... always provides an opportunity to look back but, more importantly, to look forward to the coming year. The general consensus is that, at least in economic terms, the coming year should be significantly better than last year – but will 2010 be much different to 2009 for the accounting profession?
Clearly, a better economic environment will provide a boost to all businesses – including accounting firms – and we will also benefit from the improving performance of our clients and what is expected to be a better market for transactions, fund raising and general corporate activity. However, it is important that we don’t forget the lessons of the last few years and that we assist our clients in avoiding some of the ‘excesses’ we have seen that have damaged so many businesses. We must remember that ‘if it looks too good to be true – it probably is’.
For the profession as a whole we will continue to see a continuation of some of the topics that have dominated 2009 – particularly the search for a single set of high quality global accounting standards. I think everyone has accepted that IFRS are the only credible global accounting standards to fill such a role but there remain issues over their adoption by certain countries – notably the USA – as well as concerns about the governance and accountability of the IASB (the body that issues IFRS). It is vital that we make progress on this in early 2010 and that the USA is persuaded to confirm that it will adopt IFRS by a specified date. There can be conditions for this acceptance (such as there being an acceptable governance structure for the IASB – but we urgently need the USA to confirm that they will, in principle, adopt IFRS. Japan has committed to the adoption of IFRS, it is already adopted in Europe and China will, I am confident, fully adopt IFRS as well. With the USA on board this will cover the world’s leading capital markets and should ensure that IFRS becomes the single, high quality global accounting standard called for by the G20 – and the accounting profession.
Increasing regulation is also likely to be a feature of 2010 – mostly for the financial services sector, but it must be possible that some of this will drift into the accounting profession. I hope not as, in general terms, I think the profession is well regulated although there are some countries that need to adopt regulatory systems similar to those in the more developed countries. Indeed, I would argue that in some aspects the accounting profession may be over-regulated but I see no chance of a lessening of regulation so there seems little point in arguing this case.
As we emerge from the global recession we may see a few more mergers between some of the smaller mid tier firms who want to increase their market share. However, I do not think these will significantly affect the market place as most of these firms act for smaller clients and few have many, if any, significant public interest clients. However, because size is seen as such an important indicator in the accounting profession I have no doubt that some firms will be regarded as moving into a market position that is not wholly appropriate. This may be an issue for BDO, and possibly one or two other networks who can credibly be regarded as an alternative choice to the Big 4 in much of the marketplace. We will have to work harder to explain how BDO is able provide a real challenge to the Big 4 for those companies that would prefer not to use the services of the Big 4 and how BDO is different from networks that may be growing their revenues through merger but who don’t have the necessary global infrastructure and support to be a credible choice for businesses that might otherwise use a Big 4 firm. In this context, I suspect that unless there is a major corporate collapse that prompts concerns over the role of the auditor, the Competition and Choice debate will rumble on but is unlikely to make any real progress – and in this regard 2010 will be much the same as previous years.
For me personally, 2010 will have many challenges – helping our member firms respond to changed economic circumstances, ensuring we maintain our investment in the network and, later this year, the launch of our new audit methodology and new audit process tool – ensuring that a ‘BDO audit is a BDO audit’ in whatever country it is delivered and whatever the nature of the client – a guarantee of a consistently delivered, high quality, robust audit.
BDO International Ethics Global Accounting Mark to Market Standards & Regulators 
1 Comments
February 2nd, 2010
... is the overwhelming market share held by the Big 4 (actually most of it is held by three of them) which is far greater than in the USA, Europe or elsewhere.
The smallest of the Big 4 (PwC) is only about 25% of the size of the other three firms – and the next largest firm, which is a Japanese firm associated with PwC, is about 20% of the size of PwC – and thus only 5% of the size of the largest firm in Japan. And the next several firms, including BDO, are even smaller. Clearly we need to address this if we are to deliver on our brand promise to be the leading mid tier firm and a credible alternative to the Big 4 in every major economy. At present we deliver an extremely high quality service but our lack of market share makes it difficult to overcome prejudices in favour of the Big 4 – and this is a challenge faced by all the firms aside the Big 4.
