ticking time bomb - agn international...leader for grant thornton’s leeds office when riley...

www.InternationalAccountingBulletin.comMarch 2013 Issue 523

● IAB Award winners 2013 revealed ● UK Competition Commission’s provisional findings on the audit market

● Brazil survey: Going for goal

Ticking time bombHow low can audit fees be pushed

in Poland before breaking point

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www.InternationalAccountingBulletin.com March 2013 y 1

editor’s letterInternational Accounting Bulletin

editorial Advisory BoardFrank Arford, Crowe Horwath International CEOKevin Arnold, Nexia International executive directorGeoff Barnes, Baker Tilly International president and CEOGraeme Gordon, Praxity executive directorstephen Jacobs, INPACT International presidentJon lisby, Kreston International executive director James Mendelssohn, MSI Global Alliance CEOChristian Mouillon, Ernst & Young global vice-chair, assurance ed Nusbaum, Grant Thornton International CEOMichael reiss von Filski, Geneva Group Inter-national CEOliza robbins, Morison International CEOMartin van roekel, BDO International CEOJean stephens, RSM International CEOrobert tautges, HLB International CEOPauline Wallace, PwC head of public policy and regulatory affairs

CoNteNtsNeWs 02

■ E&Y US agrees to pay $123m over tax shelter dispute

■ SFO investigates Autonomy and HP deal

■ Econ committee votes against mandatory rotation

10-14: PolANd

Top firm leaders raise alarm bells as further discounting could seriously endanger the market and its reputa-tion. Ana Gyorkos reports.

15-20: BrAzil

Despite economic slowdown Brazil’s accounting firms report strong growth and emerging opportunities from upcoming sporting events such as the FIFA World Cup and the Olympic Games, and like many other industries, accounting firms are look-ing to capitalise on those. Gundi Jeffrey reports.

CouNtry surveys 10-20

Clearly the big news this month was the UK’s Competition Commission (CC) unveiling its long-awaited pro-visional findings regarding statutory

audit market concentration (see page 5 to 9). The document looked at the introduction of some controversial remedies including - as expected - mandatory firm rotation and re-tendering.

In the background, the European Parlia-ment is engaged in its own debate, which many expect to be heavily influenced by the CC’s findings. By the time it has made its feelings known one way or the other, many countries like the UK will have made their voices heard, or even gone as far as to imple-ment their own remedies - such as in the Netherlands, where we have seen the adop-tion of mandatory firm rotation.

While it’s clear some of the remedies being discussed in Europe would mean a major shake-up for the UK, German or French audit markets, it’s not so clear how they would affect Poland, the fastest growing and sixth largest economy in Europe.

As IAB conducted its Poland survey once again following a three year gap, it found the domestic audit market on its knees, with a culture of very short audit engagements of one to three years, price-driven tenders, and low client loyalty. In short, a highly com-moditised audit market.

This, coupled with the effects of the global financial crisis, has led to Polish firm leaders questioning audit quality and corporate gov-ernance, and to worry about the sustainabil-ity of the current ‘price discounting’ culture.

So where does the Polish experience fit into the European context, in light of the EU audit reform discussion?

Well, despite the all-too-frequent retend-ering practices that have become endemic, the Polish market is still highly concentrated, with tenders only building further opportu-nities for fee discounting, according to Polish

firm leaders speaking to the IAB.As such at this stage, Polish firms find

the audit reform debates far removed from their everyday reality. While the draft docu-ments and debates so far have talked about strengthening corporate governance and audit committees in the major European economies, many important markets like Poland still have some way to go before their standards in these areas are even at the same base line as their more mature counterparts.

Perhaps ensuring consistent corporate governance rules should become a greater priority across Europe, before pan-EU audit concentration remedies are introduced? Maybe decisions over remedies really should be left to national regulators such as the CC.

Whatever the resolutions on the European level will be, more attention should be paid to some of the very real struggles going on in European markets which, if not addressed, have the potential to endanger the reputa-tion of the profession and compromise pro-fessional standards due to pricing pressures. Read the full Poland report on pages 10 to 14.

iAB Awards 2013 winners revealedThis year was only the second in which we have held the IAB Awards, but with nearly twice as many in attendance at Chartered Accountants’ Hall in Moorgate, including many global leaders of the profession, we look to be set for an even bigger and better third year in 2014. I’d like to congratulate all this year’s win-ners on an excellent performance, thank all the nominees for their efforts, and show my appreciation to our sponsor Aon, without whose support the event would not have been possible. See page 3 and 4 for the full coverage and the winners list.

Ana [email protected]

One size doesn’t fit all

05-09: CoMPetitioN CoMMissioN

Following months of vigorous investi-gating the UK competition authority has found the UK statutory audit market to have several entry barriers for smaller firms and questioned whether auditors are addressing shareholder needs. Ana Gyorkos examines the Competition Commission provisional findings.

AWArds 03-04

FeAture 05-09

KPMG, Grant Thornton and MSI Global Alliance were among the winners of the 2013 International Accounting Bulletin Awards.

Europe should look at ensuring a level playing field on corporate governance rules

before ruling on audit reform

CouNtry survey International Accounting Bulletin

2 y March 2013 www.InternationalAccountingBulletin.com

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top 5 articles

IAB Awards finalists named

E&Y US agrees to pay $123m over tax shelter dispute

IAB/TA exclusive: Top female accounting leaders share their views on gender

SEC allowed to pursue Deloitte China over Longtop documents

SEC delays China audit documents ruling

Most re-tweeted article

IAB Awards finalists named

read in 158 countries

UK 21%

US 15%

India 4%

Hong Kong 3%

Malaysia 2%

Other 55%

NortH AMeriCA

e&y us agrees to pay $123m over tax shelter disputeErnst & Young US (E&Y) has

admitted the wrongful conduct

of some of its partners and

employees in connection with the

firm’s four tax shelter schemes

sold to clients between 1999 and

2002.

E&Y has entered into a non-

prosecution agreement with the

US government, in which it agreed

to pay $123m accompanied by

a detailed statement of facts in

which it admitted the wrongful

conduct of certain partners and

employees and agreed to certain

permanent restrictions and

controls on its tax practices.

In exchange, the US

government has agreed not to

prosecute E&Y criminally for its

participation in the tax shelter

scheme.

euroPe

econ committee votes against mandatory rotationThe latest European

Parliamentary Committee to vote

on audit changes has rejected

proposals for mandatory rotation,

a cap on non-audit services and

audit-only firms

The influential Economic and Monetary Affairs Committee decided instead that it would go for mandatory tendering every seven years.

It adopted a compromise agreement that the companies’ audit committees would need to assess the audit quality of firms tendering and make recommendations, providing a choice of at least two firms and setting out a justified preference for one of them.

uK

sFo investigates Autonomy and HP dealThe UK’s Serious Fraud Office (SFO) has begun investigations into the sale of technology firm Autonomy to Hewlett Packard.

Before the SFO is able to proceed with the investigation it has to look at a potential conflict of interest arising from the watchdog currently using an Autonomy software product, Introspect.

AsiA-PACiFiC

PKF New zealand’s Wellington office joins Baker tilly internationalWellington-based PKF Martin Jarvie is to join the Baker Tilly

Staples Rodway national network (Staples Rodway) from 1 April 2013.

The loss of one of its eight firms in New Zealand follows a tough year for PKF, during which BDO merged with PKF East Coast Practice in Australia and with PKF UK. Additionally, 350 of its 1,850 staff in China joined BDO China.

uK

HsBC puts its audit contract out to tenderHSBC, the UK’s largest bank by asset base, has put its audit contract out to tender in order to comply with the UK Financial Reporting Council’s revised Corporate Governance Code, which stipulates that external audit contracts be put out to tender every ten years.

The bank said it is looking to have the winner of the external audit tender in place by 2015.

KPMG has acted as HSBC’s external auditor since 1991, and according to HSBC’s annual report earned fees of £81m for audit and audit-related services in 2012.

The retendering is likely to attract bids from all the other Big Four firms. A mid-tier bid is understood to be unlikely due to the complexity of HSBC’s audit.

NeWs rouNd-uP

Movers & sHAKers

Greg szczesny has been appointed managing director of PwC’s risk assurance practice in New york.szczesny joins PwC from KPMG where he served as a national leader in the firm’s conflict minerals center of excellence.

Ted Verkade (pictured) has been appointed chairman of Baker Tilly International’s Europe, Middle East and Africa advisory

council.Verkade has previously worked

as regional chairman between 2004 and 2011, and will

replace Eyal Horowitz, who is returning to Baker Tilly Israel.

