Category Archives: EU

September 14, 2012 · 3:41 pm

Accountancy at the heart of global competitiveness

The World Economic Forum (the organisers of Davos) has issued its latest Global Competitiveness Report. This is a fascinating insight into the health of economies beyond simply GDP, and the largest study of its kind. You can read the full report here.

Most interesting are the insights into productivity and prosperity, and how they differ between nations.

The challenge facing most policymakers is navigating the short term turmoil while trying to establish the fundamentals that underpin economic growth and development for the longer term.

While policymakers around the world remain concerned about high unemployment and the social conditions in their countries, the key call to action by the WEF is for countries to focus on raising productivity.

The report adds…

“Sustained structural reforms aimed at enhancing competitiveness will be necessary for countries to stabilize economic growth and ensure the rising prosperity of their populations going into the future. Competitive economies drive productivity enhancements that support high incomes by ensuring that the mechanisms enabling solid economic performance are in place.”

The WEF defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country.

The WEF concludes by explaining the 12-pillars of competitiveness – the structural economic foundations for growth. You can read them beginning on page 2 of the report. The first of the 12-pillars is the legal and administrative framework which underpins the financial system.

My eye was drawn immediately to this quote:

“The recent global financial crisis, along with numerous corporate scandals, have highlighted the relevance of accounting and reporting standards and transparency for preventing fraud and mismanagement, ensuring good governance, and maintaining investor and consumer confidence. An economy is well served by businesses that are run honestly, where managers abide by strong ethical practices in their dealings with the government, other firms, and the public at large. Private-sector transparency is indispensable to business, and can be brought about through the use of standards as well as auditing and accounting practices that ensure access to information in a timely manner.”

Clearly we have a tremendous responsibility as an industry and we need to continually adapt and evolve our practices to meet the demands of a complex economic environment.

RSM’s work to support the EU commission in its proposed reform of the audit market is just this. We are at the cutting edge of creating a fairer, more balanced and more competitive industry for the benefit of companies, investors and economies alike. You can read more here.

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May 31, 2012 · 4:23 pm

EU Audit Market proposals: “No change is not an option”

Yesterday, I and the CEOs of Grant Thornton, BDO, Mazars, and Rödl & Partners, along with the CEO of EGIAN (European Group of International Accounting Networks) met with MEPs in Brussels to discuss mid-tier accountancy firm’s positions on EC audit proposals.

Back in October 2010, the EU launched a consultation to improve the audit market and to specifically address the dominance of the Big Four firms.

The EU Commission highlighted a number of weaknesses in the market including:

  • a lack of choice for audit clients resulting from high concentration levels;
  • systemic risk if one of the big firms were to fail;
  • possible conflicts of interest around the independence of auditors; and
  • doubts around the credibility and reliability of audited financial statements for banks and other public interest entities (PIEs).

Yesterday’s meetings were a welcome opportunity to discuss with MEPs that status quo in the EU audit market it not an option. In doing so we presented a balanced package of measures designed to effectively address the concentration within the audit market and thereby advance public interest:

  • Two or more audit firms should be involved in the audits of PIEs;
  • Although excessive audit firm tenure needs to be addressed, mandatory audit firm rotation alone will not achieve the desired objectives, especially if rotation is allowed to take place among the dominant firms;
  • We reject assertions that only the current dominant firms can provide audit services to PIEs. There are a number of additional global networks which have the global reach, consistent audit methodologies and audit quality to compete;
  • We support proposals to prohibit restrictive clauses in tendering and other documents that limit the choice of firms and we support measures resulting in greater audit committee and shareholder involvement in a fully transparent auditor appointment process.

In addition to the workshop with the MEPs, Bob Dohrer and I met with several other MEPs to discuss our position on the EC audit proposals. We will continue to ensure that our position is explained to EU policy makers, with particular focus on advancing the public interest, and greater diversity and transparency in the market.

The context is very much explained by this recent and fascinating BBC programme In Business examining the Big Four’s global domination of auditing and reporting on the measures being taken by Chinese Government and the EU Commission to open up the market to smaller firms. The programme is an insightful analysis of the current situation and very useful for anyone who wants to understand why it is both necessary and logical to reduce the current state of excessive market concentration.