It was thus slightly ironic that on the plane home I read an article published earlier this month by the American Antitrust Institute (AAI) discussing their concern that the audit market is too highly concentrated in the Big 4 firms.
http://www.antitrustinstitute.org/archives/files/AAI%20Working%20Paper%2010-01_010720101109.pdf Their analysis of the situation and whether we now have accounting firms that are ‘too large to fail’ is interesting although not new other than they link it to current concerns about banks and other financial institutions being ‘too large to fail’. Indeed, the AAI paper suggests that the US Congress should include the Big 4 in its review of the regulation of banks and other financial institutions. The paper also suggests a somewhat more radical proposal – namely that the Big 4 each be required to divest “... no less than 20% of its domestic client revenue and the professionals who are needed to service the clients that are transferred out of the firm.”
Gosh – what do I say? Now, I am well known for expressing concerns about the concentration in the audit market and the effect this has on competition and choice but even I would struggle to support such a proposal. It seems to me to totally disregard the wishes, and the interests, of clients and of the people who work at the Big 4. Clients and our people are not commodities to be ‘sold’ I am all in favour of appropriate action to correct what I regard as distortions in the marketplace, not least the banning of ‘Big 4 only’ clauses in banking and other agreements, but I think it is neither realistic nor desirable to force firms to ‘sell’ their clients and their people.
Global Accounting 1 Comments
January 25th, 2010
... we need to stop it becoming a political debate you need only visit Japan, where I have spent the last week.
Japan is one of the world’s largest economies (probably now 3
rd behind the USA and China but with a smaller population than both those countries) yet seems to have been sidelined in the European ‘squabbles’ over IFRS and the ‘will they/won’t they adopt IFRS’ debate in the USA. Japan is committed to adopting IFRS so that the accounts of Japanese companies (and it has some very large multinationals) can be comparable to those of all other major companies – in Europe, the USA and globally.
It is a mature positive approach and conversion from Japanese GAAP to IFRS is a major topic of debate by all the accounting firms, and major corporates, in Japan – and was raised with me at every meeting I have had in the past few days.
They don’t understand why IFRS has become such a political issue – nor why individual countries or regions expect IFRS to be adapted to deal with their own political or regulatory issues. Why should Japan have different accounting standards because US, UK or other banking regulators want something different for their own purposes? Why can’t regulators use other powers they have to get the information they need rather than expect global accounting standards to be adapted to suit them?
Governments, regulators and accounting standard setters need to fully appreciate that we are seeking to have one single set of high quality global accounting standards – and this involves obligations to others.
I salute the Japanese.
Standards & Regulators 0 Comments
January 22nd, 2010
We will all have been affected by the news of the growing humanitarian disaster in Haiti and the desperate need for aid both to help the victims of the disaster but also to help rebuild the lives of people once their immediate needs have been met. How does one respond?
I believe that the scale of this disaster requires a global response and as a global network I believe that we have to play our part – inevitably this means by giving money to one of the various disaster appeals. Accordingly, BDO International is making a donation to the disaster appeal. We are also asking the people who work for the International Executive Office to play their part and have pledged to match everything that they donate. We are also encouraging all of our member firms to do likewise – by making a corporate donation, by encouraging fundraising from staff or both.
Being a relatively close neighbour of Haiti the British Virgin Islands is already involved in the provision of aid. The major funding drive in the BVI is being spearheaded by the Rotary Clubs of Tortola, of which the Managing Partner of our BVI firm and one of his colleagues are members. The latter is appearing on a Telethon being broadcast on local TV and radio and is an integral member of the organising committee. He is responsible for the IT and is heading up the finance function. BDO BVI and BDO International are both donating to this effort and BDO BVI’s staff are also taking a collection for this effort.
BDO Cayman Islands is also heavily involved in the activities of Rotary Clubs. A member of the Managing Partner’s club has a house (that’s still standing) which is currently acting as temporary hospital for 100 plus people and he has spoken with CNN to share information. He says scenes are far worse than many of the media stations are prepared to show on national television.
I am proud of the response of our firms and our people – it demonstrates our concern for others and the world we live in.
