Future looking brighter for UK entrepreneurs

I was encouraged to see recent figures from StartUp Britain, reported by the FT, showing that 380,000 new businesses were started in the UK in the past 12 months, causing the total number of British companies to rise to a record 4.8 million.

This is a promising sign for the UK economy, particularly in the light of our own report published in August this year which found that the UK’s net new business creation in the five years to the end of 2011 was just 63,000 business, reflecting an annual compound growth rate of 0.7%, literally half the EU average over the same period.

The improvement is a sign of the country’s developing start-up culture. Nesta, the national foundation for innovation, reported that small to medium enterprises (SMEs) are now responsible for almost half of the UK’s new job creation. The coalition government continues to foster the growth of SMEs through tax breaks for investors and easier citizenship procedures for foreign entrepreneurs looking to kick-start their business in the UK.

The Enterprise Investment Scheme (EIS) is such an example, providing a series of tax breaks to investors looking to pledge between £500 and £150,000. Over £10bn of private funding has been put into EIS companies since the scheme’s inception and the last 12 months has seen a substantial growth in professionally managed EIS funds.

With the broader positive developments in the UK economy, the hope is that this growth momentum in the entrepreneurial side of the market will be sustained, translating into positive news for the jobs market and the economy overall.

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A radical solution to improve the effectiveness of audits

Guest blog from Bob Dohrer, RSM’s Global Leader for Quality and Risk

A fascinating and rather contentious article that I read this summer in the Wall Street Journal described an experiment in India that changed how auditors are paid, with the result that audits became more effective. Auditors, as we all know, are paid by the businesses they audit. This, the article suggests, means that auditors can be too cosy with their clients and possibly gives them an incentive to not challenge management when management might be misleading stakeholders. Now, while I believe that the vast majority of auditors demonstrate enormous professional integrity, the major accounting debacles of the early 2000s and the subprime mortgage and financial crises of the late 2000s indicate that the effectiveness of audits need to be improved.

The solution? According to researchers at the Massachusetts Institute of Technology it could be to pay auditors out of a central fund, randomly double check their work (who audits the auditors?) and link pay to effectiveness. I suspect it is the notion of a central fund, with all its statist associations, as much as their work being subject to random regulatory checks that will irk many auditors. Nevertheless, the results are illuminating, and should at least be considered.

The experiment in India took place in the industrial state of Gujarat and involves measuring and reporting factory pollution. Half the plants hired and paid auditors at the market rate; the other half were assigned auditors randomly, who were paid from a central fund and warned that there was a one-in-five chance that an independent inspector would check their work. The experiment was adjusted in the second year to include a bonus for auditors whose work corresponded closest with inspectors. The results are interesting. Overall, auditors in the experimental group were 80% less likely to report falsely that a plant was in compliance with air- and water-pollution rules than auditors in the business-as-usual group. What’s more, auditors who worked in both groups exhibited very different behaviours. Further, the plants audited by the experimental group significantly reduced their pollution. The full article can be found here.

This is a radical idea, and although many auditors will reflexively object to this kind of interference in the market, as a profession can we really say that the current arrangement is satisfactory? The profession needs to regain and enhance credibility, and we need to look at all the options on the table. Having auditors appointed to audits and paid from a central fund is one possibility and others, like efforts to enhance the autonomy and independence of company audit committees who hire auditors, should be explored.  My fear is that unless we come up with proposals ourselves, we could have a much less palatable solution imposed upon us.

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A world united in thought and action

12 September 2013, is RSM World Day – a day when the independent member firms of the RSM network unite in thought and action to spend the day focusing on the international network to which they belong.

As CEO of the network, my focus is on bringing together like minded firms from as many countries as possible who share in the belief that what makes RSM special is the way in which we work with, support and promote our teams, our communities and most importantly, our clients.

In an ever more globalised world, the unity of our worldwide membership is key to delivering on the needs of our vast and growing transnational client base – from large multinational corporates to smaller home-grown companies who have international needs and aspirations.