We believe change needs to happen. The presenter, Peter Day, makes many points to support this position:

“Preserving the status quo may be dangerous when it might put at risk the credibility of accounts, the building blocks of the continued health of capitalist public companies.

“And that is where the arcane matter of audit practice becomes a matter of great public interest, and why the current rash of inquiries into accounting and auditing is so important.

“As the financial crisis has shown, we still need to understand far more about how companies are running their businesses. The auditors ought to be able to help.”

I firmly believe that this is a once in a lifetime opportunity. We will keep fighting hard to ensure this window of opportunity does not close before we affect meaningful change.

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April 18, 2012 · 2:19 pm

Guest post: Insights from an International Tax Advisor…

Our latest guest post is courtesy of Mario van den Broek, Partner,
International Tax Services at RSM Niehe Lancée Kooij in the Netherlands.
Mario is one of the most senior tax professionals in our industry, and I am
delighted to welcome him to the RSM World blog…

International tax structuring has undergone significant changes. Although
the principles have not really changed, the implementation of tax
structures indeed has. Whereas “ in the old days”, it was quite easy to put
together boxes to find the most efficient structure for our clients,
nowadays it is crucial to not only consider the substance of a structure
from a tax perspective but also whether or not it is still worth it to a
company to actually implement a supposedly efficient structure. In
addition, we regularly come across companies that are left with advice on a
structure, and even with the structure itself, but without any proper idea
of how the benefits of the structure should be achieved and maintained.

That makes the role of a tax advisor only a more interesting one. It is
important to stay on top of the most recent international tax developments,
but also it is important to be able to be a sparring partner to a global
operating company and form an opinion on different kinds of taxes
(corporate tax, wage taxes, VAT) and elements (transfer pricing). In
addition, it is crucial to act as a coordinator between the different
countries where a company has operations. Our global operating clients need
to focus on doing business but also have to realize that remaining in
compliance with local tax regulations is a crucial element of doing
business across borders. Of course, quite often, that is not the first
matter of attention.

I could talk for hours about the different international tax developments
and by referring to items such as treaty protection, beneficial ownership,
tax control framework, exit taxation, transfer pricing, VAT reclaims and
cross border mergers, I have already started to do that. But let me stop
there as I would like to point out a different element that is key in
building and implementing tax structures. Know what it is? Teamwork. And
not teamwork created by collecting names of colleagues in a nice directory,
no, I am talking about real team work which is established by meeting with
each other, talking to each other face to face and meeting clients
together.

As part of my role as international tax adviser I spend a lot of time
working with my colleagues and although I try to stay up to speed with
technology by for instance using Dropbox to share documents with my foreign
colleagues on the new Ipad, or using Webex on my laptop to go through
presentations page by page, nothing beats face-to-face cooperation.

Therefore, it is very important to create space to develop this process. I
really make a point to travel, investing in time to both educate and learn
from my colleagues. Even though my base lies in the Netherlands, I work in
such a way with RSM partners all over the world. From New York to Sydney,
from Hong Kong to Denmark, our success and our ability to distinguish
ourselves from our competitors lies in the frequency of how often we meet
with each other and work with each other. It makes for a strong, people
focused network. That is what RSM is about.

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March 5, 2012 · 3:29 pm

Tougher measures needed to increase number of women on boards

Today Commissioner Reding of the European Union called for a period of consultation to address the serious issue of increasing the number of women in economic decision-making positions.

Calling for the need for faster progress, she pointed to a number of studies proving that diverse boards are linked to profitable enterprises. While the Commissioner is primarily aiming to achieve “credible self regulation” for companies, during the press conference she also commented that she was not opposed to a form of quotas due to their effectiveness.

I issued a statement in response:

“European companies must do better at leveraging, promoting and developing female talent. There is an alarming disparity between the number of women entering the workforce and those who eventually reach senior management positions.