BDO International 0 Comments
January 19th, 2010
... the title of a new report from the Centre for European Reform (‘CER’) which was sponsored by BDO and launched yesterday in Brussels; there is a London launch on 2 February.
The main presentation was by Philip Smythe, the author of the report, but there were contributions from others including Peter Chidgey, a partner from BDO UK who heads up their financial services industry group.
There were some interesting views on whether there is a need to regulate hedge funds. Philip suggested not on the basis that they didn’t cause the crisis; that they were less leveraged than banks; that they had traded in CDOs; and had been allowed to fail without causing contagion to the rest of the system. He contrasted this to banks which were regulated but where these problems had arisen – and suggested the focus should be on improving regulation for banks rather than regulating hedge funds. The main argument for regulating hedge funds (which was expressed as being a ‘Brussels based view’) seemed to be that an unprecedented crisis demanded an unprecedented response and that it may be better to over-react; that we didn’t know if or how hedge funds might have contributed to the crisis; and that the only way we can know what hedge funds are doing (and address political concerns) is by regulating them. Hardly the strongest argument I have heard but if it holds sway in Brussels than I fear that we may face regulation in a variety of areas where it is not needed.
The most interesting view expressed by Philip, however, and which did seem to get widespread support is the need to ‘reverse the terms of trade between state and banks’. As Philip noted, in medieval Europe the biggest concern of the banks was that an individual sovereign (who were the banks major customers) might default on his debt (there were no female sovereigns at the time); the biggest risk now is to the state that a bank might default. This is a complete reversal of roles and there is a concern that by removing the risk of failure for banks we have weakened the incentive for them to take risk management sufficiently seriously. It was noted that Governments have ‘talked tough but acted weak’. I think this is a different way to understand the challenges we face and why there is so much legitimate political and public interest in how banks run themselves; their corporate governance; and even their remuneration policies. As with many other challenges there are no easy – or obvious – answers.
It was an interesting morning and I am glad we had the opportunity to sponsor this report.
Standards & Regulators 0 Comments
January 13th, 2010
As yesterday’s Financial Times reported
http://www.ft.com/cms/s/0/ddc1a5a6-fea3-11de-91d7-00144feab49a.html the Basel Committee have made it clear that the needs of regulators and central banks are different from those of investors when it comes to how, and more particularly when, banks should make provisions for bad debts.
This should not be a surprise as it has been clear for some time that regulators would like to see some form of ‘dynamic provisioning’ which spreads the cost of bad debts over the economic cycle – rather than recognising the bad debts when the losses are foreseeable. There are many arguments for both approaches, some of which I have commented on previously, but the two approaches are different – and they meet different needs. What is disappointing is the implication that one set of accounts should be able to meet both sets of needs or, more particularly, that they must meet the needs of regulators in priority to those of investors.
It is possible to prepare financial statements that the disclose figures on more than one basis, and a reconciliation between them. This would have the advantage of total transparency with clear disclosure of the quantum of any ‘dynamic provisions’ and could be a solution to this apparent conundrum. The other possible solution is for financial statements to continue to be prepared for investors with separate information provided to regulators to meet their needs. Indeed, regulated companies already provide additional information to their regulators so one might wonder why this isn’t the most obvious solution.
It can not be right for financial statements to be prepared solely on a basis that meets the needs of regulators with investors having no right or ability to get the information that they need. Further, it can not be right that the financial statements for regulated companies should be prepared for a different audience, and thus on a potentially different basis, to the financial statements for non-regulated companies. Regulators have the power to get the information they need; they should not do so to the detriment of investors.
Standards & Regulators 0 Comments
January 13th, 2010
... by the number of seemingly intelligent people who can’t accept that the losses incurred by banks – and others – were real and not merely a result of accounting standards.
Over the past few weeks there have been a number of letters to the Editor of the Financial Times suggesting that accounting rules were to blame. Now, I am not responsible for setting accounting standards, and I may not always agree with them, but I am clear that there have been real losses incurred and real cash has been lost.
I am not generally a write of letters to the Press but it seemed to me that someone should put the record straight – and I am pleased that the FT decided to publish my letter (you can read it via this link if you have not seen it
http://www.ft.com/cms/s/0/ca73cb8e-f8cf-11de-beb8-00144feab49a.html?nclick_check=1 ).
I appreciate that not everyone supports ‘Mark to Market’ but surely no one can seriously believe that accounting standards can cause the havoc we have seen in financial markets and in the global economy.
Standards & Regulators 1 Comments
January 6th, 2010
– a comment from Andrew Maclay, a Director in the Forensic Accounting Group of BDO’s UK firm,
on the OECD Recommendation for further combating bribery of foreign public officials in international business transactions. Andrew has specialised in all aspects of Forensic Accounting for the last 11 years and has worked on a large variety of disputes involving fraud and corruption investigations, contractual claims and quantifying losses and is thus well qualified to comment on this.
“Wednesday 9 December, as well as being international anti-corruption day, saw the publication of an interesting recommendation by the OECD working group on bribery. In the ten years since it was agreed, the OECD Convention on combating bribery of foreign public officials in international business transactions and the working group that supports it has become the most effective anti-corruption body outside the US. It is not easy to cajole 38 of the leading industrial nations in the world to promulgate laws banning bribery, but the OECD working group has put in place an effective process of monitoring its member states and does not shirk from publicly criticising them, for example, for a lack of bribery prosecutions.
The latest recommendation, whilst not mandating anything new, clearly recognises the evolving nature of anti-corruption law and urges member states to keep their laws and enforcement under constant review. BDO played a part, along with the other large accountancy networks, in helping the OECD understand the role of external auditors, which is not as the first line of defence against corruption. Corruption, however, is something that undermines the rule of law and contributes to poverty and so affects us all, whichever country we are based in.
The recommendation, for example, stops short of banning facilitation payments, but clearly the working group does not like them and companies are mandated to at least record them clearly in their accounts if they are paid. The working group promises Good Practice Guidance by June 2010, and companies are likely to be at risk if they do not implement some anti-corruption controls and then get investigated.
The US has long had an effective Foreign Corrupt Practices Act, but the OECD recommendation, together with evolution in national laws and practices such as the Corruption Bill and the recruitment of a team of 100 corruption investigators by the Serious Fraud Office in the UK, indicates that companies need to think seriously about their anti bribery policies, if they have not already done so. Perhaps the next big step in the world of anti-corruption is for the BRIC countries to take corruption seriously; Brazil has joined the OECD working group and Russia has applied to join – if China and India were to act as well, the field of international tendering could be seriously levelled."
Andrew Maclay
Standards & Regulators 0 Comments
December 15th, 2009
As reported in a recent article on the Dow Jones News Service, Robert Herz, chairman of the Financial Accounting Standards Board, has suggested that "bank-capital standards and accounting rules should be "decoupled," so that the government's determinations of whether banks are stable wouldn't necessarily be affected by accounting changes."
According to the article, the comments by Robert Herz "...were an apparent attempt to defuse a confrontation between FASB and the banking industry over "fair-value" accounting, which requires companies to peg the value of their assets to market prices."
Herz said the solution is not to alter accounting rules, but for bank regulators to exercise more flexibility in how they measure banks' capital. FASB and regulators have different missions, he said, and neither should drive the other or be subordinated to the other.
"Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation," Herz said in prepared remarks for his recent speech. Decoupling, he said, "could enhance the ability of both the FASB and the regulators to fulfill our critical mandates. We can continue to work with independence and an unwavering dedication to market transparency; at the same time the bank regulators can utilize their authority to take whatever actions are required to keep the financial system stable and healthy."
I agree.
Standards & Regulators 0 Comments
December 14th, 2009
In a letter in today's Financial Times, Peter Vipond, the ABI's Director of Financial Regulation, makes clear the concerns of the ABI over "the increased politicisation of the accounting standard-setting process".
http://www.ft.com/cms/s/0/b8d160b8-dd4e-11de-ad60-00144feabdc0.html As Mr Vipond says "It is unhelpful that pressure from within the EU has stalled the endorsement process. This confusion helps nobody in the end."
0 Comments
November 30th, 2009