Will oxley is replacing Jonathan

riley as practice leader for Grant

thornton’s leeds office when riley becomes head of

tax for Grant thornton uK on 1 April 2013.oxley currently leads the

transactions advisory services team across the north of england, having joined Grant thornton as partner in 2007, and will continue this role in tandem with his new role.

PwC US has appointed Julianne Inozemcev a partner in its risk assurance services practice.Inozemcev previously served as a partner at Ernst & Young and most recently worked as the IT risk and assurance banking and assets management leader for its financial services practice in Boston.

March 2013 y 3www.InternationalAccountingBulletin.com

NeWsInternational Accounting Bulletin

IAB 2013 winners revealedKPMG, Grant Thornton and MSI Global Alliance were among the winners of the 2013 International Accounting Bulletin Awards.

A cocktail reception to celebrate the International Accounting Bulletin 2013 awards took place in London on 14 March, attended by more

than 90 industry leaders, including spe-cial guest former IFAC chief executive Ian Ball, who received the lifetime achievement award. The event was sponsored by Aon for the second year in a row.

IAB received more than 100 nominations from across the world, across 14 categories. The shortlists and winners were decided by a judging panel, comprising former IASB chairman and current ICAS president Sir David Tweedie, ACCA technical director Sue Almond and Wragge & Co’s partner and head of accounting and actuarial liabil-ity Jane Howard, as well as IAB’s editorial team.

NetWorK oF tHe yeAr

■■ Grant■Thornton■International

risiNG stAr NetWorK oF tHe yeAr

■■ Nexia■International

AssoCiAtioN oF tHe yeAr

■■ MSI■Global■Alliance

risiNG stAr AssoCiAtioN oF tHe yeAr

■■ Praxity

Audit iNNovAtioN oF tHe yeAr

■■ Mazars■-■for■its■Corporate■Culture■Audit

Advisory FirM oF tHe yeAr

■■ Crowe■Horwath■International

eMPloyer oF tHe yeAr

■■ Plante■Moran

editors’s sPeCiAl AWArd

■■ RSM■-■for■RSM■World■Day

sustAiNABle FirM oF tHe yeAr

■■ KPMG■and■SizweNtsalubaGobodo

soCiAl NetWorKiNG CHAMPioN oF tHe yeAr

■■ KPMG

it veNdor oF tHe yeAr

■■ IRIS

youNG ACCouNtANt oF tHe yeAr

■■ Sarah■Griffiths■&■Masuzyo■Mulenga

IAB PersoNAlity oF tHe yeAr

■■ Pauline■Wallace■from■PwC■UK

liFetiMe ACHieveMeNt AWArd

■■ Ian■Ball


AWArds International Accounting Bulletin

Clockwise from top left: IAB’s Fred Crawley hands KPMG’s Brian Bannister

the Social Media Champion of the Year Award; Nexia International team

with their Raising Star Network Award, Praxity’s Graeme Gordon receives

Raising Star Association Award; RSM team celebrates the Editor’s Special

Award; Ian Ball with his Lifetime Achievement Award; Grant Thornton

International with the Network of the Year Award; Mazar’s Neil Hutchison

with the Audit Innovation of the Year Award; MSI Global Alliance’s team

celebrates winning the Association of the Year Award.


FeAtureInternational Accounting Bulletin CoMPetitioN CoMMissioN


FeAtureInternational Accounting Bulletin

All change for audits?Following months of vigorous investigation the UK competition authority has found the UK statutory audit market to have several entry barriers for smaller firms and questioned whether auditors are addressing shareholder needs. Ana Gyorkos examines the Competition Commission’s provisional findings

It all started less than three years ago with a Parliamentary committee invest igat ion into the statutory audit market concentration, looking

at whether the Big Four are too big to fail following issues exposed by the financial crisis.

The Parliamentary committee passed on its evidence and recommendations to the Office of Fair Trading (OFT) in autumn 2011, which decided to refer the matter to the Competition Commission (CC). The CC has the power to prescribe remedies, which could change the structure of the statutory audit market if it finds the market too concentrated in its final report, expected in autumn this year.

In parallel, the EU audit reform debate is looking at similar issues on a European level and, as indications of watered down proposals emerged from the EU in the past months, the expectations over the CC’s

findings were limited.However, the CC’s provisional findings,

revealed at the end of February, are dramatic, and if some of the remedies suggested such as mandatory tendering and rotation are implemented, the market might have to face some signif icant changes. Not to mention the influence the CC’s findings might have on the outcome of the European audit reform.

The CC provisional report found that competition in the UK audit market is restricted by factors which inhibit companies from switching auditors, and by the tendency of auditors to focus on satisfying management rather than shareholder needs.

The CC says audit firms outside the Big Four find it difficult to show they have sufficient experience and reputation to win the audit engagements of FTSE 350 companies. And, because companies

find it difficult to compare alternatives with their existing auditor, they prefer continuity and face significant costs in switching. They are reluctant to change auditor and so lack bargaining power.

Until its final report, the CC says it is to examine the following possible remedies: mandatory tendering, mandatory rotation of audit firms, expanding the remit and/or frequency of audit quality reviews under the auspices of the Financial Reporting Council (FRC), prohibition of ‘Big Four only’ clauses in loan documentation, strengthening accountability of external auditors to audit committees, enhanced shareholder-auditor engagement, and extended reporting requirements (see page 6 for full summary).

Despite the remedies suggested and some of the headline findings, the CC says it has not found sufficient evidence to support the hypothesis that Big Four firms


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International Accounting Bulletin

Remedies the CC is to explore until the publication of its final report

Mandatory■tendering:The UK Financial Council (FRC) recently revised the UK’s Corporate Governance Code stating FTSE 350 companies should put the external audit contract out to ten-der at least every 10 years or explain why they have not done so. The CC, howev-er, believes a more frequent time period should be considered. The CC goes on to suggest every five to seven years, stating it would consider other time periods as well if it is supported by relevant evidence.

The CC believes this remedy would ensure that companies assess the qual-ity, price and innovation of their existing auditor, compared with other options, in a structured manner on a more frequent basis.

IAB■ Verdict: The FRC conducted an extended consultation before suggesting retendering every ten years and it seem a somewhat surprising move by the CC to consider a shorter retendering period.

Mandatory■rotation■of■audit■firms:The CC■said it considers increased rota-tion of audit firms is desirable to ensure greater independence of the audit firm from management and provide the ben-efit of a fresh approach to the audit of a company.The CC is to seek views on rotation peri-ods of 7, 10 and 14 years, but it said they are open to considering other periods if supported by relevant evidence.

IAB■Verdict: There’s little evidence in support of mandatory rotation and it could potentially lead to rotation only among Big Four firms. Mandatory ten-dering could also sufficiently address some of the issues concerning mandatory rotation of audit firms.

Expanded■ remit■ and/or■ frequency■of■Audit■Quality■Review■Team■ (AQRT)■reviews:The CC said this remedy would ensure FTSE 350 companies had better (more frequent, tailored, comparable and trans-parent) information on the quality of FTSE 350 audits provided by audit firms. This would facilitate comparability of

companies’ existing auditors with other options.

IAB■Verdict: This is could have posi-tive effects on the market. However, on its own this measure would do little to decrease potential cementation in the market

Prohibition■of■‘Big■Four■only’■clauses■in■loan■documentation:This remedy would remove a limitation to competition for non-Big Four firms by removing contractual restrictions on the use of non-Big Four firms. The CC con-siders that the prohibition of such clauses could, in combination with other rem-edies, help to address some of the adverse features that it has found in the audit market. The CC also notes it may not by itself have a substantial impact.

IAB■Verdict: A welcome move by the CC as ‘Big Four only’ clauses are, according to many industry observers, an unnec-essary and outdated measure, which restricts competition.

Strengthened■ accountabi l ity■ of■ the■■external■auditor■to■the■audit■committee:The CC said this remedy would reduce the influence of executive management in the relationship with the external auditor by strengthening the accountability of the external auditors to the audit committee.

The CC says this remedy would require the audit engagement partner to report directly to the audit committee chair, such that only the audit committee and the audit committee chair would be able to negotiate audit fees, initiate tenders for audit work, authorise the external audit firm to carry out any non-audit assign-ments or conduct any other major aspect of the external audit relationship.

It considers that the finance director’s role in selection and reappointment of the company’s auditors should be limited to the minimum necessary.

IAB■ Verdict: Anything that leads to enhanced communication, more inde-pendent auditor appointment, and could further strengthen the power of the audit

committee is a welcome measure.

Enhanced■shareholder-auditor■engage-ment:The CC believes this remedy would seek to address the distortion in demand whereby audit firms compete largely for the demand of executive management, because it would enhance the role of shareholders in relation to decisions on the choice of auditor.