Proposals for European-level legislation to set binding targets for Women on Boards is both welcome and essential. Equality within the boardroom is drastically lagging and realistic quotas are a necessary evil to kick-start the changes needed to create a correct level of diversity. This is going to be an extremely interesting 3-month consultation period, and I urge forward thinking business leaders and governments to fight for results-driven measures rather than codes of conduct and weak self regulation.

Companies with diverse boards are more sustainable, profitable enterprises. Measures to secure this diversity are of paramount importance to the economic health of Europe.”

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December 2, 2011 · 4:51 pm

Talking Points – Fallout of the Euro Crisis

Read the latest edition of RSM International’s Talking Points article, ‘Fallout of the Euro Crisis’ written by David Bartlett, RSM’s Economic Adviser.

David gives a concise summary of the current state of the economy in the Euro Zone – the picture is rather grave and is changing on an almost daily basis. The OECD report issued on 28.11.11 echoes the key points of the article. The next major event is the EU summit on 9 December, which will focus on the institutional reforms addressed in this article. David will provide further analysis following this summit.

This and previous Talking Points articles can be found on the RSM International website.

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November 30, 2011 · 5:52 pm

Response to EU reform proposals

Today we have responded to the eagerly awaited proposals on the reform of auditing in the EU. The draft legislation contains a raft of measures aimed at increasing competition and improving quality of the services provided. Read our response here.

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October 25, 2011 · 8:20 pm

A long term future for our profession

A long term future for our profession

You will have seen the draft proposals from the European Commission that became public at the end of September, which, if adopted, would produce major changes to our profession, particularly in the auditing of listed companies. These proposals were followed by a detailed impact assessment prepared by the Commission’s Staff. This impact assessment is particularly welcome because it provides helpful analysis of the pros and cons associated with the key proposals and an insight into the views of other stakeholders outside of the audit profession. RSM welcomes the recognition of the challenges in the audit market that these proposals seek to address and the ambition of the proposals under consideration.

We believe that no single measure will provide an effective solution to the significant challenges faced by the audit market. The Commission’s draft proposals and subsequent impact assessment recognise this by considering a broad bundle of measures. Fundamental to our evaluation is whether audit quality will be enhanced by these measures both now and in the long term. As a profession we need to set aside ego and arrogance, which has no place in this debate, and thoughtfully consider what is in the long term interests of the market and wider stakeholders.

Strong views have been expressed in support of the status quo or more limited change. This is to be expected. However, we believe that many of the Commission’s proposals, if effectively implemented, would lead to enhancements in audit quality and would encourage investment within the profession to meet the needs of larger listed clients. RSM International has invested globally in quality assurance programmes, international audit methodologies and staff development for many years. Larger, more focused investment will be encouraged and forthcoming if these proposals reduce market concentration and deliver new opportunities.

It is time to support change in our industry – to embrace change in practices and structures that have developed over many years. This is our chance to build a profession internationally that exceeds the expectations of the market and stakeholders for the long term. In order to do this, we need to thoughtfully consider the proposals before us. Commissioner Barnier was right to say that the status quo is not an option if we are to secure a long term future for our profession.

Despite the immense amount of time we and others have spent on considering these proposals, this process is still at a relatively early stage. We look forward to a fuller debate once the European Commission adopts its final proposals.

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July 14, 2011 · 3:39 pm

Contractual Clauses Favouring The Big Four Must Become Something of The Past

You may have seen a report in International Accounting Bulletin yesterday drawing attention to findings from Paul Gillis, a visiting professor of accounting at Peking University’s Guanghua School of Management.  

Paul discovered a Big Four only lending clause in a loan agreement issued by the state owned China Development Bank (CDB) to Harbin Electric as part of a privatisation proposal.

The smallprint of the loan facility agreement stated:

No Group Member may replace the Auditors, unless the new auditor to be appointed is any of Deloitte & Touche, PricewaterhouseCoopers, Ernst & Young and KPMG.

It is examples like this from a state owned bank in a major global market that demonstrate just how prevalent these clauses actually are.

