Showing posts with label audit business. Show all posts
Showing posts with label audit business. Show all posts

Wednesday, July 14, 2021

Business Idea: Shamrock Audit Firms


No, it is not St. Patrick’s Day and we are not going to praise Guiness in this article J
I am currently studying different forms of business organisation and try to apply this knowledge in the field of audit. I was interested by Handy’s concept of shamrock organisation, which is defined in BPP P3 study text as follows:
     “The shamrock organisation, or flexible firm, has a core of permanent managers and specialist staff supplied by a contingent workforce of contractors and part-time and temporary workers.
Thus, in this post I would like to discuss the concept of flexible firms, which might change not only the value chain and network of audit firms, but also the whole audit market.

Problems
Audit businesses face number of problems:
1.     Financial crisis – clients less keen on paying for audit and there is the necessity to cut costs;
2.    New Legislation – the split of audit and advisory services would lead to problems in staff utilization. Firms might face the issue of overstaffing or understaffing (before it was more leeway to balance advisory and audit projects).
3.   Employee expenses – as a result of the two issues above, fixed expenses related with employees become burdensome for audit firms. Fixed salaries, pension schemes and other elements of package expose pressure on profit.
4.      Efficiency – are resources invested in junior staff employees show real pay off?
5.   Focus – to pick up appropriate people for audit job accounting firms should  maintain comprehensive recruitment department, waste  time of managers involved in the process, which might seen as waste of resources and shift of focus from delivery of quality services.
I think that flexible firm structure might help to address these problems and change marker

Answer: Concept of Shamrock Organisation
The shamrock concept comprises four so called leaves or elements.
The first leaf is professional core, which consists of professionals defining organization’s core competence. In audit firms it could be employees above manager assistant level or even higher grade staff. They would elaborate methodology, business processes, communicate with clients on major negotiations, review audits and sign up audit reports, establish and implement strategy.
The second element is self-employed professionals and technicians. For audit firms it could be extremely relevant element. IT services might be outsourced and there no need to be reliant on huge army of salary-paid IT specialists; tax, legal, valuation personnel and audit seniors could be hired separately for each audit project. To satisfy demand for these services freelancers as well as specialised firms could be hired.
The third leaf is contingent work force. The hire of this type personnel would totally depend on the external demand for audit firm’s services. I always wandered why audit firms hire people with higher education to do stock counting or cash section audit? Give me a week or two and I will teach secondary school graduates how to audit not only above mentioned sections but also receivables, payables, and even deferred taxes provided that these guys would know that 2x2=4 and more or less have common sense.
Thus, the contingent work force would cover the work of junior level staff, second and third year associates; this might include also the work of senior auditors in some cases (small project; tightly controlled by manager).
The forth element is supposed to be the contribution of consumers. Indeed, unlike other industries there are whole bunch of opportunities for better interaction with client in audit, e.g. audit committee, internal audit departments. I am going to expand this idea further.
            
Practical Implications
The question is rather simple: how is this model going to work? I would outline following solutions:
·    Active markets of freelance professionals;
·    Human resources (staffing) firms specialising in recruiting and training staff in certain area. For example, such kind of company might develop diverse skills in secondary school graduates and utilize this employees’ hours efficiently by outsourcing them both to audit, advisory, financial and other firms (e.g. data input/processing centers; call centers). Thus, the contingent work force could be provided by special HR firms;
·    Overseas professionals. The new developments in IT and communication allow audit firms to transfer part of work to overseas professionals achieving economy in costs. Tax section and legal contact within audit project could be easily reviewed by specialist in China or India for less fee with the same quality.
·   Consumer intervention. The model might provide client with means to influence costs. For example, there are two HR firms (A and B) providing contingent work force for audit services: A has brand name, B is less known but charges lower fees. An audit firm might provide opportunity to client to chose the firm (A or B) to be included into audit budget.
The implementation of shamrock concept might lead to rise of staffing firms specialising on low skilled financial employees. Audit firms would be focused on recruitment experienced high skilled professionals. The necessity in audit seniors (also known as “audit executives” or “assistant managers”) could be liquidated: the managers should be able to undertake some tasks and delegate less complicated issues to temporary workers.
The exchanges (analogy to stock exchanges) of professional and semi-professional labor should become more developed, elaborated and structured. They should provide businesses/audit firms with access to information about freelancer’s previous works, rate per hour, references. There are professional and freelance internet projects (e.g. Odesk or LinkedIn), but they are patchy and not so developed as commodity or stock exchanges.