The CC added that it expects to liaise closely with the Financial Reporting Council, major FTSE 350 shareholders, and shareholder representative groups in shaping a suitable remedy. This would include discussion of components such as changing voting requirements on audit issues and/or changing the possible pro-cess of dialogue between shareholders and the audit committee chairs or share-holders and auditors.

IAB■Verdict: As pointed out by some industry leaders, there are certain legal limitations to auditor and shareholder communication. The CC needs to be very clear of how it intends to enhance such communication.

Extended■reporting■requirements:This remedy would override the reluc-tance of management to disclose informa-tion about the audit process and would thereby enhance transparency, according to the CC. This is expected to improve the ability of companies and sharehold-ers to judge audit quality, thus reducing switching costs and improving the ability of shareholders to influence the auditor selection decision.

The CC recognises the ongoing work of the Financial Reporting Council (FRC) with regard to increasing the value of audit reports to shareholders and con-siders that the FRC is best placed as the specialist sectoral regulator to progress these discussions and resolve shareholder concerns.

IAB■ Verdict: The CC should let the FRC work on the potential extension of reporting requirements. The CC can act as encouragement to the FRC’s efforts.





engage in tacit collusion; that they bundle audit and non-audit services together in order to raise barriers to expansion to other firms; that they target the customers of mid-tier firms with particularly low prices; or that they are able to exercise undue influence over the formation of regulation, or on regulatory bodies, through their extensive alumni networks.

Comment ing on the prov i s iona l

findings, chairman of the CC’s audit investigation group Laura Carstensen tells International Accounting Bulletin the provisional findings report contains

“some quite radical suggestions” among the measures under consultation, and wh ich addressed the fundamenta l question of “whether there should be a culture shift from relationship-based auditing to something else”.

Carstensen explains the remedies proposed address “the issues around fami l ia r it y – they a re a nudge to behavioural change of quite a deep kind. I do regard them to represent, if we go down that route, quite a change, but there is a lot of consultation to come and I think we should discuss it.”

E laborat ing on CC ’s ma in v iew about failing shareholders Carstensen says “this is not a question of anyone behaving badly”.“It’s more a case of system design –

shareholders and investors felt they have very little visibility on auditor selection and the audit process. In actual fact, management tends to come up with recommendations and they tend to go straight through.” With this culture

in place, she says, “it’s unsurprising that auditors get very familiar with management. In that situation, we are asking: where do incentives lie, and could we do something to adjust the situation?”.

industry responseThe CC provisional report provoked different views within the profession and left the Big Four somewhat puzzled by some of the findings.

PwC UK’s head of reputation and public policy Richard Sexton, says:“We find some of their comments odd

given the evidence we have given, and a bit surprising as a result. We had no indication from the working documents published that the CC had this level of concern. We believe that the CC has grossly underest imated the cr it ica l role that audit commit tees play in protecting the interests of shareholders and governance. We are, under the law, not allowed to speak to shareholders about anything, and that is why audit committees are there. But that seems to have completely bypassed the CC.”

Ernst & Young U K and I re land head of assurance Hywel Ball says the firm strongly disagrees with the CC’s statement that the audit market is not serving shareholders.“We note that much of the summary

is on aspects of corporate governance and regulation, and in that context we are surprised that there are important omissions from the description of how that framework operates,” he says.“For example, there is no mention of the

role of the chair of boards and the senior independent directors in representing and safeguarding shareholder interests, nor of the importance of unitary boards themselves. We think the somewhat stark description in black and white terms of the role and power of the finance directors and their motives does not represent the real world as we experience it.”

One of the most controversial remedies offered by the CC regards mandatory tendering, which the CC believes should take place more frequently than every 10 years, as currently suggested by the Financial Reporting Council.“We do not support their suggestions as

regards mandatory tendering or rotation,” KPMG UK chairman and senior partner

Simon Collins says. “A f t e r l on g d e l i b e r a t ion a nd

consultation, the FRC has only just introduced tendering every ten years on a “comply or explain” basis, and this is already having a significant impact. We supported this measure as we believe it fits with the corporate governance framework in the UK and reinforces audit committee oversight of the external auditor. Arbitrary pre-set periods will do the reverse and potentially damage audit quality, and forced rotation will undermine audit committees and actually reduce shareholder choice. It is premature, therefore, to disregard the FRC measures as an effective remedy.”

Coll ins also says KPMG UK does not agree with what it sees as the CC ’s conc lu s ion t hat , e f f e c t ive ly, aud i t c om m i t t e e s a r e no t do i ng their jobs properly.“In our experience, audit committees

i n t h e U K g e n e r a l l y t a ke t h e i r responsibi l it ies ser iously, both for oversight of the external auditor and f inancia l repor t ing more general ly. Indeed if audit committees were not functioning properly, it would have much more fundamental ramifications for UK corporate governance,” he says.

M id- t i e r f i rms have been more welcoming of the CC’s provisional findings as Mazars’ UK head of public interest markets David Herbinet says:

“We applaud the CC’s findings and, in particular, the emphasis on the primacy of the auditors’ duty to shareholders. We’ve been active in this debate for the best part of the last decade and the CC deserves praise for its study. It’s the most thorough and independent inquiry ever into the FTSE 350 audit market in the

“No one can deny now that a major programme of reform is required as an urgent matter of public interest. the status quo is not an option.”David Herbinet, Mazers’ UK

“We note that much of the summary is on aspects of corporate governance and regulation, and in that context we are surprised that there are important omissions from the description of how that framework operates,”Hywel Ball, Ernst & Young


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UK and reflects the situation of most other national audit markets. It’s clearly going to make a significant contribution in Brussels as the European institutions decide the way forward on the future shape of the EU audit market.”

Herbinet continues: “No one can deny now that a major programme of reform is required as an urgent matter of public interest. The status quo is not an option.”

Grant Thornton UK also welcomes the CC’s “recognition that there are barriers to entry which prevent capable and credible audit service providers from effectively competing in this market, as well as its intention to consult on a range of possible remedies to address the issues which it has identified”.

Grant Thornton’s statement went on to say that the implementation by the CC of an appropriately balanced package of remedies will improve the diversity of the market and assist firms such as Grant Thornton to accelerate their expansion in this market.

BDO UK’s managing partner Simon Michaels says: “The CC has identified a challenge to the audit profession in demonstrating that it is, and appears to be, independent from client management. This is a challenge we acknowledge and which requires careful thought prior to selection of remedies. The CC has until October of this year to finalise its report and, in particular, to select remedies to correct the market defects.”

Michaels warns that the remedies selected by the CC need to be effective and comprehensive.“No one solution will achieve market

correction, but rather a combination of tendering requirements, encouragement of transparency and dialogue between auditors, companies and investors, and reform of outdated exclusionary practices should provide a backdrop for a healthier FTSE 350 audit market,” he says.

AC C A’s t e ch n i c a l d i r e c to r S ue Almond says that the whole point of this investigation has been about the audit market’s structure.“While the audit market is static, it

must be remembered that auditors act as society’s eyes and ears to report

Competition Commission sue Almond, ACCA technical directorThe prel iminary f indings from the Competition Commission (CC) issued on a cold February Friday morning made an interesting read and contained enough surprises to have practitioners from all sizes of firms spluttering into their cornflakes.

The whole point of this investigation has been about the audit market’s structure. But we mustn’t lose sight of the bigger picture. One of the key themes that came through in the report is the importance of transparency – whether by the auditor, the company or the audit committee. The recent work of the various bodies considering the audit market, such as the CC and the EC, has provided far more light on the structure and activity of the audit market than has ever been the case before. This in itself is valuable and provides evidence on which to challenge, or not, the status quo.

There is also little mention of the value of audit – a critical point in difficult times. It is always tempting to see audit as ‘red tape’ that can be cut, but it must be remembered that auditors act as society’s

eyes and ears to report fraud, bribery-and money laundering activities. They also assist the assessment and collection of both direct and indirect taxation, so the future of audit services needs to be assured and supported. This means not just looking at the providers of audit services, but the services themselves – are they meeting the needs of users, and are the providers encouraged to innovate and develop?

For ACCA, the issue has always been about the end-user of audit services, and we have previously said that future recommendations on the audit market need to be workable for business while enhancing investor confidence. The input from these stakeholders will be critical in shaping the final recommendations of the CC if they are to achieve the broader goal of creating an audit market that is trusted and brings most value to business.

Audit is only one part of the financial jigsaw and it is not the only way to tackle investor concerns. Progress could be made without creating more rules by enhancing corporate reporting through integrated

reporting. This development aims to ref lect the interconnected nature of economic and financial performance with environmental, social and governance factors in organisations’ annual reporting.