RSM World Day is designed to communicate RSM’s shared vision and values to each and every member of staff across all member firms, but with 32,500 staff in over 100 countries, all playing an integral part in our global network, that can be quite a challenge.  Our first ever RSM World Day came to life this time last year, and with it came the largest co-ordinated day of global community work and global advertising that RSM has ever seen. Our members embraced the initiative, made it their own and collectively our member firms won the Editors Special Achievement Award from International Accounting Bulletin commending us for ‘Global Initiative of the Year’.

So, we have a tough act to follow. I already know that there will be many inspirational and rewarding activities happening around the world in the name of RSM – from sustainability projects in New Zealand to 5km charity races around the cities of Mexico. The stories, pictures and videos will flood in over the next few weeks and I will share with you these wonderful stories in due course. The beneficiaries of RSM World Day are not just the staff who love celebrating RSM World Day itself, or the clients who benefit from the strength of our international team relationships, but the many people all around the world who are helped by the charities that our member firms have chosen to partner with this year.

RSM World Day will again make a big difference to many people on a global basis. 

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Bob Dohrer of RSM re-elected Chairman of Forum of Firms (FoF)

I would like to congratulate my colleague Bob Dohrer, Global Leader for Quality and Risk for RSM, who has been re-elected as Chairman of the Forum of Firms (FoF). Bob’s second term as Chair of the Forum will run for three years.

The FoF, of which RSM is an original full member, was established in 2002 and aims to promote international standards including quality control, auditing, ethics and independence and training standards, laid down by IFAC standard-setting bodies.

Being a member of the Forum is critical as RSM and our member firms continue to focus on promoting high quality standards of financial reporting and audits worldwide. And, as Bob pointed out at a panel discussion earlier this year and hosted by the International Accounting Bulletin, the organisational structure of networks has a direct bearing on audit quality. RSM has rigorous quality control standards that must be met by member firms, and we are keen to ensure the same level of rigour applies across the entire profession to the benefit of the public interest.

Recently, regulators and other stakeholders from around the world have called for a number of proposals aimed at increasing auditor independence, raising audit quality and enhancing auditor reporting. Bob cares passionately about standards, and is dedicated to improving audit quality. I know that with Bob as FoF Chairman, the objective of improving and ensuring consistent standards will continue to advance.

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Guest post: Building your career? Consider Chile.

By Bob Burdett, RSM’s Regional Leader for Latin America.

If you were starting out as a young and eager business professional in Latin America today where would you want to locate?

My first choice would be Santiago, Chile, and sometimes I wish that I was a lot younger so that I could try my chances there.

OK. I know that there are plenty of other attractive places in Latin America. Brazil is so big and bustling. Colombia is vibrant. Argentina is seductive. But Santiago is all about dynamic business, and is already filled with some of the best young business and financial talent in Latin America.

I’ll grant you that Santiago is not the most exciting city in the world; it’s no Paris or New York. But if you want to do deals and be where the money flows, Santiago is for you.

This is where private equity and venture capital for all of the hot markets of Latin America is happening. It’s the safe, we-know-how-to-do-it bridge city between the investment money of the US and Europe and the more difficult target countries in the region.

I recently did a three month stay in Santiago to work along with my colleagues at RSM Chile, our RSM member in the country. I have vivid recollections of the 8am meetings every Tuesday morning where partners and managers met to review the state of business – work in progress, outstanding billings, prospective clients in the pipeline, etc., etc. This is a business culture not found all over Latin America, and it produces results Chilean style. The firm has been growing at 20-30% a year for the past five years.

While in Santiago I got to know ACAFI, the Chilean trade association of private equity and venture capital firms. I spent a lot of time working with the private equity sector before I retired as a partner at McGladrey in the US, so one of the first things I look into when I arrive in a new country is the private equity business. Does it exist at all? Is it vibrant or stagnant, collegial or exclusive? What I found in Chile is a super dynamic and very global private equity sector.

Attend one of the conferences put on by ACAFI, and you will run into more top multi-lingual grads from Wharton, Berkeley, Harvard and University of Chicago than anywhere else in the south. You will learn about the many funds managing money from all over the world, and investing all over Latin America. And you will learn about some of the young, high tech portfolio companies with talent and products that you would not imagine exist in this part of the world.

