15th September 2011:
Well this is it – my last blog posting as CEO of BDO International Limited. Although I don’t actually stand down from this role until the end of the month I am now (just about) ‘winding down’ and have agreed that my successor should take over the CEO blog next week. I am particularly pleased that Martin van Roekel has decided to continue to have a CEO blog and look forward, along with many others, to reading his thoughts over the next few years.
It is fitting that I am typing this posting in China – on my last major business trip (albeit I am going to BDO Canada’s AGM next week and to a meeting with IFIAR in Bangkok the following week – did I say I was ‘winding down’?!). I have in fact spent time this week in China and Japan - both of which countries have seen significant growth for BDO and each of which demonstrates the significant development in BDO over the past several years.
China is clearly an emerging and growing economy with a fast growing professional services sector and where BDO has demonstrated a preparedness to invest and an ability to grow a significant business that can match (or beat) any of our competitors. I believe that BDO’s growth in China over the past few years is easily the fastest of all the major accounting firms and has been achieved without compromising our commitment to quality in every aspect of our business. Indeed, I am confident that our business in China today has higher quality standards as well as much greater resources and capability than ever before.
Japan is of course a mature economy and one that has faced significant challenges in recent years – and particularly this year following the earthquake, tsunami and damage to some of its nuclear power plants. Growing our business in mature economies is more challenging, particularly those that are dominated by the four largest firms – and their dominance in Japan is extreme. However, the growing attractiveness of the BDO brand has enabled us to substantially increase our audit business and I am confident that my successor will soon announce a substantial increase in our tax business in Japan.
Asia Pacific has been BDO’s fastest growing region in each of the past several years and I am confident this will continue to be the case although we are also enjoying significant growth in Africa and elsewhere.
In addition to the significant amount of time I have spent in China and elsewhere helping develop and grow the BDO network, the other matter I have spent much time on has been in the area of competition or choice – or more accurately the lack of competition and choice in certain parts of the audit market. I am increasingly optimistic that legislators and regulators will now address this issue and look forward to developments later this year in the EU as well as in the UK and possibly also the USA. I continue to regard it as disappointing that we need regulatory and/or legislative intervention to address this long standing concern and that the profession has been not been able to find a ‘voluntary solution’ to the challenge; indeed it is even more disappointing that many in the audit profession still seem to think there is no issue and have failed to properly engage with this debate and perhaps worse that some deny the prevailing facts about the dominant position of the largest firms and the distorting effect this has on the market. BDO’s success in both China and Japan has demonstrated that the market place on both emerging and mature countries wants more choice and we are fortunate that the circumstances have enabled us to provide it in these markets. I hope that the circumstances will change in other countries to enable to do likewise. BDO (and I am sure others as well) knows it will need to make further investments but is ready and willing to do so if there is a suitable opportunity.
It has been a privilege to lead BDO for the past three years and I wish every success to all my colleagues and to my successor, Martin van Roekel.
Finally, my thanks to those of you who have read and responded to my blog – including via email and in person; please continue to do so with Martin. BDO, and the profession, benefit from your engagement.
International BDO 6 Comments
September 15th, 2011
22nd July 2011:
The Economist, a leading weekly magazine, recently published an analysis of Chinese consumer habits, focussing on market growth and the emerging middle class in China, noting ‘small wonder that Western firms are piling in.’ The article entitled ‘The mystery of the Chinese consumer
’ focused initially on demand for consumer goods, before concluding with insights on expansion into China.
The article notes several factors that are essential for cross border growth into China, many of which support findings from the BDO Ambition Survey: Global Ambition
. The author, correctly in my view, highlighted the importance of establishing an ‘efficient distribution network early on’. This reflects a key discovery from the BDO Ambition Survey that finding trustworthy local partners and suppliers
is vital to expansion.
The significance of understanding the local market was also raised. The author drew upon the experiences of a US DIY chain that is downsizing its Chinese operation, as few people undertake home renovations. This is a lesson that is applicable across all industries and our survey too noted that researching and understanding the Chinese market
is crucial for cross border growth.