Which brings us back to transparency and its role. Companies can tell the story of what they do and how they do it in a very accessible way. Audit committees can be more open about why and how they have chosen their auditors, and auditors should be shouting from the rooftops what they do and the value it adds

Sue Almond, ACCA

“Given the complexity of modern business, it can take two years-plus before a new auditor is up to speed, and losing that long-held knowledge could be potentially disruptive for a company. ACCA would prefer to see an emphasis on competitive tendering.”





Potential impact of CC findings on EU audit reformNoel Clehane, global head of regulatory affairs at Bdo international, based in Brussels at the Bdo international executive officeThe issuing of the preliminary findings of the UK Competition Commission on 22 February coincides with a very signifi-cant stage in the process through which the audit reform proposals of the European Commission are proceeding.

On 11 March the Economic and Mon-etary Affairs Committee (ECON) of the European Parliament held its vote on the Commission’s proposals. This committee has sole or shared competence on some areas, but is, for the most part, an ‘opinion’ committee on these proposals. While there was considerable interest among the mem-bers of this committee in the findings of the independent UK authority and the rappor-teur is the UK Conservative MEP Kay Swin-burne, the amendments which they voted on and adopted were the same as those cir-culating since mid-February and the find-ings issued by the Competition Commission do not in the end appear to have had any notable bearing on the position adopted in the ECON committee.

The ‘lead’ committee on these proposals in the European Parliament is that of Legal Affairs (JURI). It will also meet in the near future to vote on its amendments having taken account of the vote in ECON and the second ‘opinion’ committee (ITRE) which issued its opinion in December 2012. Vari-ous dates in March had been given for the

JURI meeting but it now looks like it may be deferred until April. The rapporteur in that committee is also a UK Conservative MEP (Sajjad Karim) and in a press release since the CC findings were issued he stated that: “The measures that we adopt on audit quality are bound to affect the market. It is reassuring that the suggestions to be considered by the Competition Commis-sion mirror many of the positive changes included in my proposal”. It’s difficult to imagine that the preliminary findings from the UK CC would not shape and influence the final debate and vote in the JURI com-mittee whose position will probably go on to be the position of the Parliament as a whole. Indeed, many of the comments and observations made in the UK findings echo those of JURI MEPs at earlier stages of the Brussels process, including those in the area of the future role of auditors, transparency around auditor appointments, shareholders’ demands for information and their expecta-tions of auditors, as well as concerns about the long tenure of statutory auditors of larg-er Public Interest Entities (PIEs) and the lev-els of concentration found in that market.

The UK body is a public body, but is fully independent and has no formal or procedural connection to the European Parliament, European Commission or the EU member states, which are the three

EU parties addressing the proposed audit reforms in Brussels. However, given the extensive investigation and evidence-gathering by the well-resourced UK body, and noting the considerable interest by all of the ‘Brussels parties’ in the UK process up to now, it’s difficult to imagine that the critical closing stages of the process in Brussels will not be influenced by the UK CC preliminary findings, notably on issues pertaining to the market structure element of the EC proposals.

Noel Clehane, BDO International

fraud, bribery and money laundering activities. They also assist the assessment and col lec t ion of both d i rec t and indirec t taxat ion, so the future of audit services need to be assured and supported,” she says.

Look ing at the remed ies , ACCA says it does not believe that there is ev idence that mandatory rotat ion increases audit quality.“Given the complex ity of modern

business, it can take two years-plus before a new auditor is up to speed, and losing that long-held knowledge could be potentially disruptive for a company. ACCA would prefer to see an emphasis on competitive tendering.”

Institute of Chartered Accountants

for Eng land and Wa le s ( IC A EW ) chief executive Michael I zza warns that it is important to see the CC’s report in context.“The UK audit and accounting sector

is a significant success story which not only contributes over 1% of GDP in its own right, but helps support businesses of all sizes across every economic sector driving employment and growth. The accountancy profession is a lso the biggest single employer of graduates in the UK and a great British export. It is therefore critical when looking at how these measures are implemented, that they do not undermine or destabilise what is such an important sector for the UK economy. They also need to be seen in

an international context and be consistent with proposals currently being considered in Europe,” he says.“Increasing market choice will only be

possible if audit committees – who are responsible for appointing auditors –recognise that there is huge quality and talent to be had outside the Big Four accounting firms,” Izza adds.

This CC’s investigation is sti l l far from over. Now the industry is clearer on the CC’s thoughts, new arguments will be presented and both sides – the Big Four and the mid-tier- are likely are to fight their corner in an attempt to do what they feel is right for the future of the profession and most importantly for their business. <

CouNtry survey International Accounting BulletinPolANd


Despite the Warsaw stock exchange bearing more listings of foreign companies and the growth of non-audit service lines, audit still remains

a core service for the majority of Polish firms and, with fee discounting reaching crisis point, firm leaders are expressing concern.

RSM Poland managing partner Bartosz Milaszewski says the Polish market is in a strange situation where people complain about fee pressure, while at the same time lowering fees in order to win new clients. “It is really a lose-lose game,” he says. “In order to deal with this pressure we just decline the work we think is undeliverable for the fee offered. We try and avoid listed firms, because in that market the fee pressure is most visible.”

“Listed companies are a marketing pool for accounting firms. In Poland tenders are not long-lasting engagements. Usually com-panies reappoint the auditor or retender the audit each year and this has a very severe

effect on fee pressure. Ninety per cent of companies change their auditor every year, which leads to a situation where companies are faced with having to forgo good relation-ships because there are cheaper offers in the market.”

Milaszewski says this is leading to a situa-tion where listed clients are paying less for an audit than non-listed companies. “And firms are doing that because listed clients are per-ceived to be more reputable,” he adds.

Baker Tilly Poland group head of audit and assurance David James says that among Polish-listed companies there is this idea that it is good to change auditor at least every three years and possibly more often. “This doesn’t help auditor independence when we’re always worried that we’re going to get changed before we’ve had a chance to break even on a job,” he says adding that it would help if auditors had a guaranteed ten-der period of between three and seven years.

“It’s impossible to do a proper audit,

■ PolANd

At a glance revenueMost revenue: E&Y, PLN547.9m(e)($169.7m)least revenue: INPACT Intr., PLN0.5mHighest growth: RSM, 89%lowest growth: INPACT International, -34%

stAFF

largest workforce: E&Y, 1,742(e)smallest workforce: INPACT International,8Most partners: PwC, 52Most offices: PrimeGlobal, 10

eCoNoMiC iNdiCAtors

GdP: PLN1.6tr ($470.4bn)GdP growth: 2.4%GdP per capita (PPP): $20,183inflation (CPi): 3.9%Current Account Balance: -3.7% of GDPunemployment rate: 10%Population: 38.2m

iAB survery iNdiCAtors

revenue per employee: PLN273,457staff density: 1 accountant per 4,315 people

Notes: Totals apply to IAB surveyed data only. This includes firms that belong to global networks and associations

Source: International Accounting Bulletin, IMF estimation

Polish audit in crisisHeavy fee discounting, little quality oversight, a fragmented market and frequent retendering are pushing audit services in Poland near to collapse. Top firm leaders raise alarm bells as further discounting could seriously endanger the market and its reputation. Ana Gyorkos reports

COUNTRY sURveYInternational Accounting Bulletin pOlaNd


especially in the government sector as they don’t care about the value of an audit,” James continues. “Basically, the audit profession is at an all-time low in Poland. It’s been more respected in the past and presum-ably more respected in the future; right now it’s at an all-time low.”

And it’s not just government audits. Milas-zewski says that some European Union grants are being audited for very low fees irrespective of the EU’s guidelines, which state the cost of the audit for EU grants should be between 0.5% to 1.5% of the overall project value. “In these types of ten-ders audit firms will go as low as possible in order to win the engagements and such engagements are purely won on a fee basis. This has led to projects being valued at €20m and audited for the fee of €1,000. This poses serious questions about how much this work is worth and how much can be done for the fee,” he says. “Polish tenders don’t really respect these guidelines and the only meas-ure is price.”

Such practices worry all the firm leaders interviewed by International Accounting

Bulletin and the sentiment appears to be that the profession could sustain serious damage if a large-scale accounting fraud was missed, or government or EU funds were unaccounted for.

Deloitte Poland partner Marek Metrycki says there are attempts to make the public aware of some of the issues in the audit mar-ket; however the voices so far are not loud enough. “There is also the question of self-interest and if we say we want higher prices that might not come across right. I think the market should regulate itself. The prices are lower because auditors bid lower. They lower the price themselves in order to gain or keep a client,” Metrycki says.