These are some of the impressions and experiences that fuel my enthusiasm for Chile as a place to build a career. You could add to these the warmth and openness of the people. Before you know it you’ll probably find yourself invited into someone’s home or country house for dinner or a weekend.

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Guest post from Robert Dohrer, RSM’s Global Leader for Quality and Risk: UK’s CC provisional remedies for fairer system for audit market

The UK’s Competition Commission (CC) recently released its provisional decision regarding the remedies it is considering addressing the supply of statutory audit services to large companies in the UK. The final remedies are scheduled to be released in Q3 this year. In February of this year, the CC had said that competition was restricted in the audit market due to factors which inhibit companies from switching auditors and by the incentives that auditors have to focus on satisfying management rather than shareholder needs. The audit market for the FTSE 350 is almost entirely dominated by the Big 4 public accounting firms.

In February, the CC preliminarily put forth a package of remedies to address the domination of the Big 4 firms in the large company audit market that included mandatory audit firm rotation and mandatory retendering by companies for their audits, among other proposed measures.  Since these types of debates began with the issuance of the European Union’s Green Paper on audit reform, RSM has been a consistent and vocal advocate for a balanced package of measures that increase audit quality and that are in the public interest.

I am pleased that some of the measures proposed by the CC will effectively address the imbalance in the supply of statutory audit services to large companies (e.g., mandatory retendering for audit services by FTSE 350 companies every five years, prohibition of ‘Big 4-only’ clauses in loan documentation, and other measures to strengthen the role of the Audit Committee in the audit process). The CC has abandoned mandatory audit firm rotation in its provisional remedies. There is concern on the part of some about whether the CC’s provisional remedies are robust enough to address the initial concerns of the CC. Again, the CC’s remedies will not be finalised until Q3 this year and we will continue to advocate for a balanced package of measures that enhance audit quality and that are in the public interest.

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RSM publishes international study into business births and deaths

Today marks the publication of a landmark report from RSM, which looks at business births and deaths across 35 countries globally – The Road to Recovery: Insights from an international comparative study of business ‘birth’ and ‘death’ rates. Business creation and destruction are among the most telling indicators of economic vitality. As the seventh largest global network of audit, tax and advisory firms, with member firms in over 100 countries, RSM is ideally placed to take the pulse of economic well-being in key markets around the world.

The results of the research show that the net rate of business creation (births minus deaths) for the G7 countries (the industrialised West) was just 0.8 per cent on a compound annual basis over the five-year period of the study. The BRICS, on the other hand, show a net rate of business creation of 6.2 per cent per annum, approximately eight times the G7 rate.

The interesting outlier among the G7 is France, which has seen a compound annual growth rate in the number of active enterprises of 4.5 per cent, despite it being relatively stagnant economically over the period of the study. As the report explains, France took significant steps in 2009 to boost self-employment, known as the auto-entrepreneur system, which reduced tax and regulatory requirements for start-up enterprises.

The oddity among the BRICS is South Africa, which saw a compound annual growth rate of -3.8 per cent since the financial crisis. However, as the report explains, the interplay between births, deaths and economic vitality is complex, and a high churn, (sum of enterprise births and deaths) rate is often beneficial and frequently correlates with countries where starting a business is relatively easier and the legal/regulatory arrangements governing the closure of businesses (particularly the disposition of liquidated assets) are predictable and transparent.

The United States is a good example of a country where the death rate has often exceeded the birth rate (2008-10), but despite the high churn the three-year survival rate for new businesses in the United States is better than in Australia and the United Kingdom. Once U.S. companies traverse the so-called ‘valley of death’ (2-5 year growth period) their strong competitive assets (e.g. technology and human capital) means they are better equipped to prosper in the longer term.

These are just a few highlights. The report, I hope you will agree, makes for insightful reading. Please click here for the full paper.

I would like to thank the members of the RSM network who sourced the global data for this collaborative flagship report and RSM’s Economic Advisor, David Bartlett for writing the report.  

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