Thirdly, the feature noted challenges associated with the recruitment and retention of talented staff. This again, mirrors our global survey with identifying the right people on the ground
recognised as the single biggest challenge for successful international expansion.
Due to China’s vast economic growth, many organisations are rightly thinking about expanding into this market. Whilst, expansion provides its own unique challenges across myriad business functions, none should be considered insurmountable. Indeed, from our own experience and drawing upon insights from the BDO Ambition Survey: Global Ambition
, it is clear that thorough research, cultural understanding of China, trusted local networks and identifying the right people is the key to expanding successfully into China. I have been pleased to see an increasing number of BDO’s clients seeking to take advantage of the opportunities presented by China but rightly ensuring that they follow this advice.
I look forward to this year’s survey with interest.
International Business 0 Comments
July 22nd, 2011
8th July 2011:
BDO has today issued a Press Release confirming that after three years in my role as CEO of BDO International, and over 33 years in total with BDO UK and BDO International, I will be stepping down on 30 September 2011.
I have had a fantastic career and have been privileged to lead BDO UK for 7 years and BDO International for the last 3 years. I have had some great colleagues, worked with some brilliant people and, in my earlier career, been involved with some terrific clients. There have been many highlights during the last 3 years when I served as CEO of our international network. We can all feel proud of the growth and development of the network, particularly in China and the emerging markets, enabling BDO to be an increasingly important global accounting network. This is a reflection of the commitment and efforts of my many colleagues from across the globe who work so tirelessly and expertly every day to deliver for our clients and our people. I also take great satisfaction from the important contribution BDO has made to the ongoing debate about the future of the audit profession, in particular in discussions prompted by the European Commission’s Green Paper. I do believe that after many years of talking we are actually going to see some action.
I am grateful to all our BDO Member Firms, and specifically all their partners and staff, for giving me the opportunity to lead our network and to give BDO stronger central leadership and a more coordinated approach to the development of its business, whilst retaining our heritage and our respect for national culture.
I wish my successor, Martin van Roekel, formerly Managing Partner of BDO in the Netherlands and currently a member of my Global Leadership Team, every success. He has been closely involved in all the significant changes in BDO over recent years and is well placed to continue to lead the network’s growth and development when he becomes CEO on 1 October 2011.
As for me, it is time for a change. I don’t know what I will do but after 33 years in this business, I am looking forward to seeking new opportunities outside the accounting profession.
Of course, I will be here until the end of September – and will continue blogging until then!
International BDO 0 Comments
July 8th, 2011
4th July 2011:
I have recently had an email exchange with Paul Gillis, Visiting Professor of Accounting at Guanghua School of Management, part of Beijing University about a thesis he is writing about the Big Four in China. Professor Gillis is a former Big Four partner and, unsurprisingly, he has a very positive view on the role of the Big Four.
I am therefore very grateful to Professor Gillis for a recent posting on his blog http://www.chinaaccountingblog.com/weblog/big-four-clauses.html
which draws attention to the use of Big Four only clauses in China, something that surely the Chinese Ministry of Finance will not approve.
As Professor Gillis states in his blog:
“I have been reviewing the SEC filings for Harbin Electric’s (NASDAQ: HRBN) going private proposal... HRBN’s CEO has proposed to take the company private with $400 million of funding provided by China Development Bank (CDB). CDB is a state owned bank directly under the supervision of the State Council. It has been described as the engine that powers the national government’s economic policies. Certainly CDB would follow State Council policies for the accounting profession and not use Big Four clauses?
Think again. In CDB's loan commitment to HRBN this general undertaking is required: No Group Member may replace the Auditors, unless the new auditor to be appointed is any of Deloitte & Touche, PricewaterhouseCoopers, Ernst & Young and KPMG.
So, CDB is precluding HRBN from hiring any of China’s top local accounting firms, including the affiliates of BDO, RSM and Crowe Horwath who rank in the top 10 in China and globally. But HRBN can keep its existing auditor – California based Frazer Frost. Frazer Frost is currently serving out a suspension from taking on new clients that the SEC imposed because of shoddy accounting work in China.