He continues to say that however firms do turn down engagements where the price is too low and “we won’t be able to deliver the right level of quality”. “That to some level this is a self-regulating mechanism,” he adds.

As well as low levels of client loyalty the fragmented nature of the Polish accounting industry is not helping matters, as the market has several small one- or two-practitioner firms, which tender for SME or government

work, but might lack up-to-date knowledge and familiarity with different international accounting standards.

Metrycki says audit quality concerns are especially high with smaller firms, which might not have the capacity to look for effi-ciencies in their work. “Audit quality is a concern because you have to spend x amount of hours on understanding what is going on in the business and maintaining the quality of an audit and ensuring that you are retain-ing the top talent and delivering a proper audit. We found ways to improve efficiency and keep quality, but in the long term if pric-es continue to fall it will become harder to keep quality,” Metrycki explains.

Przemyslaw Polaczey, managing partner at Grant Thornton Poland, says that to battle the pricing pressure the firm has adopted a strategy of not following the price competi-tion. “The more you do for the client and the more complementary your service is, the higher loyalty there is. The cooperation between our audit and tax advisory line is the success factor here.”

Poland is looking to adopt International

■ PolANd

nEtwoRks – fEE dAtA

rank NameFee income

(PlNm)Growth

rate (%)

Fee split (%)

year-endAudit &

Accountingtax

servicesManagement

consultingCorporate

finance

Corporate recovery/

insolvency litigation

support other

1 Ernst & Young*(e) 547.9 9% Jun-12

2 PwC* 537.1 15% - - - - - - - Dec-12

3 KPMG*(e) 508.2 9% Sep-12

4 Deloitte* 397.2 3% 40 26 21 9 - 4 - Dec-12

5 Rödl & Partner* 58.4 12% 65 20 - - 1 9 5 Dec-12

6 BDO* 49.7 -2% 63 5 8 3 21 Dec-12

7 Baker Tilly International* 46.2 -3% 72 9 2 - - - 17 Dec-12

8 Grant Thornton International* 42.1 25% 75 17 2 6 Jun-12

9 Mazars* 41.0 0% 90 6 1 3 - - - Aug-12

10 Crowe Horwath International* 22.0 13% 50 37 - 5 - - 8 Mar-13

11 PKF International* 18.1 10% 71 6 - 1 13 0 9 Dec-11

12 Kreston International* 14.7 56% 73 15 1 5 1 0 5 Oct-12

13 RSM* 13.8 89% 60 14 6 14 - - 6 Dec-12

14 HLB International* 10.1 4% 64 10 2 10 - - 14 Dec-12

15 Moore Stephens International* 9.9 6% 75 1 14 3 - - 7 Dec-12

16 ECOVIS International* 9.8 5% 73 1 13 - - - 13 Dec-12

17 Nexia International* 4.5 46% 82 5 8 - - - 6 Jun-12

total revenue/growth 2,330.6 9%

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included. (e) IAB estimate.Source: International Accounting Bulletin



Auditing Standards (IASs) and Polaczey hopes this might have a positive impact on improving audit quality. “As far as I know, our national Charter of Accountants is working quite hard implementing IASs as the main standard of the profession,” he explains. “This means the Polish GAAP will become history in the next year or two and hopefully this will align the quality of audit. What’s more, it will ultimately improve qual-ity and control standards.”

Despite some optimism about the future of audit services, scepticism prevails. Baker Tilly’s James says: “It’s all like a house of cards, because there is no public governance to speak of. It’s a problem that is waiting to appear, a time bomb waiting to go off.”

Non-audit servicesThis year’s Poland fee table paints a very diverse picture spanning double-digit growth, double-digit loss and flat perfor-mance, which makes it hard to draw conclu-sions purely on the fees earned. The market has been more or less flat for organic growth, with some opportunities arising from non-audit services. However with audit and accounting services taking up 67% of overall fees, non-audit opportunities were mainly up for grabs for the Big Four and larger mid-tier firms. Most of the double-digit growth was a result of M&A activity such as with BDO, which acquired a small firm from the edu-cation sector, adding 20% to BDO Poland’s overall fee income.

Among non-audit services some firms saw opportunities in tax, while others noted a stagnant market. Deloitte’s Metrycki says tax services have been flat, especially in the core tax service offering.

“However we are looking at a great deal of innovation in tax services. At the end of 2012 and early 2013 we have seen some good results in tax and we expect this service line to continue growing, mainly based on some high-value products and innovation, which is increasing our tax client portfolio,” he says.

“It’s about more complex tax work and developing technological solutions for tax compliance, which are very complex prod-ucts and well received by the market. We are also looking at products focused on tax efficiency and tax optimisation, and ensuring clients are not overpaying tax.”

BDO Poland managing partner André Helin also says tax revenue growth has been flat, but he expects several reforms in the Polish tax regime, which are expected to bring about opportunities.

“I’m expecting Poland to carry out a major tax reform in the near future, espe-cially reviewing the corporate tax rate,” he says.

James at Baker Tilly says changes in tax law have been very common recently. “I think some of our international clients think that we, the tax advisors, have gone crazy when we tell them the government has done some of the things it’s done,” he says. “As an

example, if you don’t pay your supplier on time you can’t have a tax cost for the invoice. As if it’s the government’s business whether I pay my supplier or I get paid by my custom-ers on time!”

Firm leaders also say there are some opportunities arising from transfer pricing and international tax work.

In the advisory arena, all interviewed firms offer a wide range of specialised services.

RSM’s Milaszewski says both tax advisory and transactions support services have been doing well. However, he says there have been fewer risk advisory engagements as the firm is still at the stage of gathering experience in the area.

Helin says BDO Poland has seen an increased interest in forensic accounting. “As a result of the financial crisis there are more disputes between companies, which has led to our teams working on very intense and complicated cases in forensics. We expect future growth opportunities in forensic work.”

Metrycki says Deloitte has performed strongly in advisory and saw good demand for technology services. “Another trend is looking at customer management services and risk services, especially in financial ser-vices. We also see an increase in work in security and privacy and we hope to develop this further,” he adds.

James says that Baker Tilly in Poland is increasingly looking at advisory work in the area of intellectual property, forensic litiga-

■ PolANd

AssoCIAtIons – fEE dAtA

rank NameFee income

(PlNm)Growth

rate (%)

Fee split (%)

year-endAudit &

Accountingtax

servicesManagement

consultingCorporate

finance

Corporate recovery/


support other

1 Praxity* 41.0 0% 90 6 1 3 - - - Aug-12

2 MSI Global Alliance* 16.6 1% 48 51 2 - - - - Dec-12

3 PrimeGlobal* 10.6 27% 74 11 7 - - - 8 May-12

4 Morison International* 7.5 -16% 69 9 13 6 - - 3 Dec-12

5 Integra International* 6.2 0% 0 90 10 - - - - Dec-12

6 AGN International* 3.5 9% 60 30 10 - - - - Dec-12

7 MGI* 3.3 -1% - - - - - - Jun-12

8 DFK International* 2.5 - 99 1 - - - - - Jun-12

9 BKR International* 0.8 -20% 60 32 9 - - - - Jun-12

10 INPACT International* 0.5 -34% 74 8 12 2 - - 4 Dec-11

total revenue/growth 92.5 3%

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not includedSource: International Accounting Bulletin

COUNTRY sURveYInternational Accounting Bulletin pOlaNd


■ PolANd

AssoCIAtIons – stAff dAtA

rank Name

total staff Growth rate (%)

Partners Professional staff Administrative staff offices

2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

1 Praxity* 181 164 10% 4 4 151 134 26 26 2 2

2 PrimeGlobal* 95 73 30% 14 8 68 55 13 10 10 6

3 MSI Global Alliance* 91 88 3% 8 8 15 13 76 70 2 2

4 Morison International* 67 68 -1% 10 9 51 52 6 7 3 3

5 MGI* 46 34 35% 3 5 38 25 5 4 3 2

6 DFK International* 29 - - 3 - 23 - 3 - 2 -

7 AGN International* 25 25 0% 2 2 21 21 2 2 2 2

8 Integra International* 23 23 0% 4 4 16 16 3 3 1 1

9 BKR International* 10 12 -17% 2 2 6 8 2 2 1 1

10 INPACT International* 8 9 -11% 3 2 5 7 0 0 1 1

totals 575 496 10% 53 44 394 331 136 124 27 20

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included.