I would be glad if you share your thoughts on this subject. May be you have some reservations regarding this idea or you might offer the other ways to make audit business more profitable and professional

References
BPP. (2011). Paper P3. Business Analysis. Study Text. London: BPP Learning Media Ltd.

Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".

Tuesday, November 24, 2015

Audit Firm: Big4 Financial Performance 2015

The Big Four firms have recently announced their results for the fiscal year 2015. PwC has retaken number one spot from Deloitte as the world’s largest firm by revenue. KPMG is yet to announce its results.
A brief overview of the performance of these firms in comparison with the previous year is as follows.

PwC has recorded a global annual revenue increase of 10% to $35.4bn (£23.34bn), which represents its strongest growth in 10 years. Consulting now accounts for more than 30% of PwC’s total revenues after growing 18% to $11.2bn during the 2015 fiscal year. This was boosted by the acquisition of Strategy& (formerly Booz & Company) in April 2014. Revenues in PwC’s auditing division grew more slowly, rising 6.2 per cent to $15.2bn in a year marred by the profit misstatement scandal at Tesco, a PwC audit client.

According to Dennis Nally, Chairman of PricewaterhouseCoopers International Limited,
“As we look at the results for the last 12 months, all of our lines of service showed really positive growth – led by Advisory which is up 18%, Tax up 7% and our Assurance business notwithstanding some really difficult competitive market pressures – up 6%.”

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries.

Deloitte member firms (Deloitte) reported aggregate revenues of US$35.2 billion for the fiscal year ended 31 May 2015 (FY15), representing 7.6 percent growth in local currency terms.

EY announced combined global revenues of US$28.7b for its financial year ended 30 June 2015. This represents an 11.6% increase over financial year (FY) 2014 revenues in local currency, outpacing FY14 growth (which had increased by 6.8% over FY13).
All of EY’s service lines continued to grow in FY15 ahead of their FY14 growth: Advisory grew 17.6% (vs. 14.4% growth in FY14); Assurance 8.1% (vs. 4.5% in FY14); Transaction Advisory Services (TAS) 15.5% (vs. 6.5% in FY14); and Tax 10.3% (vs. 4.3% in FY14).
In FY15, EY headcount reached 212,000 globally – an all-time high.

A graphical representation of the performance of these three firms is shown for comparison purpose.

Head Count Graph


 Revenue Graph


KPMG is due to report its 2015 results in December. KPMG International Cooperative ("KPMG International") is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. We are presenting here KPMG’s 2014 and 2013 performance comparison.

The KPMG network delivered strong growth and recorded-high revenues of USD24.8 billion for the 2014 fiscal year, an increase of 6.3 percent in local currency terms over the prior year (2013), recording growth across Audit, Tax and Advisory.

Head Count Graph




Revenue Graph

References:

Thursday, October 22, 2015

Audit Firm: Vault Top 50 US Accounting Firms

Vault.com, an online careers site, has unveiled its annual ranking of the best accounting firms to work for in the U.S. Vault uses the following survey methodology to rank the audit firms.
Methodology: “When Vault asks accounting professionals what matters most to them in choosing an employer, they continually tell us that although prestige is important, it's not the only determining factor. In addition to prestige, accounting professionals find the following factors extremely important: firm culture, type of work, location, work/life balance, compensation, business outlook, and training opportunities.
As a result of these findings, Vault has compiled a weighted formula that reflects the issues job seekers care about most. We believe that this formula showcases those accounting firms deemed the Best to Work For. The Vault Accounting 50 is based on the following:
  • 40 percent prestige
  • 20 percent firm culture
  • 10 percent work/life balance
  • 10 percent compensation
  • 10 percent overall job satisfaction
  • 5 percent business outlook
  • 5 percent formal training

The top 10 Accounting/Auditing Firms in US at the Vault top 50 for 2016 are as follows.
  1. PwC (PricewaterhouseCoopers) LLP
  2. Ernst & Young LLP (EY)
  3. Deloitte LLP
  4. KPMG LLP
  5. Grant Thornton LLP
  6. BDO USA LLP
  7. McGladrey LLP
  8. Plante Moran
  9. Moss Adams LLP
  10. Crowe Horwath LLP

You can see the complete list of Top 50 Accounting firms by Vault at the under mentioned address:

Additional Thoughts

Accounting Firms should develop a congenial and friendly working environment for its employees and young graduate trainees so that they are developed and groomed professionally. A culture that promotes leadership, diversity, ideas generation will not only nurture the employees to grow professionally but will also bring good reputation for the firms locally and globally.