The dangers of audit concentration are well documented.  The significant disruption that would occur in the event of one of the leading players leaving the market unexpectedly – a scenario that is all too familiar following the Enron scandal less than ten years ago – is clear, but moreover in the interests of a fair and open market, examples like this CDB clause need to be consigned to our profession’s history.

At a European level we are pleased to see scrutiny of such matters led by Commissioner Barnier and as you can see from my post earlier this year on Challenging Audit Market Dominance we are actively involved along with others of our peers in encouraging Europe’s legislators to recognise these issues and take action.

Any such legislation needs to prohibit contractual clauses and any other institutional bias in favour of the four dominant firms.  But it is clear this is not a problem confined to European borders, and authorities globally need to pay attention.

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March 25, 2011 · 2:29 pm

Less, not more, red tape

The amount of non-financial information in annual reports has grown substantially in the past ten years with questions being raised regarding the reliability of the information that companies include at the front of these reports. More recently, there have been calls to expand the information provided with further reporting on Corporate Social Responsibility (CSR), Sustainability and the risks faced by the business.

The benefits of increased communication of non-financial information are well-publicised with perhaps the most important being it satisfies user’s demand for more information about the non-financial performance of companies and their future prospects.

This increased demand for reliable information could see the financial auditor’s role expand to give greater assurance on the narrative content of annual reports, including assessing CSR reporting and whether the statements made reflect the policies and procedures adopted in practice by the entity.

All things being equal, increasing the responsibilities of the auditor to assess the reliability of these narrative disclosures will inevitably result in an increase in the cost of an audit. Moving into new non-financial areas will require the use of specialists in these fields and additional training for existing personnel. There is also a significant issue around the sharing of risk between the auditor and external specialists. Then there’s the classic bugbear of such changes adding another level of regulation at a time when businesses want less, not more, red tape.

Despite these challenges, we think it is important to flag reporting on non-financial information as a difficult, but increasingly important, area that requires more clarity around the auditor’s role. RSM International provided feedback to the European Commission regarding the non-financial reporting in its submission on the EC Green Paper: Audit Policy – Lessons from the Crisis and will continue to actively participate in this debate as it develops.

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February 10, 2011 · 3:04 pm

Challenging Audit Market Dominance

There is a growing consensus amongst government, regulators and the profession that, amongst other issues, something needs to be done about market concentration. I support measured change to allow RSM and other networks to thrive and compete for market share. It would be a mistake to enforce punitive measures against the largest firms, who have been successful over many years in developing services for large listed companies. However, the present level of market concentration reduces choice and in most major economies has created a degree of systemic risk to their capital markets. Ultimately it is about what is good for clients.

I was pleased to hear yesterday Commissioner Barnier confirm that the status quo is not an option. It is clear from the proposals announced that the EC is determined to actively tackle market concentration. This should be supported by our profession globally. Commissioner Barnier’s proposals in the areas of mandatory periodic competitive tendering, possible ceilings on market share and the introduction of joint audits do go beyond our response to the Green Paper. However, I welcome the debate within the profession as these proposals are considered in the context of what is in the public interest.

I am concerned about further restrictions on the provision of non-audit services and the introduction of mandatory rotation of auditors. The IFAC Code of Ethics already places appropriate restrictions on the provision of non-audit services and mandatory rotation of auditors may merely result in audits rotating between the largest firms. I would rather see international consistency in line with the IFAC Code of Ethics and transparency over the regular assessment by audit committees of audit appointments.

I would also like to see an end to lenders using restrictive covenants to limit choice to the largest firms and consideration be given to requiring regulatory approval for further acquisitions of established audit firms within the EU by the largest firms, in order to protect against further market concentration.

Audit networks like RSM International have the global reach, resources and technical capability, including common audit methodology, needed to serve larger listed companies.  Our member firms and similar networks should no longer have to fight what is essentially a two tier system, which significantly favours the largest firms. 

It is vital that the momentum for change that has been generated by the Green Paper consultation not be lost and RSM International will look to be actively involved in the further development of the EC proposals.

To read the full speech given by Commissioner Barnier please click here.

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