Source: International Accounting Bulletin

■ PolANd

nEtwoRks – stAff dAtA

rank Name



2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

1 Ernst & Young*(e) 1,742 1,675 4% - - - - - - - -

2 PwC* 1,673 1,643 2% 52 47 - - - 7 6

3 KPMG*(e) 1,288 1,239 4% - - - - - - - -

4 Deloitte* 1,244 1,149 8% 46 39 958 888 240 222 9 9

5 Rödl & Partner* 361 359 1% 7 7 320 319 34 33 6 6

6 Baker Tilly International* 320 337 -5% 12 12 277 284 31 41 4 4

7 BDO* 295 279 6% 23 24 246 228 26 27 5 5

8 Grant Thornton International* 294 233 26% 20 19 222 171 52 43 7 5

9 PKF International* 254 142 79% 15 14 225 108 14 20 1 1

10 Mazars* 181 164 10% 4 4 151 134 26 26 2 2

11 Crowe Horwath International* 131 119 10% 9 9 101 92 21 18 8 8

12 RSM* 110 79 39% 10 10 92 61 8 8 2 5

13 Kreston International* 101 107 -6% 5 5 90 94 6 8 9 9

14 ECOVIS International* 95 85 12% 9 9 85 75 6 7 3 3

15 HLB International* 80 79 1% 21 12 52 58 7 9 7 5

16 Moore Stephens International* 75 76 -1% 15 9 54 60 6 7 3 3

17 Nexia International* 42 38 11% 4 3 34 32 4 3 2 1

totals 8,286 7,803 6% 252 223 2,907 2,604 481 472 75 72

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included. (e) IAB estimate




tion support and specialised services assist-ing start-up companies. James, like Heli, remarks on the increasing opportunities in forensic work. “We have done consulting work requiring forensics and litigation sup-port in the last few years,” he says.

“People take each other to court and want some backup from accountants and we’ve had one or two pretty good outcomes and some interesting work in those areas. We’re developing some new consulting products as well; we’re benchmarking products, espe-cially for the automotive sector.”

The number of transactions has decreased in the past year and no significant pickup is expected in 2013. However, the number of IPOs in the Warsaw stock exchange has increased which, according to Metrycki, is presenting opportunities.

Listing on the Warsaw stock exchange, the fastest-growing stock exchange in Europe, is, according to Polaczey, attracting special interest from companies from Russia, Ukraine, China and India. “Some of these companies are starting to consider listing in Warsaw and considering it as a gateway to international public markets.”While most Western European accountants keep a close eye on developments in rela-tion to EU audit reform, to Polish firms it all seems somewhat irrelevant. As companies tender so frequently in Poland, and client loyalty is far from an issue, the Polish profes-sion has little to worry about regarding some of the most controversial proposals such as mandatory rotation and retendering. Metrycki says he doesn’t see the Polish mar-ket being affected by any such measures. “Mandatory firm rotation wouldn’t really apply to our market where firms rotate often and the pressure of regular tendering is a fact of life for us already, and a big part of the market,” he says.

Interestingly, despite frequent retender-ing, market concentration levels are still very high in the Polish market, as mid-tier firm leaders say most public companies and financial institutions are audited by the Big Four. Perhaps Poland’s experience has been somewhat overlooked so far in the EU audit reform debate.The Polish recruitment market for account-ants has seen a shift in recent years as it becomes much more of an employer’s mar-ket. “You can open your door and the queue would be down the street,” James says. “A lot of people are simply waiting for work,

waiting to be able to come back in the pro-fession and that doesn’t do much for the salaries of the people who are in the profes-sion as they are, in many cases, reluctant to complain too much because they don’t want to end up in the same position as the unem-ployed.” James explains that this current situation is putting most of the pressure at the very junior end. “Who wants to come into a pro-fession which has such problems?” he adds.

Helin says there is growing unemploy-ment among young people and it is no time for new graduates to get a job. “We don’t have any plans of significant increase in our staff. This year is a tough one, so we try to optimise and increase efficiency, but still keep staff.” Among the Big Four there are

more opportunities, but it seems to be far from enough as the number of unemployed accountants increases.

Metrycki says: “We have increased our team in the past year and hired five new partners from outside and we increased total staff by about 100 people.

We do expect to recruit going forward as well. It has become a bit more challenging for younger people, but there are jobs espe-cially for top talent.”

The past year or so has not been easy on the Polish profession and the sense is that more unity is required if the audit fee issue is to be resolved. With little corporate gov-ernance and struggling firms attempting to juggle quality and low fees, confidence is at an all-time low. <

■ reveNue By serviCe liNe


■ MArKet sHAre


■ PolANd

FirM MoveMeNts

NetWorK/AssoCiAtioN FirM AdditioNs, MerGers & ACQuisitioNs

Grant thornton international Aquired: FPA Group, an accounting outsourcing company and renamed it Grant Thornton FPA Outsourcing; As a result of this acquisition Grant Thornton operates now in seven citities: Poznanń (head office), Warsaw, Wrocław, Katowice, Kraków, Bydgoszcz, Torunń

Kreston international Added: HDMP (Warsaw); lost: Polaudit (Warsaw)

rsM Added: RSM Poland KZWS took over Baltic Accountants & Consultants from Warsaw (former Alliot Group member )


Ernst & Young

PwC

KPMG

Deloitte

Mid-tier

23%

21%

21%

17%

17%

Audit & accounting

Tax

Advisory

15%

67%

18%

COUNTRY sURveYInternational Accounting Bulletin


BrAzil

Although it seemed Brazil was almost immune to the global economic crisis, in 2012 reality set in and the economy stuttered.

Instead of the expected 4% growth in GDP, the year ended with just under 1%. But most of the country’s accounting firms suffered few ill effects, still racking up double-digit growth – in some cases, spectacular double-digit growth. There seems to be gold in adversity, at least for the country’s accounting profession.

Meanwhile, the accounting market is reinventing itself after Ernst & Young and KPMG acquired the two top mid-tier firms, Grant Thornton in 2010 and BDO in 2011 respectively, adding to the dominance of the Big Four in the Brazilian market. The Big Four now audit about 95% of Brazil’s listed companies.

Since the Big Four took over Grant Thorn-ton International and BDO International,

the two have had to find replacement firms. Pryor Consulting Services became the new Grant Thornton, while RCS Auditores Inde-pendentes became the new BDO. The firms have made great strides to regain market share and once again are nipping on the heels of the Big Four.

B DO I nt e r n at ion a l h ad lodged a c omp l a i n t w i t h t h e C on s e l ho Administrativo de Defesa Economica, the Brazilian antitrust commission, about the KPMG acquisition of the former affiliate, but so far the complaint has not progressed beyond the analysis and discussion stage, with no final resolution expected any time soon. And, given BDO’s spectacular growth in the past couple of years, the issue may be moot.

As chief executive Raul de Corrêa explains: “The 75% growth in our revenues over the past year once again consolidated our position as one of the top

Going for goal Despite economic slowdown Brazil’s accounting firms report strong growth and emerging opportunities from upcoming sporting events such as the FIFA World Cup and the Olympic Games, and like many other industries, accounting firms are looking to capitalise on those. Gundi Jeffrey reports

■ BrAzil

At a glance revenueMost revenue: PwC, BRL1,081m(e), ($543.2m)least revenue: MGI, BRL1.3mHighest growth: Integra Intr., 314%lowest growth: PrimeGlobal, -5%

stAFF

largest workforce: PwC, 4,999(e)smallest workforce: INPACT Intr, 16Most partners: PwC, 179(e)Most offices: KPMG, 21

eCoNoMiC iNdiCAtors

GdP: BRL4.5tr ($2.4tr)GdP growth: 1.5%GdP per capita (PPP): $12,038inflation (CPi): 5.2%Current Account Balance: -2.6%of GDPunemployment rate: 6%Population: 196.5m

iAB survery iNdiCAtors

revenue per employee: BRL186,822staff density: 1 accountant per 8,582 people

Notes: Totals apply to IAB surveyed data only. This includes firms that belong to global networks and associations

Source: International Accounting Bulletin, IMF estimate


CouNtry survey International Accounting BulletinBrAzil

■ BrAzil

nEtwoRks- fEE dAtA

rank NameFee income

(Brlm)Growth

rate (%)

Fee split (%)

year-endAudit &

Accountingtax

servicesManagement

consultingCorporate

finance

Corporate recovery/


support other

1 PwC*(e) 1,081.0 13% 37 24 21 9 - - 9 Jun-12

2 Deloitte*(e) 994.5 17% - - - - - - - May-12

3 Ernst & Young*(e) 856.4 17% - - - - - - - Jun-12

4 KPMG* 819.3 24% 50 21 6 5 1 1 16 Sep-12

5 Grant Thornton International* 101.0 74% 91 5 4 - - - - Dec-12

6 BDO* 71.2 78% 61 15 8 14 1 1 - Dec-12

7 Mazars* 57.1 26% 80 8 6 6 n/a n/a - Aug-12

8 Baker Tilly International* 43.7 16% 70 14 6 10 - - - Jun-12

9 Moore Stephens International* 30.1 20% 69 14 6 11 - - - Dec-12

10 Nexia International* 18.3 159% 56 10 30 - - - 4 Jun-12

11 RSM* 18.2 47% 67 16 11 - - - 6 Dec-12

12 Crowe Horwath International* 13.0 24% 47 25 19 6 - - 3 Dec-12

13 PKF International* 11.6 3% 67 7 24 2 - - - Dec-12

14 HLB International* 7.7 3% 78 12 8 - - - 2 Dec-12

15 SMS Latinoamérica* 7.6 6% 36 7 - 11 - - 46 Dec-12

16 UHY International* 6.7 13% 70 15 - - - - 15 Dec-12

17 UC&CS America* 6.7 3% 40 40 10 - - 10 - Dec-12

18 Rödl & Partner* 5.9 24% 41 26 29 - - - 4 Dec-12

19 Kreston International* 4.0 14% 75 11 11 - - - 3 Oct-12

total revenue/growth 4,153.8 19%

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included. (e) IAB estimate.Source: International Accounting Bulletin

firms in Brazil.” He attributes part of that growth to “conquering the market lead position in a few specific sectors, such as real estate and the meat industry”.

