small businesses [by reducing administrative costs when produc- ing accounts]. They want this, security and liability, but it’s not possible to have both.” For Vermeren, the current set up in France – whereby the national accountancy body, the CSOEC, falls under the jurisdiction of the Ministry of Finance, while the national auditing body, the CNCC, reports to the Ministry of Justice – means that the ques- tions of auditor independence addressed in

n FRAnCe

Gender split CnCC and CsoeC, 2012

Female members 20% Malemembers80%

Source:The Accountant

the Green Paper are not as relevant as in other countries. Moreover, the system of using joint auditors has long been used in France for public companies and businesses which produce consolidated accounts. The laser-eyed focus of the EC on the market share of the Big Four and the per- ennial concerns about providing non-audit

The Accountant

CountRY suRVeY: FRAnCe

services to audit clients is arguably ignor- ing the country’s constitutional distinction between accountant and auditor. “What we regret in the Green Paper is that it is a way to oppose the big account- ancy firms by [encouraging] the small- and medium- accountancy firms. But for us in France it is the same profession, where you are either des Commissairesaux Comptes or Conseil Supérieur de l’Ordre des Experts Comptables.” In other words, unlike in other countries in the EU, there is no ambiguity or ambiv- alence about the role and agenda of the accountant. That said, Vermeren accepts that improvements can be made and the priority should always be to enhance the overall quality of what is being provided to clients. “We understand that we have to adapt our service to smaller entities and we have proposed a standard for auditing small- and medium-sized companies. We have to adapt to the demands of the European Commis- sion but we do want to keep the statutory audit for small companies – we believe we can do this for a reasonable fee so that it is not a financial burden and provides security for the accounts.”

spreading the word

It is clear the auditing profession needs to be better at public relations and marketing, doing a more vociferous and proactive job of explaining its role. “There is a degree of responsibility for the situation we are in as we haven’t real- ly explained what we do. A client gets an invoice and doesn’t fully appreciate that they are now certified; this is why it is necessary to have viable accounts,” Vermeren says. As ever, the best way to improve the audit is to spend time with clients as opposed to

n mutuAL LInKs: 2012

Regional/international affiliations & reciprocal agreements










Source:The Accountant

on reams of paperwork and bureaucracy. In terms of communicating the value provid- ed by statutory auditors, Vermeren argues that all you have to do is look at the finan- cial chaos in some other countries, such as Greece, where the checks and balances for SMEs are of questionable quality and con- sistency. “It is a good time to explain what the pro- fession provides in the field of checks and controls,” he says. “Today we can all see the consequences if taxes are not paid and respected.” As the final recommendations from Michel Barnier, the European Commission- er for Internal Markets and Services, were passed on to the EU Council and Parliament last year, it looks as though he has paid little attention to the statements put forward by the Big Four, mid-tier and the institutes in France, but the profession remains hopeful their lobbying will help with this next stage of the consultation process. Going forward, Vermeren says that some stability over regulatory reform would be appreciated as the continuing uncertainty is no good for members of the CNCC and CSOEC alike:

“The problem is there is always reform

in progress. We would like to have stabil- ity so we could organise ourselves with a battery of laws that will not change all the time. We would like the European Parlia- ment to understand that they have to choose between simplification and… good, liable accounts.”

new frontiers

Although the difference in responsibilities for members of the two institutes are clearly defined, there is also – rather confusingly – some overlap too as, according to DIPAC, about 85% of registered experts-compta- bles are also auditors and all auditors are accountants. The skills and training may be comple- mentary but the activities are separated to mark out the absolute independence of the statutory auditor by making sure that he or she cannot provide an auditing client with accountants’ services like advice on tax, pay roll, personnel management, social security, pensions and corporate law. In addition to this, a statutory auditor may not act simultaneously as a chartered accountant for a given client and firms are restricted from providing non-audit services to audit clients.

n FRAnCe

survey of accounting institutes: 2012































MEMBErs AT worK:







Notes:G%=growthrate;Source:The Accountant

n FRAnCe

membership 2007-2011

The Accountant n FRAnCe membership 2007-2011 Source: The Accountant 4 F

The Accountant n FRAnCe membership 2007-2011 Source: The Accountant 4 F

The Accountant n FRAnCe membership 2007-2011 Source: The Accountant 4 F

Source:The Accountant


CountRY suRVeY: FRAnCe

The Accountant

4 There are training courses which crosso- ver too for members of both institutes, nota- bly around international accounting stand- ards but, where other institutes in Europe may be considering mergers to improve efficiency, the constitutional framework in France keeps each institute and their core specialisms apart. “It is possible to merge some technical aspects but you cannot bring the two sides of the profession together as they are com- pletely different,” Vermeren notes. As was reported last year by The Account- ant, the focus for the CSEOC has continued to be on expanding the skills of its members around advisory services. Its membership has grown by 1% to 19,257 in the past year, while there has been a decline in numbers at the CNCC by 2% from 14,280 to 14,050 in 2012, which may be seen as a reflection of wider concerns about the role of the auditor in France given the stance of the EC. Vermeren states that there are actually many positives for the entire profession in France given the quantity of work that will be generated by the extra taxation proposed by President Nicolas Sarkozy, and the need for assurance and risk management advice at a time of increased economic volatility. “Clients are asking about the consequenc- es of changing legislation and there is a real need for clients to be advised. We have the work and the people to do it,” Vermeren says, who adds that there is an issue that many firms around Europe would recognise around fee pressure. “We have a lot of work – the problem [is] to turn this work into money.” Of course, the champagne is very much on ice as the profession waits to see if its lobbying has been heeded in Brussels. For Vermeren, the levels of quality and inde- pendence as described in the Green Paper are, by and large, already apparent in France with the members of the two institutes, fall- ing under the jurisdiction of the two minis- tries, not to mention the oversight provided by the Haut Conseil des Commissariat aux Comptes (High Council for Statutory Audit- ing), which was set up in 2003.

n FRAnCe

Accounting institutes: who’s who

n FRAnCe

n FRAnCe EC audit reform opposition Joint audits Large public-interest entities would be required to appoint

EC audit reform opposition

Joint audits

Large public-interest entities would be required to appoint more than one audit firm to carry out their statutory audits with one of the firms being outside of the largest audit firms in a country. Corpo- rates can only appoint two large firms when an audit requires in depth knowl- edge of a field of activity and or geo- graphical coverage.

France’s verdict: Already a system used for public companies and businesses which produce consolidated accounts in France so not an issue.

Banning of certain non-audit services

Prohibition from providing some non- audit services to their audit clients if non- audit fees exceed 10% of audit fees. Large audit firms will be obliged to separate audit activities from non-audit activities in order to avoid all risks of conflict of interest, thus creating audit-only firms.

France’s verdict: Thinks the proposal is bias against large accounting firms and ignores the country’s constitutional dis- tinction between accountant and audi- tor.

The bottom line is that the profession believes that the Green Paper, aside from causing basic constitutional challenges, would undermine the audit in France by lowering existing standards. “The problem is the incompatibility between good financial assurance on an account and over simplification,” Vermer- en says. “The audit is what we fight for in France.” It remains to be seen whether the govern- ment in the EU agrees. “We have a lot of work – the problem [is] to turn this work into money.” <


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February 2012

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