Wednesday, February 1, 2012

Audit Firms: Financial Performance 2011


What do we know about financial performance of accounting firms, especially the Big Four firms? I planned to do some analytics in this area and provide my readers with results this week. However, the smart guys from Big4 site have already done this work and all I want to do is to provide some additional considerations.
Thus, this blog post is going to discuss revenues of accounting firms.

Big4: Business as usual
The Table 1 represents revenues of the Big4 accounting firms and growth rates.
Table 1: Big4 Revenues and Growth Rates 

Figure 1: Combined Big4 Revenues

I would consider following points:
First, generally the Big4 firms have overcome consequences of financial crisis, i.e. revenue of 2011($103.6 bln.) exceeded the pre-crises level of 2008 ($101.3 bln.). However, E&Y did not manage to achieve pre-crisis revenues.
Second, PwC showed good performance in 2011 with 10% growth and regained dominant position in Big4 after it was given in to Deloitte in 2010.
Third, Deloitte is distinguished by the highest compound annual growth rate (CAGR) for the period of 2007-2011. Meanwhile, E&Y has reported the lowest CAGR of all Big4 firms.

Big4 Audit Services
The blog is about audit, so we can’t avoid talking about audit fees percentages in total revenue, which are reported in Table 2.  J

Table 2: Big4: Audit Fees Share in Total Revenue

Figure 2: Combined Big4 Audit Fees Share in Total Revenues

The sharp decrease of E&Y’s audit fees share in 2008 should not mislead us. The issue is that E&Y reported the combined figures of assurance and advisory services before 2008. That is why, for illustration purposes I depicted tendencies in audit/assurance revenues starting from 2008 year.
The tendency of decline in audit & assurance services might indicate two issues. First, the accounting firms are eager to provide consulting/advisory services, especially in economic crisis time, when clients need some advice on how to improve their businesses. Second, clients might be dissatisfied by the level of assurance services provided: accounting firms can not provide in this area something special because of strict unification of reports, or e.g. some clients wanted to delist themselves from stock exchanges. Anyway, this is a very deep and serious issue, which deserves to be discussed separately.     

Non-Big4 Accounting firms
I decided to compare information about Big4 firms with 2 big accounting global networks, BDO and Grant Thornton International (GTI). I picked up these 2 firms because they publish their reports online and information was rather accessible. According to Accountancy Age global ranking BDO and GTI, occupied 5th and 7th places respectively in 2010.

Table 3: BDO and GTI Revenues and Growth Rates

Figure 3: Combined BDO and GTI Revenues

Remarkably, the combined revenues of BDO and GTI are 2.4 times less than their closest Big4 rival, KPMG! BDO has shown good CAGR for 2007-2011, and what could be also mentioned is that the decline in revenues of -2% in 2009 was the lowest comparing with Big4 and GTI. Regretfully, GTI was not able to achieve pre-crises revenues ($4 bln.)

Non-Big4 Audit Services Share
I made the same exercise here as in case with Big4 to provide information about audit revenues, see Table 4 and Figure 4.

Table 4: BDO and GTI: Audit Fees Share in Total Revenue

Figure 4: Combined BDO and GTI Audit Fees Share in Total Revenues

Quite interesting is that the tendency for audit and assurance services growth in BDO and GTI differs from the one shown by Big4 firms. Both firms increased share of audit fees in structure of their revenues in 2009 (from 50% to 53%), and were able to keep these fees on the same level.
Unfortunately, the picture here could be distorted by BDO reporting. The firm reports audit and accounting under the same line. Though report does not specify what sorts of “accounting” services are provided, it might be suggested that these are the services related with help to clients in financial statements compilation, i.e. having non-assurance nature.

Comments are welcomed!
If you have anything to add about performance of Big4 or the other global accounting firms, please feel yourself comfortable to leave a comment. Maybe you have some insightful information about accounting firms’ balance sheets or cash flows J
PS Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. The rules and explanations regarding subject are here.

Sources: 
1. Reports and press-releases placed on the web-sites of the mentioned firms.