In any case, the musical chairs of the past few years, with larger firms snapping up smaller firms and the international ne t works hav ing to t rol l for new associates, seems to have calmed down, although most of the firms still seem keen on expanding both their geographic and service capabilities to serve a market that is looking for innovative, integrated solutions for surviving the current tough times.

Without question, the economy has been the key driver of that attitude.

Henrique Luz, a PwC partner and member of the executive board in Brazil, describes the 2012 economy as “certainly frustrating in terms of its general level of growth.” He partly attributes this to the present state of the European economies and to China’s reduction in its speed of growth as well as in its investments

in the country.“Also, Brazil’s growth over the last

five years was very much based on the migration of over 45 million people from near misery to the lower middle class. And this has lost sustainability through time. What is to drive continuous growth now are much higher investments in fixed capital and savings.”

Camillo Pachikoski, who heads Nexia’s Brazilian affiliate PP& C, notes that many companies did not reach their projected goals, and therefore tended to postpone investment plans. “There was also a postponement of issuing and openings of planned capital. Also, “the increase in inf lat ion scared us and caused uncertainty”.

Pedro Melo, chai rman of KPMG Brazil, points out that: “Despite the lower economic growth, what was originally projected for 2012, we cannot consider those results negative – quite the contrary. Although some of our clients’ industries

ended up being negatively affected by the low growth, we could note, on average, more advances than stagnation or retreat among companies. We believe that, at times of less abundance, the typical Brazilian creativity and entrepreneurship nature becomes more evident than ever, enabling good solutions to be found.”

Deloitte’s chief executive Jose Domingos do Prado explains that “although many inves tment plans were postponed , companies kept up a high level of activity and, in general, had a very profitable year.

And Paulo Sérgio Dortas, managing partner of Grant Thornton Brasil, adds that “providers of services and providers of consumer goods to the middle class are increasing their sales. This has a positive effect for us, as those are the growing dynamic organisations that we target and work with to unlock their potential for growth. The lack of growth and pressure on prices have not influenced us as they would in other sectors of the economy.”



The results were better than expected for many of the firms, although a few did experience some downward pressures.

Baker Tilly International Latin America regional head Osvaldo Nieto says his firm met its targets in the major cities, but not in the smaller markets, leading to an overall 2012 increase of 16% in revenues, partly due to growing market share in the audits of listed companies, a market that had been highly concentrated in the hands of the Big Four. Advisory services and internal audit also showed good growth.

Moore Stephens Internat ional in Brazil had hoped to gain 15%, but eked out 6% as, says executive director Hélio Eiji Yamasaki, clients “took a more conservative approach to contracting services in general.” He also said there was increased competition from the Big Four,

“who began to show an interest in the small to medium market in which we operate.”

Nexia’s PP&C came in a bit short of its 20% target, but Pachikiski says the firm has been able to win over “some important business” from his competitors, “especially from the Big Four. Our association with Nexia International gave us visibility and we are getting numerous clients referred by our network.”

Grant Thornton Brazil’s 30% growth

kept it in the same market position as the year before. Dortas says not only were there new opportunities as international companies aimed to expand their markets in Brazil, but the expansion of the oil and gas industry in Rio de Janeiro boosted the firm’s client base there.

PwC grew by 22%, regaining its traditional leadership in the audit of listed companies, “lost during the first round of mandatory audit rotation in 2004,” says Luz, adding that “our firm continues to be the largest in Brazil, surpassing BRL1bn ($504m) in 2012.”

Mandatory rotationThe Comissão de Valores Mobiliários, Brasil’s securities commission, recently reinstated mandatory auditor rotation, beginning in 2012. The requirement, orig inal ly introduced in 1999, was suspended in 2008 to a l low l isted companies to transition to IFRS without having the disruption of changing audit firms at the same time. Companies are, however, allowed to keep their auditors for a limit of 10 years.

Deloitte’s Domingos do Prado simply confirmed that the firm met its targets and, given the reintroduction of mandatory audit rotation, “we were able to take

back our historical leadership in certain business segments, such as utilities and real estate. We also experienced unexpected growth in the area of road concessions.”

KPMG posted a 24% revenue increase and Melo says, “we have certainly gained market share in our audit, tax and advisory services.” The firm did lose some audit clients in the mandatory rotation process, but also won significant new ones.

BDO’s de Corrêa notes that the growth of tourism, continuing investments in real estate and the attractiveness of foreign capital, along with major sports events coming to Brazil – the FIFA Confederation Cup this year, the FIFA World Cup in 2014 and the 2016 Olympics – provided

“a steady forward push for our firm. Those factors, allied with the general strengthening of the middle market guaranteed our good results.”

Changes in the nation’s tax system also helped firms produce good results. According to Pachikoski, federal, state and municipal tax authorities introduced an electronic system for col lect ing and monitoring tax and accounting information, “leading to one of the most complex and efficient taxpayer collection systems anywhere. This has contributed significantly to the sales of services

BrAzil

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AssoCIAtIons – fEE dAtA

rank NameFee income

(Brlm)Growth

rate (%)

Fee split (%)

year-endAudit &

Accountingtax

servicesManagement

consultingCorporate

finance

Corporate recovery/


support other

1 Praxity* 52.0 25% 80 8 6 6 n/a n/a - Aug-12

2 MSI Global Alliance* 15.0 80% 40 - 20 - - 10 30 Dec-12

3 PrimeGlobal* 11.2 -5% 52 24 19 2 - 1 2 May-12

4 DFK International* 8.9 0% 57 22 12 - - - 9 Sep-12

5 KS International* 8.5 21% 50 15 10 10 5 10 Dec-12

6 Morison International* 7.3 103% 57 9 16 8 n/a n/a 10 Dec-12

7 BKR International* 7.2 6% 80 10 10 - - - - Jun-12

8 Abacus Worldwide* 7.1 - 15 15 10 17 - 43 - Dec-12

9 Integra International* 2.9 314% 20 60 20 - - - - Dec-12

10 GMN International* 2.2 5% 68 26 3 - - - 3 Dec-12

11 MGI* 1.3 9% - - - - - - - Jun-12

12 INPACT International* 1.1 31% 73 10 - 10 - 4 3 Dec-11

total revenue/growth 124.6 27%

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not includedSource: International Accounting Bulletin



in the tax area.”Dortas agrees, saying that, “on the

one hand, this results in requiring more manpower and technology to keep abreast of the changes and, on the other, it triggers more demand for our services.”

Yamasaki also points to government attempts “to stimulate the economy through payroll tax relief, as well as tax reduction and exemption of some consumer products such as cars, appliances and others, but the result apparently frustrated the expectations of government and business in general.”

Overall, traditional services led the growth in services. De Corrêa says BDO, for example, has seen increasing requests for audit services, due diligences, risk advisory, corporate finance and sustainability. For Grant Thornton, “all service lines contributed equally to the

accomplishment of our targets, although advisory and tax did lead in growth, while audit and outsourcing attracted new and interesting clients.” PwC found its best growth in business consulting for retail and consumer clients, logistics, financial services, agribusiness and middle-market companies, whereas, again, audit led growth for PP&C.

Nieto says the audit of manufacturing and service companies in major capitals and in oil and gas regions like Vitoria topped the growth l ist , a long with audits for private companies that aren’t actually required to have them. Advisory services for the infrastructure also posted good gains.

Melo adds that, in addition to the growth in audit and advisory services, KPMG found good opportunities in the trend that has Brazilian companies

and institutions strengthening their organisations and raising governance standards, which he now describes as

“comparable to the ones used in the world’s most advanced economies. This progress inside our corporations opens great opportunities for our work.”

To boost overall practice strength, some of Brazil’s firms introduced new service lines in the past year. BDO International’s f irm launched a forensic practice in response to the “increasing need for fraud, investigation and dispute services.”

PwC is developing more multi-discipline solutions for clients, basically using teams from across practice lines and expertise to work together on solving a particular client’s or industry sector’s problems, while Baker Tilly Brazil established a governance, risk and compliance service line that includes services aimed at dealing

■ BrAzil

nEtwoRks – stAff dAtA

rank Name



2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

1 PwC* (e) 4,999 4,700 6% 179 160 - - 449 - 17 17

2 Deloitte* (e) 4,725 4,500 5% - 133 - - - - - -

3 Ernst & Young* (e) 4,131 3,935 5% - 144 - - - - - -

4 KPMG * 3,634 3,481 4% 145 133 3,124 3,103 365 349 21 20

5 Grant Thornton International* 850 675 26% 30 27 770 606 50 42 - -

6 BDO* 623 371 68% 22 13 526 301 75 57 13 9

7 Mazars* 445 435 2% 13 8 384 386 48 41 4 3

8 Baker Tilly International* 415 428 -3% 29 30 353 358 33 40 8 9

9 Moore Stephens International* 373 290 29% 40 35 291 218 42 37 13 10

10 Nexia International* 343 150 129% 22 17 285 120 36 13 7 6

11 RSM International* 207 168 23% 7 7 184 148 16 13 3 3

12 UC&CS America* 142 137 4% 5 5 124 119 14 13 2 2

13 UHY International* 135 124 9% 4 4 70 70 61 50 5 5

14 Crowe Horwath International* 121 97 25% 11 9 91 71 19 17 2 2

15 PKF International* 104 103 1% 11 10 78 76 15 17 5 5

16 HLB International* 67 56 20% 6 6 57 47 4 3 2 2

17 Kreston International* 45 45 0% 3 3 38 38 4 4 1 1

18 Rödl & Partner* 44 30 47% 1 1 32 21 11 8 1 1

19 SMS Latinoamérica* 24 19 26% 8 9 12 10 4 4 1 1

totals 21,427 19,744 9% 536 754 6,419 5,692 1,246 708 105 96

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included. (e) IAB estimate




BrAzil

■ BrAzil

AssoCIAtIons – stAff dAtA

rank Name



2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

1 Praxity* 445 435 2% 13 8 384 386 48 41 4 3

2 MSI Global Alliance* 223 217 3% 8 10 165 158 50 49 1 1

3 Abacus Worldwide* 122 - - 12 - 81 - 29 - 4 -

4 KS International* 117 101 16% 9 9 92 81 16 11 6 6

5 PrimeGlobal* 88 91 -3% 12 13 55 56 21 22 7 7

6 Morison International* 83 62 34% 17 8 58 46 8 8 3 2

7 DFK International* 77 77 0% 4 4 61 61 12 12 2 2

8 Integra International* 76 12 533% 4 6 60 5 12 1 1 2

9 BKR International* 56 56 0% 8 8 48 48 0 0 7 7

10 GMN International* 46 46 0% 6 6 26 26 14 14 3 3

11 MGI* 29 29 0% 3 3 7 7 19 19 2 2

12 INPACT International* 16 15 7% 4 4 10 8 2 3 1 1

totals 1,378 1,141 10% 100 79 1,047 882 231 180 41 36

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included.


with IT security and governance.KPMG invested in new expertise in

logistics, strategic sourcing and supply chain management for projects aiming at cost reduction and adaptation of service levels. It also created a global strategy group to strengthen advisory services for global or Brazilian companies. And, in response to the increasing regulatory and digital tax obligations, the tax technology group developed the KTAX solution, a suite of technological tools to help deal with the new requirements.

Meanwhile, even though IFRS was adopted several years ago, the international standard continues to offer healthy service opportunities for Brazil’s firms, says Melo,

“due to the trend of the standards being adopted by a greater number of companies seeking to expand their transparency and governance standards. Therefore, in addition to listed companies and large corporations, which by law already have had to adopt IFRS, smaller companies have been adopting them to prepare their financial statements as well.”

Dortas notes that specific issues, such as

lease accounting, “will probably affect our clients and this will create new business opportunities as these changes come along.”

Nieto says that there are still “major opportunities in the advisory of complex pronouncements and impairment tests,” but adds that even though IFRS is now also mandatory for SMEs, “the implementation by this sector is still very slow.”

And Luz points out that an equivalent of IFRS is on the horizon for the public sector, which will generate new business as government agencies need to change from their traditional cash-base accounting to an accruals basis.

Like in the rest of the world, service lines are being transformed in response to market demand. Nieto points to the

“specialisation of our advisory services in the infrastructure area, the outsourcing of back office services, including accounting and tax, the co-sourcing and outsourcing of internal audit, and the increasing request for audit services by family businesses, which are not required to have statutory audits.”

Dortas notes that transfer pricing rules changed in December 2012, “and

it is important to note that they are significantly different from OECD rules. This creates uncertainty in the perspective of existing and potential investors in this economy, which definitely creates new business opportunities. As Brazilian rules change and controls become stricter and there is more transparency, it creates at the same time challenges to work and understand those changes, while also creating opportunities to add value to our services for our clients.”

To deal with the new legislation, PP&C developed a powerful computerised tool called Tax Experience. “This system is capable of reading and linking about a thousand bits of information contained in the various control systems and calculation of t axes created by the Braz i l ian government,” Pachikoski says, “to identify errors and inconsistencies that wil l certainly be identified by tax authorities and create problems for taxpayers.”

Luz agrees that transfer pricing has been growing rapidly, as has business consulting in front office disciplines.

De Corrêa believes the many global


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sports events heading Brazil’s way over the next few years are driving growth for the firm’s new sports service practice.

Besides new services and organic growth, expansion into new areas in the country also boosted bottom lines, although 2012 saw far less M&A activity than in prior years.

BDO opened four offices, added to its former 11, so that it now has representation in every corner of the country. KPMG was joined by Brainet, a company specialising in logistics and supply chain management. Grant Thornton strengthened its presence in Rio de Janeiro, as well as Belo Horizonte and Goiania. PP&C opened a new office in Manaus, which Pachikoski says has produced higher than expected revenues.

For its part, Baker Tilly Brazil had a quiet year, but plans to open six new offices this year, looking for “top-quality” specialist firms in the tax and outsourcing areas for merger purposes. And Moore Stephens developed a multi-year plan that is expected to see the firm grow 50% by 2015, both by adding new members and by opening new offices in at least 10

strategic cities.This year promises to be no less

challenging than the one just past. In fact, Correa feels 2013 will be much like the year before. He says: “IPOs, the increasing demand for professional services in the middle-market, demands related to the global sports events to be held in the country, and sectors impacted by government incent ive measures should all generate demands for audit, risk, tax, corporate finance and sports services that I hope will contribute to our goal of becoming a 1,000-employee company by 2014.”

Pachikoski continues to be preoccupied with the fact that Brazil has one of the highest percentages of Big Four companies carrying out listed companies’ audits in the world, but feels his firm is well positioned to grow all the same. “Due to our size, we compete not only with the Big Four, but also with the smaller firms.” But, he adds, “market concentration does make a difference – resulting in prices lower than what would normally be acceptable for customer retention.” <

■ BrAzil

FirM MoveMeNts

NetWorK/AssoCiAtioN FirM AdditioNs, MerGers & ACQuisitioNs

Abacus Worldwide Added: B&B Gestao Contabil (Sao Paulo); Cunha Oricchio Ricca Lopes Advogados (Sao Paulo); Souza, Berger, Simões e Plastina Advogados (Porto Alegre)

Bdo Added: four offices (Campinas, Campo Grande, Florianópolis and Goiânia)

integra international Added: NK Contabilidade (Sao Paulo); Lost: Assmann & Asociates (Sao Paulo)

KPMG Acquired: operations of TTG-Tax Technology Group

Moore stephens international Added: Moore Stephens Vector Auditores (Brasilia)

Morison international Added: APSIS Consultoria e Avaliações (Rio de Janeiro)

Nexia international Added: PP&C (Sao Paulo)

PKF international= Added: Nilton Belz, a partner of Guideline, a small consulting firm in valuations and corporate finance; Arnaldo Kurayama, a small audit firm which is joining PKF's Japan Desk; Launched Directa PKF Business Process Technology in a partnership with V&B Officeware (March 2013).


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