I doubt that CDB made a conscious decision to insert the Big Four clause in HRBN’s loan commitment. I suspect it was boilerplate inserted by White & Case, CDB’s U.S. legal counsel, which itself is evidence that these Big Four clauses are more widespread than the Big Four would like you to think. (the fact that the firms are not in alphabetical order, but in the order of size in the U.S. market, not in China, lends further support to that argument). There is a lesson in here for CDB, however – it is important to read the agreements and when adopting western practices to make sure they actually are the best practices for China's development.”
The suggestion that Big Four only clauses are “boilerplate” has been denied by many but it seems the evidence that this is the case is increasingly apparent. More worrying is the spread of these clauses, particularly to China. The longer it takes Governments and Regulators to ban Big Four only clauses the more damage they will do.
Global Accounting Role of the Auditor Standards & Regulators 2 Comments
July 4th, 2011
27th June 2011:
Regular readers of this blog will be aware of my ongoing interest in China – and the success that BDO has enjoyed in that country where we now have over 6,000 people. I was thus very interested in a recent article in Harvard Business Review entitled ‘What the West Doesn’t Get About China’
, by George Stalk and David Michael, both senior staff members at Boston Consulting Group
, a management consultancy. The article offered data and insightful commentary on the country’s acceleration towards a consumer-driven economy and the need to understand the special challenges of doing business in China.
The article referred to the need for organizations to invest in both capital and human resource to cope with ‘extraordinary growth in demand’. However, the article only alludes to the significance of staffing. In my view this understates the importance of people as demonstrated by the BDO Ambition Survey: Global Ambition
which found that identifying the right people on the ground
is of paramount importance and the single biggest factor for successful expansion into China.
Stalk and Michael advised companies looking to capitalise on expansion opportunities in China to be equipped to do business in hundreds of locations, rather than a handful of large cities. They also recognised the huge impact equipping businesses for such an operational shift would have on organisational structure, distribution infrastructure and choice of business partners, as well as capital. This mirrors another finding from the BDO Ambition Survey: Global Ambition
, which emphasised how imperative it is to establish local suppliers and efficient distribution networks when expanding into China.
Business leaders are right to think of China when expanding internationally, due to its economic growth rate, increasing consumer demand and expanding market size. However, it is becoming clear that understanding the local market from an operational perspective to ensure recruitment of talented staff and robust distribution networks are key to successful cross border expansion into China. This is reflected in BDO’s experience in China.
Global Accounting International BDO International Business 1 Comments
June 27th, 2011
25th May 2011:
I have never understood Twitter but, along with many in the UK and other countries, I was curious to know if the rumours I had heard of the name of the UK footballer who had a super injunction was correct (it was) and, as every news broadcast told us, this information was available on Twitter. Whilst there, and given a comment I read in a magazine recently that you should do a ‘Google search’ on yourself every few months just to see what others will find out when they do such a search on you, I did a ‘Twitter search’ on myself – not expecting to find anything. Imagine my surprise therefore when I found many references to my recent blog posting about the recent announcement by the UK’s Office of Fair Trading (OFT)
Most seemed to just link back to my blog but one went to a website with an article that started:
“Perpetual fusspot and BDO Global CEO Jeremy Newman has not been shy about how unfair he thinks the dominance of the Big 4 is. The majority of his blog posts are tagged ‘Global Accounting’ and several consist of bellyaching about Big 4 this and the Big 4 that. Of course, since the mainstream media has finally picked up on the idea that the concentration of auditors could be a bit of a problem,...” http://goingconcern.com/2011/05/jeremy-newman-would-prefer-if-the-big-4-would-just-allow-real-competition-but-regulatory-action-will-do-just-fine-thank-you/
Now call me sensitive, but I do not see myself as a “perpetual fusspot” or “bellyaching”- just someone raising a valid concern and one that has now been recognised by others, including the OFT but also the European Commission, MEPs, the UK’s House of Lords and many others, as being a potential issue. I also don’t think the dominance of the Big 4 is “unfair” – I think it is a risk and not in the public interest. And again this view is shared by others – including those who represent the public interest.
So, my apologies to anyone who thinks I come across as a “fusspot” or “bellyaching” – it is not my intention to do so; but rather to raise valid concerns that need a full and open discussion and require appropriate action to be taken.
Global Accounting Standards & Regulators 4 Comments
May 25th, 2011
20th May 2011:
.. it is very tempting to do so in the wake of the announcement by the UK’s Office of Fair Trading (OFT) earlier this week.
Under the headline “Antitrust watchdog urges reform to break audit grip of Big Four” the FT states:
“Regulatory action may be required to break the dominant grip of the Big Four accounting firms on UK audits of leading companies…”
The only word I would challenge is “may” – it should say “will”.
The OFT said it had “… reached the provisional view that there are reasonable grounds for suspecting there are features of the market that restrict, distort or prevent competition in the UK” – to which I would add in many/most other countries as well.
According to Accountancy Age, the Chief Executive of the Financial Reporting Council, Stephen Haddrill, said:
“…that the OFT's expertise and power made it well-placed to deal with opening up the audit marketplace.”
"Having explored ideas for addressing these issues through our Market Participants' Group, it has become clear to us that the competition authorities are better placed than audit regulators to tackle competition concerns," said Haddrill.
At long last it seems that something might now be done to open up the audit market. It is a shame it has taken so long and that it will require regulatory intervention – though it is not too late for my colleagues in the Big Four, and others, to act on a voluntary basis to create the environment necessary to allow real competition.
Global Accounting Standards & Regulators 0 Comments
May 20th, 2011
19th May 2011:
It is no secret that I have, for many years, been concerned about the domination of the four largest accountancy networks. Recent events in Brazil – where the Grant Thornton firm (Terco) was acquired by Ernst & Young and our own firm was acquired by KPMG – only serve to increase that concern. The dominance of the market in Brazil by the four largest firms is now almost total and although we now have an exceptional new firm in Brazil, more than capable of handling the necessary work for our clients, it is perhaps only 20% the size of our previous firm. Accordingly, we have lodged an objection with the various competition authorities in Brazil to register our concern at the acquisition of the former BDO firm by KPMG.
I believe that this is the first time that such an objection has been made – and I suspect our objection was unexpected by others as we have typically all accepted that the continued dominance of the Big 4 is unstoppable. And whilst our objection may or may not be successful, I think is important that we ‘stand up and be counted’ and make clear why we object to the acquisition which, in my view, has been prompted by KPMG's desire to significantly reduce competition and increase its market share in Brazil.
Of course, KPMG have had to explain to the Brazilian authorities why they think their acquisition should be approved and I must admit that this has brought a wry smile to my face. Now, whilst I object to the dominance of the Big 4 I have a great degree of respect for them and there is much they do that I admire, and some things I wish we could emulate. In particular they are usually very good at ensuring consistency in their global messaging particularly around matters of public policy and regulation – and certainly about the supposed importance of the need to have massive technical resources (thereby supposedly justifying their size). So there were two aspects of KPMG’s submission that have amused me.
First, their comment on the need – or otherwise – for technical capability. According to KPMG’s submission to the Brazilian authorities:
“The audit, tax consultancy and general consultancy markets have low barriers to entry. There are many certified professionals in the market that can provide these types of services. As an example, in 2009, there were over 220,000 accountants with a college degree in Brazil which were registered in the Regional Accountancy Councils. The initial necessary investment is relatively low (primarily in terms of facilities and human capital) and the regulatory barriers can be easily overcome, as the registration in the professional supervision boards is accessible to anyone that has the necessary qualifications.”
ie all you need is a college degree, certification and a modest investment!
Not quite consistent with their usual assertion that they need to be the size they are to enable them to afford the necessary investment in technical and other skills. As KPMG said in their submission to the UK FRC Market Participants Group that was looking at competition and choice in the UK audit market in March 2007:
"To undertake high quality audits in the context of current and evolving business practices and accounting standards, it is particularly important that audit firms have available (and under their control and subject to their quality control processes) a sufficiently broad range of technical skills"
The second is their comment on compulsory audit rotation, which is currently one of the proposals being promoted by the EC Green Paper as a possible was of creating a more dynamic audit market. In KPMG’s submission to the EC, with which sentiment I wholly agree, they state:
“…there is a danger that mandatory rotation and tendering will achieve precisely the opposite effect from the one intended by the Commission. As the representative of BDO LLP recently said in evidence to the UK House of Lords … “there is a study … that says that mandatory rotation compounds the concentration issue because, while audits are put out to tender, those that are put out to tender by the non-Big Four firms are generally sucked up by the Big Four and it is very difficult for the non-Big Four to win them back"
However, they have suggested to the Brazilian authorities:
“…it should be noted that the existence of a mandatory rotation of auditors … contributes to the dynamic operation of the independent audit market."
So now you know; the acquisition of the former BDO firm in Brazil can only be justified by changing your mind on technical skills and audit rotation!
Global Accounting Standards & Regulators 0 Comments
May 19th, 2011
13th May 2011:
The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has released their opinion on the EC Green Paper and it makes encouraging reading.
“…the high market concentration of the "big four" audit firms may cause an excessive build up of risk, smaller firms are diverse and their growth and expertise should be encouraged through increased opportunities to compete…”
“…following the financial crisis, auditors have been identified as being able to play a key role in strengthening the risk management oversight of financial institutions, in particular…”
“…review audit committee practices with regard to tendering processes with a particular view on aspects of transparency and administrative burdens associated with a formal tendering process; whilst ensuring that the quality of auditing services is not affected; considers that, in order to guarantee the independence of audits, companies should consider an open tendering process for statutory appointments of external auditors every eight years…”
“…investigate the use of restrictive covenants by banks and other financial institutions on loans and other financial products to companies, which may be limiting auditor choice…”
All good stuff and a few more useful suggestions as well.
The paper also calls for “…the Commission (DG Comp) to hold a detailed investigation into the audit market…” So a potential competition enquiry by the EC as well as the one currently under consideration in the UK. A mixed blessing if it actually happens as these enquiries can take a long time and may delay the implementation of other changes – but recognition there is an issue that needs to be addressed.
We now await the report from the Committee on Legal Affairs (JURI) to see how many of ECON’s proposals it takes on board – and what else it proposes.
My thanks to the various MEPs who were involved for all their efforts – I am sure we are not the only ones who are grateful – including ECON’s rapporteur Kay Swinburne and others including Sharon Bowles, Sylvie Goulard, Wolf Klinz, Olle Schmidt and Corien Wortmann-Kool.
Standards & Regulators 0 Comments
May 13th, 2011
9th May 2011:
I have often commented that one of the privileges of my job is that it gives me the opportunity to deal with people from many different cultures and backgrounds.
I have always been struck by the consistency of the BDO partners and people in every country I have visited and their commitment to the development of exceptional people who are committed to delivering an extraordinary level of client service built on strong relationships.
I am typing this on a plane leaving Australia having spent a few days there at a joint meeting of the partners of the BDO Member Firms in Australia and New Zealand. I saw this BDO spirit there as I have seen everywhere else but what struck me at this meeting was the human spirit I see everywhere and the resilience of people.
The meeting was held at the Gold Coast, just outside Brisbane – and thus very near the area most badly affected by the Queensland flooding last year. There were a number of partners from our Brisbane office at the meeting. There were also a number of partners from our office in Christchurch, New Zealand – which was badly affected by the tragic earthquake. In recent weeks I have also been in Tokyo (I have previously commented on this
) and in Beirut for our Middle East Regional Meeting; this meeting being attended by partners from offices in other countries in the Middle East that have had to close for some time during the current unrest in the region.
In all these places people have borne unimaginable challenges – arising both from natural disasters and human actions – yet none of them have let this overwhelm them. Indeed, the camaraderie I saw between the Australians and New Zealanders was uplifting – each seeking to help the other and all committed to ‘business as usual’. I am only sorry I could only spend a few days with them.
International BDO 0 Comments
May 9th, 2011