Friday, September 23, 2011

Audit in Politics: Russia vs Yukos vs PwC


There have been two events in recent days which triggered me to write post on this subject. First, last week The Economist published the article about auditing in China. Second, the recent decision of European Court of Human Rights (ECHR) regarding the Yukos vs. Russia case.
The article in The Economist considers the issue which happened between Deloitte and Longtop, a Chinese company once listed in NYSE. Here is remarkable abstract:
     “… After signing off Longtop’s financial statements for several years, the firm smelled trouble during its audit for the financial year that ended in March. Its subsequent questions did not go down well at Longtop, which seized some of Deloitte’s papers and threatened to keep Deloitte staff from leaving company premises. Deloitte quit as auditor, and Longtop’s shares ended up being delisted from the New York Stock Exchange in August.”
Subsequently, SEC issued subpoena for Deloitte’s audit working papers in relation to Longtop. After Deloiite’s refusal to cooperate the PCAOB threatened to decertify its Chinese division.
Medvedev and Putin
Several features of the above case look like Yukos-PwC affair which I would like analyse in several following articles. Yukos-PwC matter is perfect case for audit, accounting, tax and business ethics studies. It is rather complicated and requires accurate consideration of all facts. I am going to cover audit related professional and ethical issues. In this post I will give brief overview of the issue.

Essence of Issue
Yukos was one of the largest Russian oil companies with successful growth strategy and was listed on the LSE. However the company eventually had to file for bankruptcy (2006) after the Russian Ministry of Taxation proved in court (in 2003) that Yukos’ tax evasion amounted around $28 billion. The hypotheses standing behind this case are as follows:
1.      Tax evasion. This is obvious: company tried to pay less taxes using illegal schemes;
2.  Politically motivated expropriation of the company. The major shareholders and top-managers of Yukos, Mr. Khodorkovsky and Mr. Lebedev, were arrested in 2003 with criminal charges including tax evasion, fraud, forgery and embezzlement of assets. Meanwhile it is believed that Khodorkovsky and Lebedev had political ambitions and tried to influence state parliament by financing both left-wing and right-wing parties. Eventually, Mr. Putin being the president of Russia (now prime minister) decided to punish these independent oligarchs.
Khodorkovsky and Lebedev

The issue is that both hypotheses might be truthful partially. The fact is that similar tax evasion models were used at those time (and now used also) by almost all oil and gas companies in Russia and the only company which carried its part of punishment was Yukos. Nevertheless, I do not want to focus on this dispute, I am interested in the role of auditors in all this mess and here they come…  


Involvement of the Russian PwC firm
Unfortunately, PwC was an auditor of Yukos, acted as advisor on tax strategy, worked closely with Kodorkovsky on financial and accounting issues. After years of cooperation with client, PwC decided to withdraw its audit opinions in 2007 issued in respect of Yukos consolidated financial statements for 10 years from 1995 to 2004!
The Russian PwC office claimed that during tax investigation the prosecutors revealed new facts, which managers of Yukos misrepresented during previous audits. So what facts were revealed? The level of cooperation with client on tax issues was so close that there are significant doubts about this?
The other peculiar matter is that PwC-Cyprus has not withdrawn its audit opinions in respect of Yukos Cuprus subsidiaries.
Third, there are beliefs that Russian PwC was a coerced into opinion revocation by the Russian authorities.

Questions
Finally, based on the above overview I would like to raise following questions in my further blog posts:
·      What were the audit evidences, which had dramatic impact on PwC’s opinion?
·      Could Yukos case raise the same concerns of PCAOB about reliability of the Russian PwC audit working papers as in case Deloitte-Longtop affair?
·      Might the significant share of audit fees incoming from state owned giant company, Gazprom, somehow impact PwC’s decision?
·      What are ethical stances behind PwC deed?
The specialists, blogers who would like to contribute to the discussion of this issue and probably post their own article in “Audit is Cool” blog are welcomed (please send me message) or you can just leave your comment.

PS: Funny Reality
Here is the real phrase from Russian court ruling on the second case against Khodorkovsky and Lebedev (p. 613):
“… Khodorkovsky and Lebedev kept two sets of financial accounts (reporting per Russian Accounting Principles and US GAAP) and concealed from shareholders consolidated financial reports, by publishing them only in English language…”
This funny words were noticed by my friend in Livejournal, tema57 J

Sources:
Khodorkovky and Lebedev Communication Center: